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Nurturing Discourse: An Overview of AIAC’s Diversity in Arbitration Week

Mon, 2020-07-27 01:00

Arbitration’s international character is derived from it being a melting pot of individuals from divergent academic, professional, age, gender, racial and ethnic backgrounds. But how far have we come from the adage that arbitration is pale, male and stale”? The Asian International Arbitration Centre (“AIAC”) launched its inaugural Diversity in Arbitration Week (“DAW”) as part of its ADR Online: An AIAC Webinar Special Series between 14th and 17th July 2020. During the week, 90-minute webinars were held each day on select topics relating to diversity in arbitration. What culminated was a week’s worth of engaging and insightful discussion on where we are, where we need to be and what needs to be done to enhance the facets of diversity.

 

Gender

Gender diversity is arguably the most prominent aspect of diversity being addressed by the arbitration community. To understand more about the unique experience of female arbitrators in practice, the AIAC collaborated with the Equal Representation in Arbitration Pledge (“ERA”) on a webinar titled “Remotely Personal”. Opening remarks for the webinar were delivered by Sitpah Selvaratnam (Tommy Thomas & ERA Global Steering Committee) with Mohanadass Kanagasabai (Mohanadass Partnership) expertly moderating. The panel comprised of six female arbitrators – Juliet Blanch (Arbitration Chambers), Briana Young (Herbert Smith Freehills), Tan Swee Im (39 Essex Chambers), Christine Artero (The Arbitration Chambers Pte Ltd), Patricia Saiz Gonzales (ESADE Law School) and Olufunke Adekoya, SAN (ÁELEX) – all of whom shared stories of the explicit and implicit biases faced in their careers whilst stressing the importance of female practitioners being given opportunities, based on merit, to excel in their careers. The panel highlighted that there remains a societal expectation for women to shoulder most household and parental responsibilities, although corporate culture is now more receptive to the needs of working parents through flexible working arrangements, which has increased female retention rates. Nevertheless, pipeline leak and repeat appointment issues remain prevalent in arbitration. The panel was of the view that until more women make it to the top of their respective practice areas, the chance of increasing female arbitrator nominations is slim.

Since its inception in 2016, the ERA Pledge has played a significant role in female arbitrator appointments with the LCIA recently winning the ERA Pledge GAR Award 2020 for appointing 43% female arbitrators in 2018. Although this is undoubtedly a step in the right direction, more can be done by law firms and arbitral institutions to heighten female representation in arbitration; whether it be by providing mentorship and promotion opportunities for talented and capable females, or by making concerted efforts to nominate and appoint more females as arbitrators. Nevertheless, the panel stated female practitioners themselves also play a key role since only by increasing their profile will they increase their chances of appointment, despite the systemic challenges.

 

Age 

Age and, by proxy, experience, were also two vital aspects of diversity touched upon during DAW, predominately in the context of young practitioners landing their first arbitration appointment. In collaboration with the Asia-Pacific Forum for International Arbitration (“AFIA”), the second webinar titled, “Roundtable on Age Diversity in International Arbitration – An Imagined or Real Problem” was held. Opening Remarks for the webinar were delivered by Jonathan Lim (Wilmer Cutler Pickering Hale and Dorr LLP & Co-Chair of AFIA) with Janice Lee niftily moderating (Harry Elias Partnership). The panel comprised of Diana Rahman (AIAC), Emmanuel Duncan Chua (Chevron Corporation – immediate past), Dr. Michael Hwang SC (Michael Hwang Chambers LLC) and Isuru Devendra (Latham & Watkins).

What became apparent was that the perceptions attached to age appeared to differ depending on the arbitration stakeholder in question. From a counsel’s perspective, the preference is for practitioners with sufficient experience in the subject matter of the dispute. Hence age, gender and/or cultural backgrounds were not considered prohibitive factors in nominating arbitrators. From a client’s perspective, the preference towards young arbitrators is primarily driven by the busy schedules and expense of more seasoned arbitrators who are high in demand. Whilst comparable, young and astute arbitrators had the added advantage of bringing high energy levels to the proceedings, which is generally welcomed by clients.

Arbitral institutions once again were considered uniquely placed to reduce age barriers, where AIAC was referenced for making 30 of the 155 appointments of first-time arbitrators in 2019.

Although there is no magic formula for young practitioners trying to break into the industry and forge their arbitration careers, it was unanimous that specialised knowledge in a specific area of the law, whilst being cognisant that smaller is better (in terms of the claim amount) and a less complex dispute is more appropriate for one’s first few appointments, would give a young practitioner a competitive edge to land their first appointment.

 

Professional

A benefit of arbitration is the ability to choose a subject-matter expert (i.e., industry professionals) to act as an arbitrator as opposed to a legally trained individual. In collaboration with the Chartered Institute of Arbitrators (“CIArb”) (Malaysia Branch), the third webinar of DAW was titled, “Professional Diversity in Arbitration – Inevitable or Idealistic?”. Opening Remarks were delivered by Foo Joon Liang (Gan Partnership & Chairperson of CIArb Malaysia Branch) with Choon Hon Leng (Raja, Darryl & Loh) craftily moderating the session. The panel consisted of arbitrators, both lawyers and industry professionals – namely, Ir. Harbans Singh K.S. (HSKS Dispute Resolution Chambers), Karina Albers (algeny & Karina Albers), Daniel Tan Chun Hao (Tan Chun Hao Advocates & Solicitors), Fatima Balfaqeeh (RKAH Consultancy), Suzanne Rattray (Rankin Engineering Consultants) and Professor Philip Yang (Philip Yang & Co., Ltd) – all of whom shared their unique journeys into arbitration as well as the benefits and shortcomings of arbitral tribunals which have industry professionals.

The general theme was that industry professionals who act as arbitrators, especially those with substantive subject-matter expertise, can bring a great deal of pragmatism to a proceeding since more complex commercial transactions are created by business professionals and not by lawyers. Notwithstanding, industry professional arbitrators need to develop an understanding of the law and ADR to be effective arbitrators. A noteworthy observation made was that although industry professionals have access to ADR training programs through CIArb and other reputable institutions, courses in arbitration tend to be more theoretical as opposed to practical. Currently, there is minimal, if any, opportunity to simulate an arbitration proceeding. In light of this, institutions and training providers were urged to provide options to foster soft, practical skills as the way forward.

 

Race and Ethnicity

Undoubtedly, when it comes to diversity, the elephant in the room tends to be racial and ethnic diversity. In collaboration with #Careers in Arbitration, the fourth and final webinar was titled, “Globalising Arbitration – Enhancing Racial and Ethnic Diversity”. Opening Remarks were made by Amanda Lee (Seymours Solicitors & Founder of #Careers in Arbitration) with Catherine Ann Rogers (Arbitrator Intelligence, Queen Mary & Penn State Law (on leave)) brilliantly moderating the session. The panel comprised of Dr. Emilia Onyema (SOAS University of London), Dr. Kabir Duggal (Arnold & Porter Kaye Scholer LLP), Professor Darius Chan (Fountain Court Chambers), Sarah Malik (SOL International Ltd) and Thiago Del Pozzo Zanelato (Pinheiro Neto Advogados).

It was noted that counsels do not place much emphasis on racial & ethnic diversity due to the entrenched systems of party-appointed arbitrators and repeat appointments. In this regard, the efforts of initiatives such as the ERA Pledge, the Arbitrator Intelligence Questionnaire, and the AIAC’s DAW were noted for promoting racial and ethnic diversity in arbitration. However, the panel lamented the lack of communal efforts to close the racial and ethnic gap. Emphasis was also placed on the importance of understanding the struggle of an intersectional individual fighting a battle against gender, ethnic and racial issues, and thus becoming implicitly marginalised at multiple levels whilst trying to engage with the rest of the industry. An appreciation of the nuances and role culture has on the conduct of an arbitration proceeding was also considered imperative to improving the quality of arbitral justice.

Arbitral institutions and counsels were once again considered best placed with moving things forward. For instance, arbitral institutions could be more proactive in approaching the unknown and finding raw talent, whilst counsels could take an active role in persuading their clients in having a diverse panel.

 

Conclusion

The key takeaway from the DAW discourse is that there is a long way to go when it comes to enhancing diversity in arbitration. However, the power to effect change does not lie with one individual or organisation; rather, collective and concerted efforts are required from all international arbitration stakeholders and participants to close the diversity gap. Although initiatives already exist to address some of the existing barriers to diversity, this does not mean we can be complacent that a resolution to diversity and inclusion issues is imminent.

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ECT Modernisation Perspectives: The Energy Charter Treaty and EU Law – A Cherry-Picking Relationship?

Sun, 2020-07-26 03:57

The Energy Charter Treaty (ECT) has recently become a household name, moving from the oblivion of the 1990s, when the treaty was drafted, to one of the most hotly debated topics in legal (and other) circles nowadays. Some have demonized it as an instrument for the corporate usurpation of democratic functions, such as the host state’s right to regulate its energy and environmental policies, while others have defended it as a unique regime promoting the rule of law in international energy relations. Against this background, this post reflects upon the increasingly complex relationship between EU law and the ECT and the treaty’s transformation from a bed of roses strewn by the hands of the EU, when it pioneered the ECT in the 1990s, to a thorny marriage in the past few years. Ever since the ECT backfired leading to a wave of intra-EU claims, i.e. claims brought by EU investors against EU member states, the EU and its Member States have launched themselves into a cherry-picking exercise about which aspects of the ECT to apply, which ones to discard, and those that need reform.

The EU’s cherry-picking approach to the ECT has been manifesting itself in different fronts: in the internal negotiations between the EU member states; in courts around the world, including the amicus curiae submissions of the European Commission in ECT investor-State arbitrations; in arbitration proceedings, including the first ever claim against the EU itself (brought by Nord Stream 2); and in the negotiations between all the ECT contracting parties on the modernization of the treaty. In this context, an important question that arises, with wider implications for international law, is: has the EU been acting consistently and in a way that promotes legal certainty and respect for the international rule of law with regard to its (evolving) relationship with the ECT? Or, on the contrary, has its cherry-picking approach been creating legal uncertainties and potential threats to the international rule of law?

 

The EU’s Perspective on the ECT: One Voice or Many?

In each of these settings, the EU does not appear as a united front speaking with one voice in its external relations as regards the applicability of the ECT within the EU.

First, the ECT was the main point of contention and differentiation among Member States in the political declarations they issued in January 2020 on the legal consequences of the Achmea judgment. In the Declaration of the Member States of 15 January 2019 on the legal consequences of the Achmea judgment and on investment protection, 22 Member States declared that “international agreements concluded by the Union are an integral part of the EU legal order and must therefore be compatible with the Treaties”. They further stated that, if the arbitration clause included in the ECT were to be interpreted as applicable between Member States it “would be incompatible with the Treaties and thus would have to be disapplied”. Consequently, the majority of the Member States declared that they will “inform investment arbitration tribunals about the legal consequences of the Achmea judgment, as set out in this declaration, in all pending intra-EU investment arbitration proceedings brought either under bilateral investment agreements concluded between Member States or under the Energy Charter Treaty”.

It is not clear what the effects of such an information obligation are under international law – apart from the risk of interference with the rule of law, as Gabrielle Kaufmann-Kohler had noted in the context of the Interpretative Powers of NAFTA’s Free Trade Commission. Moreover, any legal effects of this political declaration are weakened by their unilateral nature, as they do not represent a unanimous EU position (or even a unanimous interpretation by the relevant treaty parties). Such effects are further weakened by the fact that Sweden and four other Member States issued a counter-declaration, which refrained from taking any position on the ECT’s arbitration clause noting that several arbitral tribunals have interpreted the clause as applicable in intra-EU disputes. The counter-declaration also states explicitly that, since this interpretation was contested before a Member State’s national court, Member States should allow for due process and not interfere with the judiciary. Hungary took a more affirmative position by declaring its view that the Achmea judgment was silent on the arbitration clause in the ECT and was of no consequence to any pending or prospective arbitration proceedings under the ECT.

Interestingly, the majority declaration, according to which a treaty should be interpreted “as an integral part of the EU legal order and as compatible with the Treaties” does not seem to differ much from Russia’s arguments on the supremacy of its Constitution in the Yukos case. Subjecting the interpretation of an international treaty to the internal legal order without any explicit provision in the text of the treaty itself can create legal uncertainty and run counter to Article 27 of the Vienna Convention on the Law of Treaties, which precludes states from invoking their internal legal orders to bypass their international-law obligations. As EU law (including the allocation of EU competences) evolves much more rapidly than international investment treaties – especially older ones such as the ECT – the legal uncertainty about the relationship of EU law with the ECT increases.

The 5 May 2020 agreement for the termination of intra-EU bilateral investment treaties that followed the above declarations has not provided any further clarity on the future for intra-EU ECT arbitration. Despite the explicit link that the European Commission has drawn between the Member States’ political declarations of January 2020 and the termination agreement, the latter excludes the ECT from its scope. In particular, the agreement states in its Preamble that it does not cover intra-EU proceedings that have been filed on the basis of Article 26 of the ECT.

Notably, the agreement was not a bolt out of a clear sky but was the culmination of a process that the European Commission initiated in 2018, following the CJEU’s judgment in Achmea. Given the duration and intensity of the negotiations and the exclusion of the ECT from its scope, it is rather surprising that the agreement still does not represent a uniform position: five member states have refrained from signing the termination agreement.

 

It Takes Two to Tango: Whither the EU – ECT Relationship?

Unanimity and legal certainty about the relationship of EU law with the ECT, and particularly its investor-state dispute resolution mechanism, have thus not been achieved in the context of the negotiations within the EU. As such, the question is what – if any – progress has been made in the context of the EU’s negotiations with the other ECT contracting parties as part of the ECT modernization process.

The EU’s position in the negotiations on the modernization of the ECT appears to be reserved and defensive on the question of the relationship between EU law and the ECT. In the recent EU proposal for modernizing the ECT, the EU contented itself in stating that it aims at the reform of the ECT’s investor-State arbitration mechanism in line with the EU’s work in the ongoing multilateral reform process in the United Nations Commission on International Trade Law (UNCITRAL). It also said that any amendments to the ECT do not affect the Commission’s view that the ECT’s arbitration clause does not apply to intra-EU disputes, as expressed in the Communication on the Protection of Intra-EU Investments.

Member States have therefore disagreed on the relationship between EU law and the ECT, internally, while also abstaining from discussing the matter externally. What is, then the forum where the relationship between EU law and the ECT will actually be debated? It appears that the “battlefield” has moved to the judicial arena with activism in the courts substituting transparent and constructive policy making. Notably, the European Commission’s numerous amicus curiae submissions both to arbitral tribunals and domestic courts (within and outside the EU) largely reflect the position that most – but not all – Member States took in the declaration of 15 January 2020.

Questions thus arise in this context as to the legal value (or even political weight) of amicus curiae submissions that do not represent a solid, unanimous EU position agreed upon by all Member States. Apart from the risk of their interference with due process and the creation of legal uncertainty, they can also be considered as poor substitutes of necessary and urgent policy discussions. The ECT modernization process should not just be about continuous, wearing damage control; on the contrary, the ECT remains the only multilateral investment treaty currently dedicated to the energy sector. It is, thus, indispensable to link the discussions about its future with the EU’s ambitious Green Deal and energy-transition targets. Further delaying an open and transparent debate about the relationship of EU law, including the EU’s energy and climate ambitions, with the ECT can pose risks not only to the international rule of law but also to the very objectives that the rapidly evolving EU energy law – and the ECT itself – aims to achieve.

 

To read our coverage of the ECT Modernisation process to date, click here.

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ECT Modernisation Perspectives: “Can the EU Make the ECT the Greenest Investment Treaty of them All?”

Sat, 2020-07-25 03:56

The signatories of the Energy Charter Treaty (“ECT”) have begun the process of the Treaty’s modernisation. This is by no means a small task given the complexity of the Treaty’s scope which covers energy trading, efficiency, transit, investment protection and dispute resolution. Additionally, in order to amend it, all the signatories need to be on board.

Among other things, the signatories have declared that they want to make the ECT greener. Recently, the Energy Charter Secretary Urban Rusnák has stated that the ECT can play a key role in the implementation of the Paris Agreement and UN Sustainable Development Goals. But he warned that if the modernisation process fails, he does not see a future for the Treaty, effectively making the process a ‘make-or-break’ kind of situation.

Only a handful of the signatories have revealed their positions. Based on the ECT Secretariat’s document titled ‘Policy Options for Modernisation of the ECT’, the parties in favour of ‘greening’ the ECT are: Azerbaijan, the European Union (‘EU’), Georgia, Luxembourg, Switzerland and Turkey. Some parties generally support the incorporation of sustainable development into ECT. But others do not necessarily share this view. Japan, the second most influential signatory, holds the position that “it is not necessary to amend the current ECT provisions.” Further, some signatories heavily rely on fossil fuel export and instead wish to focus the modernisation on transit issues.

The most vocal proponent of this ‘greening’ approach is the EU. The EU is politically the strongest block in the ongoing negotiations and the biggest driving force behind the process of modernisation. Demonstratively, the EU has been the only ECT signatory to have made its draft modernisation proposal public.

The stakes are really high and the EU will not have it easy. Can it achieve such an ambitious project as greening the ECT? In our post, we will introduce and briefly analyse the most important green provisions in the EU’s proposal, while at the same time assessing the context and wider consequences of introducing sustainable development principles into the Treaty.

 

The Current State of Law in Terms of Sustainable Development

The ECT is an ‘old’ investment protection treaty. Having been signed in 1994 it doesn’t have any of the modern bells and whistles. The Treaty regulates sustainable development in Article 19 (titled ‘Environmental aspects’), which rather vaguely states that “each Contracting Party shall strive to minimise in an economically efficient manner harmful Environmental Impacts (…)”. In addition, the provision reaffirms the traditional principles of environmental law; that is, the precautionary principle and the polluter pays principle. Article 19 addresses possible environmental disputes as well, but again, very vaguely: If no other appropriate international fora exist, such disputes are to be submitted to the Charter Conference “to aim at a solution.”

This is currently all the green the ECT can offer, because in practice most of the environmental initiatives take place outside of the Treaty. For example, the Energy Charter Secretariat pushes for energy efficiency as one of its main priorities. Further, the signatories agreed to minimise harmful environmental impacts from energy use. And finally, most recently, the signatories signed the 2015 International Energy Charter which is a political declaration calling on all countries to achieve sustainable development.

Still, the ECT is criticised for its alleged adverse impact on the environment. The need for the ECT to catch up with the trends to make treaties greener peaked in November 2018 at the Energy Charter Conference meeting in Bucharest. The meeting’s final Declaration recognised the importance of moving towards a sustainable energy future and to meet the UN Sustainable Development Goal 7, which stipulates access to sustainable energy for all.

 

EU Sees Green

The ECT modernisation takes place in challenging times for the energy sector, particularly in Europe. The European Commission has launched its much-anticipated Green Deal to address climate change. In addition, several EU Member states push for the Paris Agreement to be an essential clause in all international agreements negotiated by the EU. And in June 2020, France and the Netherlands issued a joint call for tougher enforcement of environmental standards in EU agreements as part of the fight against climate change.

The EU’s draft proposal on the ECT modernisation contains amendments of all important parts of the ECT and significantly expands the scope of its sustainable development provisions. The EU’s proposal contains altogether eight new and ‘greener’ provisions. The most notable ones implement the Paris Agreement and State-to-State arbitration concerning that treaty into the ECT, which we will introduce in the next part below. Here, we describe a few other examples of the proposed green provisions:

First, the EU’s proposal explicitly links the development of international trade and investment in energy-related sectors to sustainable development. It does that by adding substantive provisions on the host state’s right to regulate based on similar language proposed by the EU in different investment negotiations.1)See e.g. CETA, Art. 8.9.; EU-Singapore IPA, Art. 2.2. jQuery("#footnote_plugin_tooltip_6960_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6960_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Second, the proposal aims to improve transparency. As is the EU’s practice in trade negotiations, any measure that may affect the environment is made subject to comments by stakeholders. Substantively, the signatories must carry out a transparent environmental impact assessment of all energy projects potentially harmful to the environment. This may present an important preventive and monitoring tool.

Third, regarding arbitration, the EU proposes that arbitrators be required to have expertise in labour or environmental law. This is an interesting change in its treaty-making because the EU usually requires specialised knowledge of, or experience in international investment law, international trade law, or dispute resolution.2)See e.g. CETA, Art. 8.27.; EU-Vietnam IPA, Art. 3.38. jQuery("#footnote_plugin_tooltip_6960_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6960_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

EU Adds Articles Implementing Paris Agreement and State-to-State Arbitration

The most notable element of the EU’s proposal, however, is a completely new article to be added in Part IV of the Treaty. Under this proposed article, each signatory would have to “effectively implement” the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement. The signatories would further be required to cooperate on climate change mitigation and adaptation to accelerate the transition towards a low emission, clean energy and resource efficient economy, as well as to climate resilient development.

This provision would be enforceable through a State-to-State dispute mechanism. Notably, the Paris Agreement has no enforcement mechanism. If the EU succeeds with its proposal, then the obligations under the Paris Agreement would be given an international enforcement mechanism via the ECT. Of course, this would still apply only to the ECT signatories and would not affect some of the world’s biggest polluters (including China, the US, and India). It would nevertheless be a huge step forward especially if China joins the ECT in the future.

From past practice, we know that inter-state arbitration involving human rights or environmental law issues can be wide-ranging. In order to be effective, the proposed dispute resolution provision gives tribunals the right to use external experts from the International Labour Organisation or relevant bodies established under multilateral environmental agreements.

And to demonstrate that the EU means business, we have to point out the EU’s willingness to initiate State-to-State disputes with its partners under various FTAs. In December 2019, the EU alleged that Korea failed to comply with its labour rights commitments under the EU-Korea FTA and both parties entered into dispute settlement proceedings by selecting the members of the panel. In July 2019, the EU started a dispute with Ukraine regarding Ukraine’s export prohibition of unprocessed timber under the EU-Ukraine Association Agreement. One can therefore imagine the EU being vigilant over other states’ complying with the Paris Agreement.

 

Concluding Remarks and Future Talking Points

By amending the ECT, the EU has a unique opportunity to significantly influence the development of global standards for investment protection in relation to climate change law. As we have demonstrated above, we are seeing very ambitious language proposed by the EU on sustainable development in the context of trade and investment negotiations. As such, it confirms the firm intention of the EU to go further than simply aligning the ECT with its other policies and its current international treaty negotiations.

One thing to watch closely is the proposed State-to-State dispute mechanism. It may very well provide an enforcement instrument for the Paris Agreement as well as the newly introduced sustainable development commitments in the ECT and in effect accelerate the ongoing transition to clean energy. If the EU succeeds with its ambitious proposal, the ECT could be the greenest investment treaty ever negotiated. On the other hand, one must ask how realistic it is to expect that the EU’s proposal will be accepted in the context of multilateral negotiations which require unanimity.

If we zoom out from the different negotiating positions, we observe that including sustainable development into the ECT may bring greater confidence in the agenda of investment liberalisation, investment promotion and protection needed to encourage business’ contribution to greening the world economy and support green growth through FDI. It may also help legitimise the ECT in the eyes of the public since the organisation is currently under immense pressure from civil society and is facing reports of internal dysfunction of its Secretariat. A question remains whether a greener ECT would help or hinder its territorial expansion with new countries including China joining.

 

To read our coverage of the ECT Modernisation process to date, click here.

References   [ + ]

1. ↑ See e.g. CETA, Art. 8.9.; EU-Singapore IPA, Art. 2.2. 2. ↑ See e.g. CETA, Art. 8.27.; EU-Vietnam IPA, Art. 3.38. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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ECT Modernisation Perspectives: Quantum Indetermination in the Current ECT Framework – A Need to Revamp Damages Provisions in the Pursuit of Full Reparation

Fri, 2020-07-24 04:00

In the absence of a uniform standard of compensation under the Energy Charter Treaty (“ECT”), tribunals have been tasked with filling the gap and have done so by exercising an important margin of appreciation for the assessment of damages. Such wide discretion has resulted in divergent approaches in assessing damages. Since the first ECT decision, tribunals have provided little guidance as to the basis upon which damages will be awarded. The lack of sufficient reasoning coupled with divergent outcomes has led quantum to remain the main concern of parties, while garnering significant criticisms due to its onerous and seemingly arbitrary nature. The discrepancies regarding quantum determination have undermined the capacity for the ECT to ensure reparation for internationally wrongful acts in a harmonized and consistent fashion.

This post first examines the scope of application of Article 13 of the ECT, to highlight the ambiguity surrounding the current formulation of the ECT’s only express compensation standard. It then highlights the methodologies applied to valuation in ECT disputes to propose some concrete recommendations. The recommendations aim at streamlining the application of the ECT compensation standard for treaty breaches to ensure consistency and predictability in future ECT cases.

 

Article 13 of the ECT: A Limited Scope of Application

Like other analogous treaty-based reparation standards, the ECT solely provides a standard for compensation in case of lawful expropriation. Article 13 of the ECT enshrines an obligation to pay “prompt, adequate, and effective compensation” for lawful expropriations. Article 13 also sets out general principles concerning the valuation of such damages, focusing on “the fair market value of the investment expropriated”. Article 13 then provides that the market value is estimated “at the time immediately before the expropriation” or at the valuation date. While the inclusion of a particular valuation methodology was perceived as a welcome development at the time of the ECT’s adoption, its narrow scope of application leaves various issues unaddressed.

Notably, Article 13 fails to provide sufficient guidance on what compensation will be due for unlawful (including indirect) expropriations. In addition, none of the ECT provisions directly tackle the standard of compensation for other ECT breaches (including the fair and equitable treatment provision), or the availability or quantum of pre- or post-award interest. In the absence of guidance on how to assess damages in these situations, tribunals have frequently endorsed customary international law principles of compensation to devise an appropriate valuation methodology. For instance, in the Nykomb arbitration, the tribunal stated that the principles of compensation within Article 13 (1) of the ECT would not apply to an assessment of damages under Article 10 of the ECT (the fair and equitable treatment provision). It found on this basis that “the question of remedies to compensate for losses or damages caused by the Respondent’s violation of its obligations under Article 10 of the Treaty must primarily find its solution in accordance with established principles of customary international law”. This has meant that most ECT tribunals have referred to the principle of full reparation under customary international law in order to assess compensation for unlawful expropriation and other breaches of the ECT.

 

Reforms for ECT Remedies Provisions?

The current text of the ECT treaty does not contain any reference to the principle of full reparation, and also fails to incorporate existing industry practice concerning the valuation of damages for non-lawful expropriations and other treaty breaches. In the absence of clear direction, tribunals may engage in an overzealous approach to valuing quantum in ECT cases, which may risk unduly favoring one of the parties. In addition, difficulties arise in discerning fair market value (“FMV”) and full restitution when measuring loss. In particular, emerging jurisprudence shows that many tribunals do not draw a clear distinction between FMV and full restitution, thereby making it hard to discern on what assessment such amounts are awarded.

The ECT modernization process could therefore usefully produce some articulation of applicable compensation standards that should apply in ECT investor-State arbitration cases, in addition to those applicable to lawful expropriations. It could moreover usefully supply tribunals with more guidance as to the methodology that should apply to calculate quantum in ECT investor-State cases.

To this end, the ECT contracting parties have proposed to reform damages in the context of the ECT modernization process. For instance, Turkey has suggested an additional protocol to cover this topic, aiming at explicitly including FMV and excluding lost profits. The EU recently proposed a Revised Draft Proposal on April 2020. The EU draft article is still unclear on the question of quantum calculations, stating inter alia that: “[v]aluation criteria shall be based on internationally recognised principles and norms” (i.e. full reparation), and adding that “[t]he EU reserves the right to propose more detailed rules on valuation at a later stage pending the outcome of discussions in other international fora”. In view of the EU’s increasing role in ISDS reform, a concrete proposal on damages is to be expected in the future.

 

A Need for Guidance as to Applicable Valuation Methodologies

Embracing new techniques and including alternative methodologies in the new draft of the ECT will be in line with the objective of ensuring that the ECT can encourage and create stable, equitable, favorable and transparent conditions for investors. This could encompass a range of reforms regarding damages.

First, the ECT parties should expressly indicate what principles should guide damages assessments including, for example, to designate the role of full reparation standards in damages analyses. The Turkish proposal endorses the use of a FMV methodology, and exclusion of lost profits in quantum assessments. It is in our view, however, important that tribunals have the capacity to account for post-expropriation events, including lost profits, as these directly affect net recovery. This also aligns with the full reparation principle, recognizing consequential and other losses. While States have yet to put forward more detailed proposals, these considerations indicate that the ECT modernization process could usefully encompass revisions to the text to more expressly endorse (or detail) a methodological analysis. In our view, there continues to be a role for methodologies like discounted cash flow (“DCF”) analysis. This is a method that accounts for the importance of the nature of the asset and the specific facts of the case. DCF techniques1)On the reliability of DCF, see ECT cases PV Investors v. Spain, Masdar v. Spain, Antin v. Spain, 9REN v. Spain, SolES Badajos v. Spain, Operafund v. Spain, Watkins v. Spain, Greentech v. Spain, CEF Energia v. Italy; see also, on the “modern DCF” methodology adopted in the Tethyan case: R. BARNES (2017) “Not so rare : the valuation method behind the Tethyan case”, Global Arbitration Review: “rather than capturing both the time value of money and risk in the discount rate, risk is accounted for in the cash flows being discounted, and only the time value of money is captured by the discount rate” but see, Nextera v. Spain, in which the tribunal rejected the DCF for one year of operating profits. jQuery("#footnote_plugin_tooltip_1438_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1438_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); appear to be more consistent than FMV methodologies with the overall objective of the full reparation principle, because it accounts for future income streams. DCF treats an investment as an asset or enterprise capable of generating profit in the future after expropriation. By contrast, the FMV standard contained in Article 13, which assesses quantum as at the date of expropriation, has two draw-backs. First, it negates the nature of the investment as an asset or enterprise capable of operating in the future. It also fails to take into account post-expropriation events. There may be circumstances in which a state may legally take a profitable investment that would have continued to operate with an enhanced profit. However, by applying a FMV standard, tribunals may end up compensating with a lower value which goes against the basic tenet of the full reparation principle.

Second, ECT parties could use the modernization process to adopt a clear and coherent choice of valuation methodology, including to stipulate guidance as to its use for specific violations. In this respect, we are of the view that the application of different methodologies should not be based on whether or not expropriation has been lawful or not. Rather, importance should be placed on the nature of the underlying investments that have been subject to either lawful or unlawful expropriation. Such criteria were already suggested in the 1992 World Bank Guidelines on the Treatment of Foreign Investment, whereby the compensation would “account [for] the nature of the investment, the circumstances in which it would operate in the future and its specific characteristics”. This approach has a significant advantage because it attempts to measure the value created by a business directly and precisely. Such an approach would also remain sensitive to assumptions related to perpetual growth of underlying dispute.

Finally, the ECT modernization process could usefully define which methodologies will apply in different circumstances (based on specific industry standards) to prevent the overzealous interpretation of provisions by tribunals and narrow the scope of applications. Defining methodologies and applying them based on specific industry standards is important because it underlies that each asset may have a different stream of revenue based on the specifications of that industry. For instance, evaluation for oil and gas extraction requires accounting projected future net revenues, or if the investment is a start up with no track record, history of operation or other solid basis on which to make projections of profits, then other methodologies may be more suitable.

 

Final Remarks

Revising the ECT to provide a comprehensive compensation standard and methodology for assessing damages for both expropriation and other breaches of the ECT would give tribunals the confidence to thoroughly explicate their quantum decisions. Moreover, it would provide comfort to States parties which are also respondents over the outcome of disputes, while at the same time, giving investors greater certainty regarding the possible outcome of any recourse to the treaty for dispute resolution. Finally, giving the ECT a robust textual provision for damages would increase consistency and predictability in the interpretation of the ECT, as well as the investment arbitration system as a whole.

 

To read our coverage of the ECT Modernisation process to date, click here.

References   [ + ]

1. ↑ On the reliability of DCF, see ECT cases PV Investors v. Spain, Masdar v. Spain, Antin v. Spain, 9REN v. Spain, SolES Badajos v. Spain, Operafund v. Spain, Watkins v. Spain, Greentech v. Spain, CEF Energia v. Italy; see also, on the “modern DCF” methodology adopted in the Tethyan case: R. BARNES (2017) “Not so rare : the valuation method behind the Tethyan case”, Global Arbitration Review: “rather than capturing both the time value of money and risk in the discount rate, risk is accounted for in the cash flows being discounted, and only the time value of money is captured by the discount rate” but see, Nextera v. Spain, in which the tribunal rejected the DCF for one year of operating profits. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Developing an Archetypal ISDS Arbitrator: Unicorn or Rhinoceros

Fri, 2020-07-24 03:00

Today, there is no universal code of conduct, no single professional regulatory organization or global certification process in the field of investor-state dispute settlement (“ISDS”). Instead, the field of international arbitration is didactically governed by self-policing, episodic, and distinct ad hoc measures serving to collectively safeguard the integrity of the international arbitration process. On the one hand, codifying best practices could improve the integrity, certainty and legitimacy of international arbitration, establishing a systemic set of ethical “do’s” and “don’ts”. On the other hand, a standardized code may be confusing, aspirational and ineffective. What is clear, change is afoot, particularly in the field of ISDS.

The Secretariats of the International Centre for Settlement of Investment Disputes (“ICSID”) and the United Nations Commission on International Trade Law (“UNCITRAL”) recently issued a Draft Code of Conduct for Adjudicators of ISDS (“Draft Code”) on May 1, 2020, which was previously discussed by Professors Chiara Giorgetti and Vanina Sucharitkul on the blog. The Draft Code seeks to provide binding rules applicable to arbitrators, judges, and other ISDS adjudicators. As ICSID envisions, the Draft Code “has the potential to memorialize a uniform set of ethical expectations for ISDS generally.” UNCITRAL’s Working Group III on ISDS Reform addressed the drafting of the code in its thirty-fifth, thirty-seventh, and thirty-eight sessions.

But is a universal code of conduct for ISDS arbitrators actually needed? The integrity of the ISDS arbitrator is the subject of a diverse set of (hard and soft law) rules by different institutions and organizations. Applicable rules may include those of the administering institution, seat of the arbitration or as customized by the parties (e.g., IBA Guidelines on Conflicts of Interest). Other leading arbitral institutions have already undergone similar changes to improve transparency and reduce conflicts of interest within the field. Such changes include the addition of Article 24 of the 2017 Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) requiring the tribunal secretary to remain impartial and independent; Article 27 of the 2017 Investment Arbitration Rules of the China International Economic and Trade Arbitration Commission (“CIETAC”) requiring funding disclosures; and amendments to the 2017 Arbitration Rules of the International Chamber of Commerce’s International Court of Arbitration (“ICC”), which now authorize a party to request from the ICC reasons for its decisions including those made on challenges, consolidations, and jurisdiction. Even the proposed multilateral court for international investment arbitration envisions measures that eschew conflicts of interest. Paragraphs 18 and 19 of the European Union’s submission to the UNCITRAL Working Group III on “Establishing a standing mechanism for the settlement of international investment disputes” of 18 January 2019 provides that “Adjudicators would be subject to strict ethical requirements” and that “[i]ndependence from governments would be ensured through a long-term non-renewable term of office.” Despite these changes, the rules are meant to offer baseline protections and where apparent deficiencies persist, the arbitration process invites the parties to tailor-make their archetypal neutral.

Similarly, the standard of review, which is the ultimate stress-test on disclosure obligations, also varies. For example, a successful application for disqualification of an arbitrator under ICSID Convention Article 57 requires demonstration of a “manifest lack of qualities” whereas only “justifiable doubts” are prescribed by UNCITRAL Arbitration Rules Article 12. For a discussion on other standards, please see blog posts by Gary Born and Chiara Giorgetti. Regardless of the variation, it is generally accepted that the standard to disqualify an arbitrator is remarkably high. The typical prerequisites of “high moral character”, “recognized competence”, and “independent judgment” are benchmarked against difficult tests that are rarely impaired. For example, only five of seventy-six publicly-listed arbitrator challenges under the ICSID Convention have been upheld. Generally speaking, the party alleging the challenge must demonstrate “manifest”, “actual”, “self-evident”, “clear”, “plain”, “evident” or “obvious” appearance of bias, “justifiable” or “reasonable” doubts” or, in some cases, a “perception of bias”. Accordingly, the current system is a patchwork, which invites ambiguity as ISDS stakeholders must evaluate the import of (each of) the (sometimes various) applicable law(s); but, if there is a convergence of outcome, does the difference in source and language even matter?

A significant exception, however, is the recent annulment of the Eiser v Spain Award on June 11, 2020, which is understood to be the first time in ICSID’s history that an award has been annulled on the basis of an arbitrator’s lack of independence and impartiality. In that case, one of the arbitrators, Stanimir Alexandrov, failure to disclose a longstanding professional relationship with one of the Claimant’s expert witnesses from the Brattle Group led to the annulment of the €128 million award. While this annulment may be considered an outlier, it fans the flame that change is warranted.

Assuming, arguendo, deficiency in the current schemes of ethical rules and standards of review, each case ultimately boils down to its unique facts and the recent rule revisions by leading arbitral institutions are telling. Namely, certain apprehensions towards the role of the ISDS arbitrator have polarized amongst ISDS stakeholders; and pre-existing rules have been largely deemed by the international arbitration community as ineffective or unresponsive. Answers, however, are not easily found. Instead, solutions develop over time and have required regular updating. For example, in the last eleven years the ICC (2012, 2017), SCC (2010, 2017) and CIETAC (2009, 2015) have all updated their arbitration rules twice. ICSID is working on its fourth amendment (1984, 2003, 2006), which is addressing hotly debated matters such as double-hatting and third-party funding by offering clearer guidelines. Efforts against double hatting have also seeped into treaty drafting practice. The investment chapter of the new United States-Mexico-Canada Agreement, which came into force on 1 July 2020, forbids arbitrators from acting in another capacity (i.e., as counsel, party-appointed expert or witness) in any other pending arbitration under the Agreement. Moreover, there will inevitably be new considerations in the future, such as developing standardized practices to deal with cybersecurity concerns flowing from confidentiality and the digital exchange of information (see e.g., Don’t be the Weakest Link) or how to address the independence and impartiality of the underlying predictive software of artificial intelligence used to aid the arbitration process (see e.g., Arbitrator Intelligence). In other words, the ISDS world is dynamic and nimbleness to change is its guidepost. A code of conduct that does not reflect this inherent need for flexibility may in the end stunt the development of best practices.

So, can it be achieved? The ICSID/UNCITRAL Draft Code suggests that it can be; but, questions remain. The Draft Code is currently open to comment but will it receive the input and attention that is necessary? Rounds of revision will undoubtedly mete out problem language in the text as well as problem articles. For example, draft Article 6 imposes a complete ban on double-hatting, which will have serious repercussions for who is eligible to act as an ISDS adjudicator under the Draft Code. More specifically, women, minorities, and, more generally, young professionals seeking to establish themselves as an authority within the field will be largely disadvantaged. Young, hungry, motivated individuals equipped with great budding legal minds will be forced into silos: academic, practitioner OR adjudicator, with the latter a near (financially) impracticable choice. A similar criticism may be levied at the onerous disclosure obligations. Draft Article 5(2)(d) requires prospective arbitrators to disclose a list of all publications and public speeches made by the adjudicator or candidate. The first question is whether this is even practicable, particularly in light of the illustrious careers of certain arbitrators (and given the ban against double-hatting naturally precludes younger candidates); but it also follows whether, as a natural implication, it will lead to a “scholarship chill”, whereby those pining for an arbitrator’s seat refrain from championing provocative argumentation and ideas because they prefer to safeguard a prospective “call up” to the big leagues as ISDS adjudicator over simply being regarded as a novel thinker of the minors. Are we also ready for a binding code? Is it even necessary in light of the stringent challenge standards discussed above? Or, will it even have the desired effect given that the archetypical arbitrator under the Draft Code will likely be an ex-government official or retired judge, who may have already procured diplomatic immunity. For those without such privilege, it will likely increase adjudicator insurance premiums, which may translate, over time, into higher arbitrator fees.

While finding answers to these questions will be challenging and debating the details a laborious process, the trending way forward for ISDS is to backstop proposed reforms against legitimacy and integrity improvement efforts. The tandem effort by ICSID and UNCITRAL in preparing the Draft Code is step in the right direction. Certainly, reforms that enhance and safeguard ISDS arbitrators’ independence and impartiality ought to be encouraged and embraced; but, the bottom line of any code of conduct for ISDS arbitrators will be towed by its practical utility. Accordingly, the scale of its success will be marked by its use in ISDS.

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ECT Modernisation Perspectives: Reforming the Fair and Equitable Treatment Protection

Thu, 2020-07-23 03:00

The investment protection mechanism in the Energy Charter Treaty (ECT) is meant to, among other things, promote, attract, and protect foreign investments in the member states’ energy sectors. In 2018, the Energy Charter Conference announced its list of approved topics for the modernization of the ECT. The list included several substantive investment protection provisions. This post focuses solely on the fair and equitable treatment (FET) standard. The crux of the matter breaks down to: (1) what level of protection does the current FET standard provide (de lege lata), and (2) what level of protection should it generate subsequent to the ECT modernization process (de lege ferenda)?1)For an elaborate discussion on this topic, the reader is advised to consult Professor Schreuer’s seminal chapter and Professor Hobér’s ECT Commentary. jQuery("#footnote_plugin_tooltip_9803_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9803_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Why Reform the FET Standard?

Article 10(1) of the ECT contains an FET standard, providing that:

“Each Contracting Party shall, in accordance with the provisions of this Treaty, encourage and create stable, equitable, favourable and transparent conditions for Investors of other Contracting Parties to make Investments in its Area. Such conditions shall include a commitment to accord at all times to Investments of Investors of other Contracting Parties fair and equitable treatment.” (emphasis added)

It soon became apparent through arbitration that scholars and practitioners had to clarify whether the FET standard was a reference to the minimum standard of treatment under customary international law. Another issue was whether the FET obligation in Article 10(1) was a stand-alone provision or connected to other substantive protections. The latter proved rather cumbersome given the lumping together of several protections in Article 10 (1) of the ECT. Adding to this, the inherent ambiguity in “fair” and “equitable” has not made things more certain, especially pertaining to host State rights to regulate without breaching the standard of protection. As a result, the interpretation and application of the obligation contained in Article 10(1) has not been easily discernable and the lack of clarity has produced inconsistent and divergent arbitral awards.

The main reasons for FET reform seem to be a lack of clarity and a possibility of a “regulatory chill”. Adding fuel to the overall reform debate is the allegation of an “investor-bias”. Therefore, some statistics may be necessary to encapsulate current affairs: (i) there have to date been 130 ECT arbitrations; (ii) 12 EU States have been respondents; (iii) most claimants are EU nationals; (iv) most claimants are small and medium enterprises; (v) the outcome of final awards (65) break down as follows: 43% (finding of breach of ECT and award of damages), 15% (finding as to a lack of jurisdiction), 31% (finding of no breach), 6% (settlement agreement embodied in award), 3% (finding of breach but no award of damages), and 3% (outcome is unknown). Out of the final awards that are publicly available (64), the FET standard was invoked in 24.3% of the cases. A substantive breach of investor protection was found in 32 cases, out of which a breach of the FET standard constituted 64% of the successful claims.  Statistically speaking, therefore, there seems to be no systematic favoritism (“investor-bias”) embedded in the ECT ISDS regime. However, investors do win and have mostly been successful when invoking the FET protection. In this light, several states, NGOs, and some scholars now emphasize that the current FET standard creates a “regulatory chill” and is in need of reform.

 

De Lege Lata and De Lege Ferenda

Initially, some considered the FET standard a “catch-all” provision (encapsulating e.g. constant protection and security, non-discrimination, etc.). However, nowadays most experts treat it as a stand-alone standard that generates a negative right, i.e. a duty on the host State to refrain from certain prohibited actions. Through arbitral practice and scholarly work, several sub-standards have been considered to constitute part of FET protection. States have engaged in (re)defining the FET standard in new IIAs in order to reflect these developments and provide more clarity. Most strikingly, in the Comprehensive Economic and Trade Agreement (CETA) the EU has proposed a list definition of measures that constitute a breach of the FET obligation. To similar effect, several ECT members have proposed revising Article 10(1) of the ECT to reflect different policy options meant to clarify the FET standard. The main policy considerations are whether:

  1. the FET standard should include a list of measures that constitute a breach of the FET obligation?
  2. the list should be closed or open-ended?
  3. the FET provision should offer protection for legitimate expectations?
  4. the legitimate expectations sub-standard should only be breached if there has been a specific representation and reliance (i.e. a form of promissory estoppel)?
  5. the FET provision should be narrowed to align with the minimum standard treatment under customary international law, or whether it should offer more robust protection?

ECT member states disagree as to the way forward. For example, Azerbaijan and Georgia advocate in favor of the minimum standard treatment alignment. Further, the EU advocates for a closed list approach (e.g. denial of benefits, manifest arbitrariness, duress and harassment, etc), and for legitimate expectations to be narrowed to situations where a party has made a specific representation which the investor relied on when making or maintaining the investment, whereas Switzerland proposes an open-ended list of FET obligations, and Japan does not believe that any amendment is necessary.

It is the sub-standard of legitimate expectations that has been the most controversial in reform discussions, as it represents one of the main features underpinning the so-called “regulatory-chill” argument. In this light, we must ask a fundamental question: is it inherently unreasonable that an investor should be able to argue that a high level of transparency could form part of a legitimate expectation under FET, giving rise to a right to expect their investment to benefit from foreseeable laws, regulations, administrative rules, and policies? In fact, investor compliance with domestic law demands foreseeability and State actions in a coherent and consistent manner. The value of stability and predictability should not easily be substituted, not even for supposedly very noble purposes. The ancient wisdom in “the means does not justify the ends” deserves some attention in this part of the reform debate. FET protection should protect investors’ reliance on reasonable transparency and consistency in the host State’s legal framework.

Finally, a central part of the FET reform debate asks whether the current standard leads to a widespread “regulatory chill”. To address this issue, member states have to determine how to protect investors while also ensuring that the State is able to regulate in order to preserve public policies. Some States have opined that a separate provision stipulating a “right to regulate” may be necessary. The EU is of the opinion that reforms are needed to ensure that “governments’ right to regulate for public policies such as the protection of health, safety, or the environment is fully preserved”. We believe that this debate will unfold through a narrowing of the material scope of the FET obligation in the ECT. The EU is paving the way for such an approach through its proposal to clarify that the investment protection provisions should not be interpreted as undermining State rights to “change their laws in the future, even if that may negatively the investor’s expectation of profits”.

 

A “Hush and Rush Reform” is Intellectually Lazy and Divorced from Reality

We are much in favor of a modernization process that is driven by well-intended, justified, and substantiated reform proposals, i.e. such that align with furthering the object and purpose of international investment protection. The underlying focus should be, as Graham Coop put it, on “how the ECT could be improved in order to become more attractive as an instrument for settling major—that is, critical—international energy disputes”.

If, however, there is a hidden agenda among some overly influential stakeholders (e.g. several NGOs not engaging in regime interaction considerations or reasonable balancing between investor protection and obligations) for a total transformation of international investment law and ISDS as we know it, we ought to proceed with serious caution. Any reform that is rushed at the backdrop of the recent backlash and in light of the current legitimacy debate must be strenuously scrutinized.

This post has zoomed-in on the FET standard because it is such a controversial standard of treatment that in turn underscores much of the overall criticisms of ISDS – primarily vis-á-vis the balancing between states’ right to regulate and investor protection. The regulatory-chill and alleged investor-state bias arguments have been driving factors in pushing for a transformation of the content of international investment law and for reforming the ISDS system. However, as things stand, both the alleged investor-bias and the supposed regulatory-chill argument have not been substantiated. At the end of the day, the FET standard in the ECT has helped promote a global rule of law with respect to a nowadays transnational energy sector. Reforming the FET standard without taking thorough account of its strengths risks undercutting its achievements.

As transnational scholars and lawyers, we must not forget the deeply entrenched post-WWII and post-Cold War mission to facilitate interdependence and interconnectivity through cross-border trade, commerce, and investments. There is no better way to facilitate these transactions than through the elaboration of favorable IIAs with ISDS clauses. Internationally recognized substantive protection with the option of procedural redress in a neutral venue elevates these treaties to instruments of trust. Let us also not forget that ISDS promotes a global rule of law, which assists to hold states accountable for breaching laws and regulations of global concern. By way of illustration, the FET protection in the ECT has recently been relied on by investors when host States have interfered with their investments in the renewable energy sector. Thus, holding States accountable can indeed prove to promote a common global cause, apart from the obvious bona fide and pacta sunt servanda element in adhering to its international obligations. It is important that arbitrators get this balance between investor protection and regulating for public purposes right. Several mechanisms for doing so have been proposed, including the doctrine of proportionality as a tool for arbitrators in achieving this. Thus, striking a balance between the right to regulate (e.g. redressing the supposed “regulatory chill” argument) and the right to expect regulatory stability is an important one, but unfortunately a large part of the current criticism risks throwing out the baby with the bathwater. Small and medium enterprises must be able to rely on a host State refraining from actions that de facto constitute systematic violations of their reasonable and justified expectations with respect to stability and transparency of the legal environment. Multinational corporations have their ways of negotiating outside default regimes.

 

To read our coverage of the ECT Modernisation process to date, click here.

References   [ + ]

1. ↑ For an elaborate discussion on this topic, the reader is advised to consult Professor Schreuer’s seminal chapter and Professor Hobér’s ECT Commentary. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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AFSA Launches New International Arbitration Rules for Public Comment

Thu, 2020-07-23 02:00

On 1 July 2020, the Arbitration Foundation of Southern Africa (“AFSA”), a leading arbitral institution in South Africa, launched its new draft International Arbitration Rules for public comment.  The International Arbitration Rules were launched via a webinar co-hosted by Professor Dr. Maxi Scherer, chairperson of AFSA’s Drafting Committee and Advisory Board, and Patrick Lane SC, a member of the Advisory Board.  They were joined by other members of the drafting committee, Ndanga Kamau, Chiann Bao, Remy Gerbay and Jonathan Ripley-Evans.  (The webinar is available to view here)

AFSA first announced in October 2019 that it would revise its international arbitration rules to meet the needs of its increasingly international users.  This was a timely announcement, given the dramatic increase in AFSA’s international case load, which more than doubled since the enactment of South Africa’s International Arbitration Act (“IAA”) based on the UNCITRAL Model Law in late 2017.  In order to facilitate this growth and to continue to provide a high level of service based on international best practices, AFSA decided to review its international rules.  To this end, AFSA assembled an international Drafting Committee and Advisory Board comprising leading individuals from the region and all over the world, including senior members of the South African bar, prominent arbitrators from the African continent, senior in-house practitioners and practitioners with extensive experience in leading global arbitral institutions.  Further details regarding AFSA’s drafting committee and advisory board are available here.

The published draft International Arbitration Rules are a collective labour of love and aim to set the standard for arbitral institutions in the African continent and beyond.  It reflects recent developments and best practices in international arbitration globally, while introducing a number of innovations targeting issues of emerging concern to arbitration users, such as the use of administrative secretaries, multi-party arbitrations, the availability of fast-track procedures, the flexibility to have fully electronic arbitration filings and remote hearings, and provisions striking a balance between confidentiality and transparency.

Key features include:

  • A new structure with the establishment of an AFSA International Board, an AFSA International Court and an AFSA International Secretariat led by the AFSA Secretary-General.  This structure will allow AFSA to benefit from even more international expertise, while dedicating resources to the close supervision and support of arbitrations administered by AFSA under its rules.  The AFSA International Court will play an important role in the confirmation, appointment, challenge and replacement of arbitrators, as well as in some decisions regarding joinder and consolidation.
  • Express provisions enabling fully electronic submissions (without the need for paper filings) and permitting hearings in any form the arbitral tribunal considers appropriate, including remote hearings conducted entirely by video or telephone conference.
  • Provisions expressly empowering arbitral tribunals to appoint administrative tribunals and specific guidance on the functions, duties and fees of administrative secretaries appointed by arbitral tribunals.
  • Provisions setting forth a new expedited procedure for cases where the amount of dispute does not exceed US$500,000 or where the parties agree, as well as a new procedure for the appointment of an emergency arbitrator to grant urgent interim or conservatory measures that cannot await the constitution of an arbitral tribunal.
  • Provisions on interim measures (including security in connection with such interim measures and the cost consequences of an application for interim measures) and security for costs.
  • Provisions on the early dismissal of claims or defences that are manifestly without legal merit or manifestly outside the jurisdiction of the arbitral tribunal.
  • Provisions on the parties’ right to representation, guidelines on the conduct of party representatives (in the form of Annex 2), and sanctions for the breach of guidelines.
  • Provisions on disclosure obligations relating to the existence of a third-party funding arrangement and the involvement of a third-party funder.
  • Provisions on multiple contracts, joinder and consolidation, which address the availability of such procedures both prior to the constitution of an arbitral tribunal and after the constitution of an arbitral tribunal.
  • Provisions on confidentiality, exceptions to confidentiality and the publication of awards by default (either where there is no objection in writing within 30 days of the notification of the award or, where there is such an objection, publication in an anonymised or pseudonymised form).

The new rules have been uploaded onto AFSA’s website and can be found here.  Arbitration practitioners are encouraged to consider the draft new International Arbitration Rules and to provide feedback to AFSA by 31 August 2020.  Comments can be emailed to [email protected].

 

In the interests of full disclosure, the authors are the Secretaries to AFSA’s Drafting Committee.

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ECT Modernisation Perspectives: ECT Modernisation and the Denial of Benefits Clause: Where the Practice Meets the Law

Wed, 2020-07-22 04:00

Denial of benefits clauses (DoB) have gained considerable traction in the past prolific years of Investor-State Dispute Settlement (ISDS), and more specifically, with the growing number of Energy Charter Treaty (ECT) arbitrations.

UNCTAD’s Investment Policy Hub still lists a considerably small number of international investment agreements (IIAs) providing for DoB: little above 200 which would account to less than 10% of IIAs. The ECT, in the current form of Article 17, provides for the following DoB:

Each Contracting Party reserves the right to deny the advantages of this Part to:

(1) a legal entity if citizens or nationals of a third state own or control such entity and if that entity has no substantial business activities in the Area of the Contracting Party in which it is organised; or

(2) an Investment, if the denying Contracting Party establishes that such Investment is an Investment of an Investor of a third state with or as to which the denying Contracting Party:

(a) does not maintain a diplomatic relationship; or

(b) adopts or maintains measures that:

(i) prohibit transactions with Investors of that state; or

(ii) would be violated or circumvented if the benefits of this Part were accorded to Investors of that state or to their Investments.

The situation referred to in paragraph 2 is still to be tested in practice (although with the increase concerns of economic sanctions, the matter is very much open). Paragraph 1 has been more frequently invoked.

It is understood that the purpose of DoB clauses like that in Article 17 of the ECT is to exclude investors and their investments from the protection of the IIA, even if formally satisfying the definition of investor, when not having a real (economic) connection with the home State. As such, DoB is not only a guarantee against the abuse of rights, but also a safety measure for safeguarding the integrity of the principle of reciprocity embodied in investment treaties.

In one of the decisions regarding the modernisation of the ECT, the Energy Charter Secretariat included the following note with regard to the DoB: “some IIAs specify that the denial of benefits clause can also be invoked once Investment proceedings have started”. The DoB is therefore on the radar of the reform process, with several issues being identified in the application of Article 17 of the ECT that may warrant amendment. These include the procedural aspects for invoking a DoB before arbitral tribunals, and issues pertaining to the substantive requirements under Article 17 (or ratione materiae, as referred to by the Waste Management arbitral tribunal).

While discussions are conducted in the ECT Subgroup on Modernisation, there is little transparency on the progress of the modernisation process. On 27 May 2020, the EU published the proposed amendments to the ECT provisions, including those concerning Article 17 on the DoB. The proposed text appears to include solutions to the issues raised before ECT arbitral tribunals so far and also align the DoB with the recent IIAs concluded by the EU (for example, Art. 8.16 of the CETA):

It is also noteworthy that the paragraph 1 situation (substantial business activity in the Contracting Party) is a matter addressed in recent EU IIAs as a matter of jurisdiction and also reflected as such in the EU proposal through the amendment of Article 1(7)(a)(ii) of the ECT.

In light of the Energy Secretariat and EU proposals, and for the limited purpose of this post, two matters will be addressed: (1) the exercise of the right to deny the benefits of the ECT; and (2) the time when the respondent Contracting Party to the ECT should deny the benefits of the ECT. The brief analysis below reveals that the proposals for the amendment of Article 17 of the ECT are triggered by the evolving practice of arbitral tribunals with respect to DoB. In other words, the proposed new treaty text is aimed at reflecting arbitration practice. This is not an unusual approach, but a natural evolution of any system. For ISDS, this is not novel: ICSID, in its latest amendment process of the ICSID Arbitration Rules explicitly states in relation to various amendments that “the proposal streamlines the procedure in line with current practice”.

 

Exercising the denial of benefits right

The debate surrounding the existence of a DoB in an IIA first revolves around the question whether the denying State can benefit from the automatic application of the provision when the conditions spelled out in it are met or, to the contrary, if the State must exercise this denial right before the putative investor files its claim.

Article 17 of the ECT currently provides that ‘[e]ach Contracting Party reserves the right to deny’, as opposed to, for example, the corresponding provision in Article 8 of Iran-Slovakia BIT which states that ‘[t]he benefits of this Agreement shall be denied’.

As it stands, Article 17 of the ECT requires the denying Contracting Party to exercise the DoB ‘right’. In Plama v. Bulgaria, the arbitral tribunal took precisely this approach:

In the Tribunal’s view, the existence of a ‘right’ is distinct from the exercise of that right. … The language of Article 17(1) is unambiguous; and that meaning is consistent with the different state practices of the ECT’s Contracting States under different bilateral investment treaties … (para 155).

The arbitral tribunal in Khan Resources v. Mongolia, in holding that the ‘denial of benefits’ right must be exercised by the denying State, put forward a more incisive approach to this matter:

Article 17(1) of the ECT provides that the Contracting Party ‘reserves the right’ to deny the benefits of Part III of the ECT. The ordinary meaning of the verb ‘to reserve’ suggests that the right to deny the benefits of the Treaty is being kept by the Contracting Party, to be exercised in the future. … The interpretation that Article 17 requires an active exercise of the Contracting Party’s right to deny the benefits of Part III of the ECT is in line with the Treaty’s object and purpose (paras 419 and 421).

After establishing that the ‘denial of benefits’ right must be actively exercised by the respondent State, ECT arbitral tribunals embark on assessing the proper manner in which such exercise should be effected. Some IIAs require a prior notification and/or consultation procedure between the parties to the applicable IIA before effectively denying the benefits of that treaty to the putative investors. One such example is the now defunct Article 1113 of NAFTA. The ECT does not provide for such preliminary step.

In Plama v. Bulgaria, the tribunal considered that the exercise of the DoB “would necessarily be associated with publicity or other notice so as to become reasonably available to investors and their advisers” (para 157). As further explained by the Plama tribunal, “[b]y itself, Article 17(1) ECT is at best only half a notice; without further reasonable notice of its exercise by the host state, its terms tell the investor little; and for all practical purposes, something more is needed” (para 157).

As to prior notification, under the current Article 17 of the ECT arbitral tribunals are called upon to apply the DoB as it is. As the wording of the provision does not lead to the conclusion that the notification of investor is required and, furthermore, no time limits are associated with the exercise of the ‘denial of benefits’ right, arbitral tribunals should be cautious in reading such prerequisites into this clause. This is particularly so in light of Article 46 of the ECT, which provides that “[n]o reservations may be made to this Treaty”. One would also assess the opportunity of such a prior notice. In reality, in many instances host States become aware of investors and their particularities, and, more specifically, whether they fit into the ‘denial of benefits’ situation, at the time they are served with the request for arbitration. The proposal of the EU appears to identify the issue of a prior notification and suggest that the wording of Article 17 should be clear in that no “prior publicity or additional formality related to its intention to exercise” the DoB is required. Clear treaty language is certainly to be encouraged, in particular in the context of the concerns with consistency, coherence, predictability of ISDS.

 

When should a State exercise its denial of benefits right?

The surveyed ISDS case law shows that respondent States rely on DoB and effectively deny the benefits of the applicable IIA when a dispute is well underway, and more specifically, after the host State becomes aware of the request for arbitration submitted under the investor-state dispute settlement provisions. From a practical point of view, unless foreign investments have to be authorized by the host State, few denying States will become aware of the case before the submission of arbitral proceedings takes place.

In Ascom v. Kazakhstan, the arbitral tribunal expressed the position that “Art. 17 ECT would only apply if a state invoked that provision to deny benefits to an investor before a dispute arose” (para 745).

The proposal from the Energy Charter Secretariat for the amendment of Article 17 of the ECT suggests that a respondent Contracting Party could invoke the DoB even after the commencement of the ISDS proceedings under the ECT. This appears to be more in line with the conclusion of non-ECT arbitral tribunals dealing with DoB. For example, in EMELEC v. Ecuador, the tribunal concluded that “Ecuador announced the denial of benefits to EMELEC at the proper stage of the proceedings, i.e. upon raising its objections on jurisdiction” (para 71). In Ulysseas v. Ecuador, under the UNCITRAL Arbitration Rules, the tribunal concluded that the respondent State raised the DoB in a timely manner:

The first question concerns whether there is a time-limit for the exercise by the State of the right to deny the BIT’s advantages. … According to the UNCITRAL Rules, a jurisdictional objection must be raised not later than in the statement of defence (Article 21(3)). By exercising the right to deny Claimant the BIT’s advantages in the Answer, Respondent has complied with the time limit prescribed by the UNCITRAL Rules. (para 172).

It is undisputed that DoB gained traction and prominence in the first arbitration cases under the ECT. The ECT modernisation process is well underway and, while more transparency would be welcomed, it appears to implement an immediate response to concerns raised in ECT arbitral proceedings concerning operation of DoB. However, DoB must not only be viewed in isolation, for at least three reasons. First, DoB provisions, given their similarity, would inevitably experience a cross-fertilization, in particular when it comes to their application by arbitral tribunals. Second, ultimately DOB clauses are treaty provisions and their interpretation and application is to be performed in accordance with international law, possibly without any tribunal activism nor by adopting a dynamic interpretation approach. Third, in the context of the ISDS reform, mainly conducted under the auspices of the UNCITRAL Working Group III, the ECT cannot remain in isolation and DoB appears to respond adequately to some of the concerns raised in this process.

 

To read our coverage of the ECT Modernisation process to date, click here.

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ECT Modernisation Perspectives: Modernisation of the Energy Charter: The Long Story Told Short

Tue, 2020-07-21 03:48

Modernisation of any multilateral treaty is a category of tasks on its own. There are several prerequisites which shall be in place, apart from obsolete language and provisions. The most crucial element is a steady political will of a critical mass of countries based on the strong motivation, which will break inertia and create new dynamics among its contracting parties.

In the Energy Charter Process, the starting point of the reflections on potential modernisation was the decision of the Russian Federation to withdraw from the provisional application of the Energy Charter Treaty back in 2009. The Energy Charter Conference in Rome in December 2009 discussed some of the consequences and adopted the Joint Statement. The Rome Statement included the notion of modernisation of the Energy Charter Process and the creation of the Strategy Group for examining the possible options of modernisation of the Energy Charter Process for consulting on possible enhanced legal frameworks for energy cooperation, also taking into account other proposals on future cooperation in the energy field with left significant ambiguity for its interpretation.

While the Russian Federation was calling for modernisation of the Energy Charter Treaty, the rest of the ECT’s constituency was reluctant to embark upon the endeavour and referred to the Modernisation of the Process instead. The Russian Federation proposed in April 2009 a complete replacement of the Energy Charter Treaty by the Conceptual Approach to the New Legal Framework for Energy Cooperation, pointing out, inter alia, the uselessness of the Treaty during the gas transit crises and the failure of Ukraine to live up to its transit obligations. This attempt of ‘modernisation by replacement’ was not successful, despite important efforts of Russian energy diplomacy promoting it bilaterally and in all relevant international fora. The main reason for their failure was not so much its content – the similarity to the Energy Charter Treaty went up to copying such details like including sawdust and wood scrap as the types of energy materials covered by it. The key problem was the non-acceptance by any potential partner of the replacement of the existing Energy Charter Treaty by the negotiation of a new legally binding text, even if according to the Russian draft only three countries would have been needed for the multilateral instrument to enter in to force. Russia didn’t find two more countries ready to accept it.

In November 2010, the Energy Charter Conference approved The Roadmap for Modernisation of the Energy Charter Process referring to the Russian Conceptual Approach. The Roadmap emphasised the focus on concluding negotiations of the Transit Protocol, targeted expansion of the ECT geographical coverage, complementing the effectiveness of the ECT provisions given major trends affecting investments into the energy sector, enhanced cooperation with other organisations on energy efficiency and promoting Policy Dialogue within the Energy Charter Process. The document was short of explicitly mentioning future modernisation of the Energy Charter Treaty.

As the modernisation roadmap was gradually being implemented, it become obvious that while part of the objectives of the Roadmap could be achieved through improving operational measures by the Secretariat in close coordination with Members, some others would need major efforts to complete existing negotiation mandates from the past and for the rest of the objectives of amendment of the ECT to be at least considered. In 2012, through a series of consultations with Contracting Parties and Signatories1)In 2012, five original Signatories of the ECT from 1994 have not ratified the Treaty yet: Australia, Belarus (applied ECT provisionally), Iceland (ratified ECT in 2015), Norway and Russian Federation (withdrew from the provisional ECT application in 2009). jQuery("#footnote_plugin_tooltip_9944_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9944_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of the Energy Charter Treaty, the modernisation process was organised in phases taking into account the instruments needed to achieve its objectives. The first phase of the modernisation, embodied in the Warsaw Mandate, was focused on the Modernisation of the European Energy Charter of 1991 (the political, legally non-binding foundation of the process). The second phase was intended to improve internal processes, addressing all existing and pending negotiation mandates (namely the Transit Protocol and the Supplementary Treaty) and identifying objectives, which could be resolved without amendment of the ECT by soft law instruments. The third, ultimate phase of the modernisation, was again not defined by substance, but by an understanding that if the objectives of the Modernisation would prove not to be achievable without addressing the text of the ECT, a discussion about possible ECT modernisation could be launched.

After two years of negotiations, the International Energy Charter was signed by participants of the Hague II Energy Charter Conference meeting of May 2015. The updated political declaration provided an essential boost to several objectives of the modernisation process, namely in the relations with non-European countries sharing the same values as the Conference members potentially interested in joining the Energy Charter Process. Many of them have been reluctant to subscribe to the European Energy Charter, as they considered it a rather Eurocentric document reflecting the early post-Cold War period.

The second phase of the modernisation yielded important efficiency gains by streamlining the number of Subsidiary Bodies, improving transparency of the Energy Charter Process by de-restricting Conference decisions, returning the political ownership to Members by introducing the rotating Chairmanship, to name only some of the improvements achieved to date. During the second phase of the Modernisation, it became obvious to some Contracting Parties that there were questions and concerns which could not be addressed within the existing text of the ECT. Neither has it been possible to resume negotiations of the Supplementary Treaty nor to conclude the Transit Protocol within the approved mandate.

The changing external context created additional reasons for opening internal discussion about the potential Modernisation of the ECT. Shifting global patterns in energy consumption from OECD to newly emerging economies, climate change challenges, public pressure on the existing system of investment protection and growing African thirst for modern forms of energy have been among most important externalities.

But the internal drivers have been decisive for the opening of the discussion on Treaty’s Modernisation. True, the Energy Charter Treaty was delivering what had been asked for: the promotion and protection for foreign investors in the energy sector, a reliable legal framework for energy transit, a transitional mechanism into WTO and a forum for energy policy. Russian withdrawal from the provisional application of the ECT in 2009 (when the arbitral tribunal in the Yukos vs. Russian Federation cases accepted ECT jurisdiction) and its effective cessation of participation in the Energy Charter Process in 2014 (after the Yukos award of USD 50 bn had been made public) could be traced to the impact of the Treaty. The combination of different factors led to the surge of claims by investors against several EU members in the period 2013-2016. This surge fuelled ongoing discussion on preventing the intra-EU application of investment protection treaties. The withdrawal of Italy added an additional confusion to the situation. Beyond the EU, there has also been some discontent with the ECT brewing for entirely different reasons. Groups of landlocked, energy-exporting countries from the Caspian region, have claimed that the Treaty, the only existing multilateral agreement with transit provisions, doesn’t deliver protection of transit flows as expected. For this reason, Turkmenistan resorted to the UN General Assembly, where it initiated several political UN GA Resolutions related to stable and reliable transit.

As a consequence of the above, in December 2017, the Conference at its meeting in Ashgabat agreed to launch a process for discussing potential modernisation of the Energy Charter Treaty. To the surprise of the delegations engaged in the scoping exercise and many nay-sayers, in November 2019 the Conference established and mandated the new Modernisation Group to start negotiations on the basis of the list of 25 topics agreed in 2018. It was agreed to refer to this as the “Tirana Mandate” for ECT modernisation. The work of the group started in December 2019, and after solving all procedural aspects and technical challenges arising from COVID-19 pandemic, the first negotiation round was done in early July 2020.

At this stage, I cannot comment on any substantive aspects of the ongoing negotiation. Therefore I would like to limit myself to remind readers that negotiations started exactly 30 years after the first proposal of the Ruud Lubber’s Plan on the creation of the ‘European Energy Community’ was made in Dublin in 1990. From this proposal, through the European Energy Charter (1991), the Energy Charter Treaty (1994), the Trade Amendments (1998) and the International Energy Charter (2015), we have reached the point of the ECT modernisation. We are facing historical responsibility, and success cannot be taken for granted. However, we have all the elements for the future success on the table: the external and internal preconditions, the critical mass of Contracting Parties for modernisation, and the highly qualified Secretariat’s team supporting it. I am convinced that the Contracting Parties will be able to raise the common denominator to make Energy Charter Treaty 2.0 fit for its purpose for the next 25 years, enabling energy cooperation during the ongoing energy transition and strengthening the level playing field. A modernised ECT would be, without any doubt, attractive to many newcomers and will lead to the gradual acceptance of its principles and rules as an ultimate universal standard for international energy cooperation for the 21st Century.

 

To read our coverage of the ECT Modernisation process to date, click here.

References   [ + ]

1. ↑ In 2012, five original Signatories of the ECT from 1994 have not ratified the Treaty yet: Australia, Belarus (applied ECT provisionally), Iceland (ratified ECT in 2015), Norway and Russian Federation (withdrew from the provisional ECT application in 2009). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Pandemic Arbitration: A Time to Sow?

Tue, 2020-07-21 02:00

The impact of the pandemic on arbitration has been the subject of several posts on this Blog (see here and here). Rightly so, this is a seismic event in history that certainly has shaken the dispute resolution process, both state sponsored judiciaries as well as arbitration tribunals and practice generally. Entities which fall victim during this time may need to pivot from court proceedings to get their cases heard as courts are struggling with their dockets and may not be equipped with the flexibility arbitration or other ADR can offer to bring their matters to resolution quicker and hopefully less expensively.

It is also a time to give arbitration a new think and stakeholders should consider to devise creative ways to accelerate the pace of improvement of the process; to push new streamlined measures not only to quicken the arbitration timeline from filing to award, but also make arbitration such that it is even more user friendly and far less expensive. This is likely an (ironically) opportune moment, a historical transition time from pandemic to immunity of some sort. In the dispute resolution market, one would hope that arbitration stakeholders would use this time to innovate and indeed capture a larger share through the appeal of arbitration which by definition can more easily absorb new technologies and new protocols and other rules about speed and expense. Indeed, the pandemic can be the very catalyst for exploring and implementing new ways to attack trouble points and issues in dispute resolution in general and, perhaps, in arbitration or ADR deal with “issues that need fixing” more quickly than in disputes in the public state courts which have built-in conflicts with social distancing. And it seems the economics of the arbitration process should begin to tilt more to the consumers of arbitration, the parties.

 

Starting Basics

The obvious starting point is embracing the best technology and adapting it such that it brings ADR to its laudable goals of being a real, genuine alternative to the court process by being truly faster, less expensive, and conducted by those with at least some modicum of expertise. This process should welcome in depth consideration of introducing new technologies such as artificial intelligence, ledger technology, smart contracts, in addition to the latest video and remote technology, allowing arbitration to be both travel free and print free. The merits hearing, considered to be the most difficult to change from the physical and in person, has already evolved during this time by going “virtual” today in many disputes. This has proved to be a solid substitute if not an improvement in many situations, where the tribunal can see the witnesses up close, no need to twist your neck to decipher a demonstrative exhibit, and actually there is more straight forward cross examination. Virtual hearings may indeed prove to be a major significant improvement, saving time, expense, and travel and be here to stay in many situations, and perhaps become the default choice.

 

The US Supreme Court: Arbitration Is Flexibility and Innovation

Thirty-five years ago, the US Supreme Court delivered perhaps its most famous arbitration decision to date, and certainly its most groundbreaking at that time in the sense of it being a call to innovation. In Mitsubishi v Soler, 473 US 614 (1985), discussed here, a case decided at the very dawn of modern international arbitration as we know it today, the US Supreme Court was presented with the issue as to whether international antitrust or competition cases were even arbitrable under the New York Convention and the U.S.’s corollary legislation, the Federal Arbitration Act. Many may not grasp the importance of that decision and prescience of Justice Blackmun writing for the majority, as arbitration had little track record and the Court was somewhat writing on a blank tablet. Yet the Court, in holding these cases arbitrable, was willing to take the chance in some respects to give the discipline the jump start to move where it is today. The Court stated “the potential of these tribunals for efficient disposition of legal disagreements arising from commercial relations has not yet been tested. If they are to take a central place in the international legal order, national courts will need to “shake off the old judicial hostility to arbitration.” 473 US at 638 (emphasis supplied). In response to the argument that competition cases are too complex for arbitration, the Court said that argument actually proves the point, that because the cases may be complex, that they are the perfect candidates for arbitration as “adaptability and access to expertise are hallmarks of arbitration.” And “it is often a judgment that streamlined proceedings and expeditious results will best serve their needs that causes parties to agree to arbitrate their disputes; it is typically a desire to keep the effort and expense required to resolve a dispute within manageable bounds that prompts them mutually to forgo access to judicial remedies.” 473 US at 633.

Thus, none other than the US Supreme Court has stated to the arbitration world that arbitration, as opposed to the courts, may be a smart alternative, with its built-in flexibility for innovation and informality, to develop a product that evolves with conditions for a simplified, less expensive process to streamline the resolution of disputes. The green light for this creative adaptation came when the Court said the parties really trade up in having their complex disputes arbitrated by ”trad[ing] the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration.” 473 US at 628. The opportunity during this bleak pandemic should be seized by arbitration stakeholders to put in place a new improved process that consumers will see is as “faster, smarter, and cheaper.”

There is already some movement in this direction, but the stakeholders and other individuals and organizations should not lose this opportunity to take this farther. Many of the major arbitral institutions and organizations have issued “guidance notes” or other protocols to provide their suggested best practices to counsel and arbitrators as to how best resolve disputes that come before them during these days when social distancing is the most effective health strategy. The point is these guidance notes can be the very springboard to make long lasting streamlined improvements in arbitration. (e.g., The Seoul Protocol on Video Conferencing in International Arbitration).

 

The Crisis as a Time to Sow

The most widely pushed development is the concept of virtual arbitration via a video conferencing platform which in fact has been used is some form in arbitration for decades; video conferencing, even telephonic proceedings, have been prevalent for years and serve to make the process cheaper, more expeditious. Moreover, today videoconferencing and telephones will also significantly serve to avoid the heavy carbon footprint in travel and print and in addition save time and expense. That we see daily webinars and the guidance notes from institutions and protocols on virtual arbitration is a welcome development as this will keep the arbitration process moving seamlessly, as opposed to stop/starts in many court proceedings, during times when distancing is recommended.

Although arbitration has been virtual in part for a long time and has utilized the technologies in place at the time, one should not forget Justice Blackmun’s message, that the process has as its very foundation a flexible and nimble form of dispute resolution that is less expensive and quicker, and done by persons of the parties’ choosing, not by elected or appointed state officials, yet enforceable by the state. Arbitral institutions and stakeholders should use this time to craft an even better virtual proceeding as live in person proceedings are less of an option, parties’ legal spend budgets are even less during this time, and perhaps most of all, as noted above, the virtual proceeding is proving in many respects to be equal to or superior to the live proceeding (just like the recent literature that a video bench trial is more robust than a live one). Of course, the important environmental and cost savings in avoiding travel, printing, and the like must always be a key driver as well.

Examples abound in ways the stakeholders can use this crisis as a jump start to a higher, more efficient, quicker, and cost saving plateau, including the overall digitalization of arbitration. Online dispute resolution has been around for years and has evolved its technological bandwidth perhaps up to now more than traditional ADR process. Additionally, already many arbitral rules allow summary disposition of certain defenses and claims, allowing the process to be shorter, simplified, and less expensive. Likewise, rules can be amplified to allow for the consolidation of arbitrations with common issues and common parties, such as seen in SIAC Rules. Arbitration rules should consider affording flexibility in allowing arbitrators, especially in the complex case, to deal with issues in phases if to do so will lead to a faster resolution and even enhance the chances of settlement. SIAC itself has just announced it will use this time to update and improve its rules “to consider revisions dealing with multiple contracts, consolidation of claims and joinder; expedited procedures and emergency arbitration; appointment and challenge of arbitrators; tribunal powers including early dismissal; new technology and new procedures; and general trends in international arbitration rules.”

 

Conclusion

Consider using this time as a time to quicken the process and develop default “presumptions” to that end; in that way, hopefully, the economics in arbitration will greatly improve to favor the consumer of the service. Develop a process that presumptively calls for virtual proceedings and that incentivizes a mandate for page limitations on submissions to moderate counsel and arbitrator time. Consider a process that incentivizes restrictions on far reaching discovery, number of witnesses and experts, perhaps a default to a sole arbitrator, and encourage page limits on awards, which many times can run to encyclopedic proportions. These “presumptions” or incentives, to be sure can be overcome in a certain case with a proper showing, but the time is ripe to develop an even more streamlined, simplified process to cut expense, cut the carbon footprint, and cut the time from start to finish.

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ECT Modernisation Perspectives: An Introduction

Mon, 2020-07-20 03:47

The Energy Charter Treaty (‘ECT’) opened for signature in 1994, entered into force in 1998, and now boasts some 50 member States. The ECT has since given rise to some 130 investor-State arbitrations, making it “the most frequently invoked international investment agreement”. This high use, coupled with a perception that the ECT is frequently invoked in aid of protecting fossil fuel investments, has meant that the ECT has attracted scrutiny and criticism, as well as calls for reform. The Energy Charter Conference has therefore agreed to initiate an ECT modernisation process. The first formal round of modernisation negotiations was held earlier this month. As the ECT Secretary-General has remarked, “The stakes are high. If the modernisation process fails, I don’t see a future for the Treaty.” To mark the start of these significant negotiations, our series this week will provide different perspectives on the progress and prospects for reform of this important multilateral treaty. Today, we start with an introduction to the ECT and the reform process, and provide a snapshot of the posts you will see throughout the week.

 

The ECT Modernisation Process

In 2018, the Energy Charter Conference appointed a Subgroup on Modernisation, which developed a list of topics for potential modernisation/reform. The list contemplates a range of potential reforms, including:

  • various definitional modifications (including to the notions of ‘investment’ and ‘investor’);
  • insertion of a ‘right to regulate’ clause and sustainable development and corporate social responsibility rules;
  • substantive reforms, including to the ECT’s fair and equitable treatment, protection and security, expropriation, and umbrella clauses;
  • various procedural amendments, including to the rules governing frivolous claims, transparency, and security for costs; and
  • amendments to the valuation rules and rules related to third party funding.

The Energy Charter Ministerial Conference approved these topics in November 2018, also adopting a declaration recognising “the importance of the modernisation of the Energy Charter Treaty to guarantee that it keeps providing balanced rules to protect investments that ensure stable energy supply, energy access, and a sustainable energy future”. Modernisation negotiations focus on this list of 25 approved topics and various policy options put forward by States parties.

In November 2019, the Energy Charter Conference established a Modernisation Group to conduct modernisation negotiations. It was agreed that negotiations would take place for approximately 4 days every 3 months, with the Conference to assess progress in December 2020. Most, but not all, ECT States have supported the need for modernisation. Japan, for instance, has indicated its view that “it is not necessary to amend the current ECT provisions”, with Luxembourg urging the “parties/secretariat to conduct sound impact assessments on any and all major changes that will be proposed in the modernized Treaty”. The details of the various proposals are not yet fully elaborated in public documents. As negotiations progress, it is to be hoped that more concrete proposals will emerge to allow for sustained engagement by other stakeholders – including civil society organisations – and that sufficient transparency and time will be provided to allow for the types of assessment contemplated by parties like Luxembourg.

 

Towards Cleaner, Greener Energy Investments?

In addition to the topics identified by the Subgroup on Modernisation, various member States have also indicated their particular reform agendas. The EU, for instance, has noted its view that “[t]he objective of the Modernised ECT should be to facilitate investment in the energy sector in a sustainable way”, such that “[t]he Modernised ECT should reflect climate change and clean energy transition goals and contribute to the achievement of the objectives of the Paris Agreement”. The EU is not alone in these aspirations. Albania, for example, has indicated that it is “open to discuss the possibility to align the modernisation process of the ECT with the Energy Transition/Decarbonisation Processes and Contracting Parties’ Climate Change Commitments”. Azerbaijan, too, has adopted a view that the modernisation process should give “[p]articular attention… to key components such as sustainable energy issues, including energy efficiency and alternative energy”.

One way in which States have contemplated encouraging cleaner and greener energy investments is via amendments to the ECT’s definitional provisions. This includes amending Article 1(5)’s definition of “economic activity in the energy sector”. The EU notes that “[s]uch economic activity is associated with products and materials that are largely fossil fuels-related”, and “may not cover new trends in investment, in particular with regard to renewable energy nor the energy efficiency tools and on-going digitalisation of the energy sector”. It therefore proposes modifying the ECT to ensure that it “allows addressing the challenges and opportunities of the transition to a safe and sustainable low-carbon, more digital and consumer-centric energy system”. Some States have made concrete textual proposals to support such an aim. Albania, Azerbaijan, Luxembourg and Turkey, for instance, have each proposed modifying Article 1(5)’s definition to “cover new investment trends and technologies” to align the ECT with “the contracting parties’ commitments in the fight against Climate Change”. States have also sought to make the ECT more climate-friendly by modifying its provisions to recognise a State’s “right to regulate”. Albania, Georgia, Switzerland and Turkey, for instance, each note the possibility of including a separate “right to regulate” provision. Luxembourg, too, envisages scope for a “right to regulate”, connecting this proposal to “the energy transition process and the specific context of implementation/fulfilment of the Paris Agreement contracting parties’ commitments”.

The modernisation process also contemplates including specific sustainable development and corporate social responsibility provisions. The EU, for instance, has issued negotiating directives focussing on several reform objectives, including modernising investment protections to incorporate sustainable development and corporate social responsibility provisions into the ECT. States have flagged the potential to include such provisions in the treaty’s preamble, or as stand-alone provisions. Luxembourg has proposed, for instance, incorporating a “stand-alone article with reference to Climate Change Commitments, Decarbonisation process, Corporate Social Responsibility and Sustainable Development instruments”, including references to specific instruments containing the content for such standards. The negotiating documents are unclear as to whether the intention would be to merely refer to such standards, or to otherwise impose obligations on investors to comply with them. Switzerland, for instance, expressly contemplates “the possibility of including a non-binding language in the Treaty referring to the responsible business conduct”, whereas the EU appears to envisage making such standards obligatory through domestic law.

 

Changes to Substantive Investment Protection Obligations

The modernisation process also encompasses potential reforms to the ECT’s investment protections. As Georgia notes, “the interpretation of various legal concepts of investment protection under the ECT have greatly evolved since the conclusion of the ECT; therefore, the modernisation of the Treaty is necessary and timely”. Albania, Georgia and Turkey, for instance, have each proposed revising the ECT’s most-favoured-nation clause to prevent investors from invoking more favourable dispute settlement provisions from other investment treaties. Switzerland has indicated its opposition to such a proposal, save that it agrees that “[i]t should not be possible that procedural and substantive provisions from other agreements that were concluded before are used in a dispute”. The ECT States have also identified numerous possible reforms to the ECT’s “fair and equitable treatment” obligation (covered in detail as part of our series), protection and security provision (with most States focussing on restricting the potential for the provision to be invoked to secure legal protection) and umbrella clause (with most States focussing on clarification of the scope of commitments that will be covered by the clause). Protection from expropriation is also a topic for possible modernisation, with State comments indicating the need for a clearer definition of “indirect expropriation” and “rules about the compensation for expropriation”.

 

Reform of Investor-State Dispute Settlement

The modernisation process also encompasses possible reforms to ECT investor-State arbitration. The States parties have indicated their intent to integrate such reforms with other ongoing reform discussions, including those in the UNCITRAL,  ICSID and OECD contexts. The EU, for instance, has referred to ongoing multilateral initiatives for reform of investor-State dispute settlement processes, including its intent to ensure any future multilateral investment court applies to ECT investor-State disputes. Turkey similarly invokes parallel reform efforts. It supports, for instance, drafting a declaration on third party funding, potentially referencing UNCITRAL discussions. This would include an obligation for parties to arbitration proceedings to disclose whether they have received third party funding and, if so, its source. Georgia, too, emphasises that “due regard” should be given to the work of UNCITRAL and ICSID in developing an ECT mechanism for security for costs and regulation of third party funding. Georgia proposes, however, the development of an ECT-specific transparency regime for arbitration, noting that it “does not support straight incorporation of UNCITRAL Rules on Transparency in the ECT”. This differs to other States’ positions, with Switzerland for instance proposing an ECT “declaration to refer to the application of the UNCITRAL Rules on Transparency in arbitral proceedings”. Save perhaps the EU’s approach, most reform proposals focus upon modifying the investor-State dispute settlement arrangements already in the treaty. Given that the Energy Charter Secretariat is an active promoter of investor-State mediation, it will be interesting to see whether new detail on dispute settlement options (or even requirements to resort to non-arbitral means of settlement) will feature in the reform discussions.

 

A Preview of Our ECT Modernisation Series

Given the modernisation process’s scope, our contributors this week offer several perspectives on the various proposals under consideration by ECT States. As you will see, the ECT modernisation process highlights the tensions and complexities associated with the reform of international investment treaties, the different viewpoints regarding the desirability of particular reforms, as well as the difficulties produced by the interaction between different investment regimes and other bodies of law.

The series begins tomorrow with a post by the ECT Secretary-General, Dr. Urban Rusnák, setting out the lineage of the reform process and the conditions needed for its success.

Our next three posts will focus on reforms to the ECT’s substantive provisions. In Wednesday’s post, Dr. Crina Baltag and Professor Loukas Mistelis examine the possible reform of the ECT’s denial of benefits provision. On Thursday, Ylli Dautaj and Per Magnusson examine the proposals concerning reform of the ECT’s substantive investment protection obligations, focussing on the possible reform of the ECT’s fair and equitable treatment provision. On Friday, Munia El Harti Alonso and Naimeh Masumy examine possible reforms for the valuation approaches used in ECT investor-State disputes.

The following two posts examine the relationship between the ECT and other bodies of law. On Saturday, Dr. Aikaterini Florou considers the evolving relationship between the ECT and European Union law. On Sunday, Jan Kunstyr and Ondrej Svoboda consider the connections between the ECT State-State arbitration mechanism and international environmental law.

We hope that this series offers you some useful insights, and that you will enjoy hearing our contributors’ different perspectives on the features of the ECT modernisation process, as well as the tensions and limits becoming evident now that the negotiations have begun.

 

To read our coverage of the ECT Modernisation process to date, click here.

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The Contents of the ASA Bulletin, Volume 38, Issue 2 (June 2020)

Mon, 2020-07-20 02:00

We are happy to report that the latest issue of the ASA Bulletin is now available and includes the following articles and cases:

 

ARTICLES

Felix DASSER, The Times They Are A-Changin’ (Fine – But How Much and For How Long, Exactly? And What Does It All Mean For Us?

In his message, ASA President, Felix DASSER addresses the changes brought about by the COVID-19 pandemic and calls on the arbitration community to cooperate to serve the users’ needs.

Caroline MING, Christian IOVENE, Advantages and Benefits of the Revised Swiss Rules of Mediation 2019 – in Light and in Line with the Singapore Convention

Executive Director and General Counsel of the Swiss Chambers’ Arbitration Institution (SCAI), Caroline MING, and Christian IOVENE present the advantages and benefits of the revised Swiss Rules of Mediation (2019) in light of the United Nations Convention on International Settlement Agreements Resulting from Mediation (Singapore Convention).

Bernhard BERGER, Die Schweiz als Schiedsort für Investitionsstreitigkeiten – Erkenntnisse aus der neueren Rechtsprechung des Bundesgerichts – Teil II

Bernhard BERGER provides practical guidance on the do’s and don’ts, pitfalls and challenges of conducting arbitral proceedings before investment treaty tribunals seated in Switzerland in light of his survey on the case law of the Swiss Federal Supreme Court relating to investment treaty awards (see ASA Bull. 2020/1 for Part I of his article).

Hans-Ueli VOGT, Patrick SCHMIDT, Schiedsklauseln in Vereinsstatuten. Bemerkungen zum Bundesgerichtsurteil 5A_1027/2018 vom 22. Juli 2019 und zur Revision des 12. Kapitels des IPRG und des Aktienrechts (Teil II)

Hans-Ueli VOGT and Patrick SCHMIDT address the material and formal validity as well as the necessary and admissible content of clauses contained in the articles of an association or corporation further to a recent decision of the Swiss Supreme Court on this issue (see ASA Bull. 2020/1 for Part I of their article).

Jörg RISSE, The Shadow Arbitrator: Mere Luxury or Real Need?

Jörg RISSE discusses the role of a shadow arbitrator, his/her interaction with counsel and added value for the arbitration.

Nobumichi TERAMURA, Ex Aequo et Bono and Arbitration Theories: an Arbitrator’s Subjective Perspective of Fairness as the Final ‘Gap-Filler’

Nobumichi TERAMURA submits the alleged uncertainty arising from the power of arbitrators to decide ex aequo et bono is largely exaggerated and explores the theories (and values) of arbitration underpinning arbitrators’ concept and sense of fairness.

Ole JENSEN, Aligning Arbitrator Assistance with the Parties’ Legitimate Expectations: Proposal of a ‘Traffic Light Scale of Permissible Tribunal Secretary Tasks’

Ole JENSEN presents a new approach to the appointment of tribunal secretaries, namely a formal appointment process culminating in ‘Tribunal Secretary Terms of Appointment’.

Olivier MARQUAIS, Alain GREC, Investment Management and Corporate Structuring Considerations for Third-Party Litigation Funders in Luxembourg

Oliver MARQUAIS and Alain GREC shed light on the activity of third-party funders and explain why Luxembourg, the second largest asset management centre worldwide, offers a highly suitable regulatory framework and attractive investment vehicles to third-party litigation funders.

Daniel GREINEDER, Anastasia MEDVEDSKAYA, Beyond High Hopes and Dark Fears: Towards a Deflationary View of Soft Law in International Arbitration

Drawing on the origins of soft law in public international law, where the concept originated, as well as more recent academic debate in that field, Daniel GREINEDER and Anastasia MEDVEDSKAYA examine its legitimacy and efficacy in international arbitration.

DECISIONS OF THE SWISS FEDERAL SUPREME COURT

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Egypt Court Annuls Award against Libya on the Substantive Ground of Fundamental Error of Law

Sun, 2020-07-19 05:00

In a ‘ground-breaking’ precedential decision, Al-Kharafi v Libya (Judgment No. 39 of 130 JY, 3 June 2020), the Cairo Court of Appeal in Egypt ruled that it can review an arbitral award for fundamental errors of law that amount to a violation of public policy or equity and justice notions.

The decision relates to an ad hoc arbitration under the Unified Treaty for the Investment of Arab Capital in the Arab States (the “Unified Treaty”).

The original arbitration award was issued on 22 March 2013 ruling that the State of Libya was responsible for breaches of contract, national law and the Unified Treaty.

 

Background

In 2006, the Libyan Ministry of Tourism entered into a 90-year land leasing agreement (the “Agreement”) with Kuwaiti investor Mohamed Abdulmohsen Al-Kharafi (“Al-Kharafi”) for 240,000 m2 of state-owned land in Tripoli for the construction and operation of a tourism complex.

The project was supposed to start 7 years after signing the Agreement; however, construction work never commenced. The Libyan Ministry of Economy cancelled the project in 2010 and terminated the Agreement.

Al-Kharafi launched an arbitration case in 2011 under the Unified Treaty claiming compensation from the State of Libya for failing to hand over the project land “free of occupancies and persons”, and hence delaying the construction, and for illegally cancelling the project and terminating the Agreement.

The arbitral tribunal was constituted under the Unified Treaty with Cairo chosen as the seat of the arbitration. The tribunal was composed of Dr. Abdel Hamid El-Ahdab (presiding arbitrator), Dr. Ibrahim Fawzi (Al-Kharafi’s nominee) and Justice Mohamed El-Kamoudi El-Hafi (State of Libya’s nominee).

The tribunal issued its final award on 22 March 2013 ordering Libya to pay:

  • US$ 5 million for losses and expenses;
  • US$ 30 million for moral damages;
  • US$900 million for lost future profits for 83 years, representing the length of the terminated Agreement;
  • US$ 1.94 million for arbitration costs and expenses; and
  • 4% interest on all amounts awarded from the date of the arbitral award until full settlement of the said amount.

 

First annulment attempt

Libya brought an annulment action to set aside the arbitral award before the Egyptian courts, being the courts of the seat of arbitration.

On 5 February 2014, the Cairo Court of Appeal, in its Judgment No. 39 for 130 JY, dismissed Libya’s annulment claim on the basis that an award rendered on the basis of the Unified Treaty is final, and may not be subject to any challenge before the courts of the member states. The court relied on Article 2(8) of the Unified Treaty’s Annex, which provides that:

“[a]wards of an arbitral tribunal rendered in accordance with the provisions of this article shall be final and binding … No appeal may be made against arbitration awards”.

 

No contradiction between ‘finality’ and ‘annulment’ proceedings

Libya challenged the judgment before the Egyptian Court of Cassation which vacated the judgment and referred the case back to Cairo Court of Appeal by virtue of its Judgment No. 6065 of 84 JY, 4 November 2015.

The Court of Cassation ruled that the Unified Treaty prohibits challenging an arbitral award through the means of recourse set forth for national court rulings. The treaty, however, does not prohibit a party from initiating an annulment action, which is an exceptional mechanism for reviewing final awards on the limited grounds mentioned in the Egyptian Arbitration Law No. 27 for 1994 (the “Arbitration Law”).1)The Arbitration Law entered into force on 22 May 1994. jQuery("#footnote_plugin_tooltip_4419_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4419_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These grounds are mainly concerned with due process and the integrity of the arbitration process itself, and do not allow the court to re-examine the case on the merits or facts, unlike an appeal.

The Court of Cassation further noted that every arbitration seated in Egypt is subject to the rules of procedure under the Arbitration Law, including the procedure for annulment proceedings, which aims at correcting and guarding against manifest mistakes and serious irregularities in the arbitral process.

The Court of Cassation observed that arbitration is neither an “absolute” system nor an “end in itself”; it is rather a “legal system” that has specific rules and essential boundaries. A tribunal is not allowed to exceed such boundaries or to violate the essential rules of justice and equity, or to deviate from the applicable legal and ethical obligations under the guise of finality of arbitration awards.

The court therefore held that there is no contradiction between the finality of the arbitral award and the annulment procedure, and ordered the lower court to hear the annulment claim initiated by the State of Libya.

 

Second annulment attempt

On 6 August 2018, the Cairo Court of Appeal, in its Judgment No. 39 of 130 JY, dated 6 August 2018, dismissed the annulment claim of Libya again, but this time on the procedural ground that it lacks jurisdiction over arbitration awards issued under the Unified Treaty.

Libya appealed the decision again before the Court of Cassation. On 10 September 2019, the Court of Cassation, for the second time, overturned the decision of the Cairo Court of Appeal and referred the case back to the Cairo Court of Appeal, ordering it to decide the case on the merits. The Court of Cassation ruled in its Judgment No. 18615 of 88 JY, 10 December 2019 that the Cairo Court of Appeal had erred in dismissing the case on the basis of a lack of jurisdiction.

The Court of Cassation reconfirmed that the Arbitration Law is the umbrella under which all arbitrations seated in Egypt are run, and the Cairo Court of Appeal, according to the Arbitration Law, has explicit jurisdiction to hear annulment actions against international arbitration awards.

 

Annulment on the basis of fundamental errors of law

The arbitration award returned for the third time to the Cairo Court of Appeal, which finally issued a decision on the merits by virtue of Judgment No. 39 of 130 JY dated 3 June 2020 (the “June 2020 Judgment”).

The court annulled the arbitration award on the basis of serious mistakes of law, noting that the tribunal had grossly and egregiously misinterpreted and misapplied the law, amounting to a failure to observe rules of public policy and the well-established notions of equity and justice.

The court disagreed with the tribunal’s method of calculating the compensation amount, and considered the compensation disproportionate to the damage incurred as a consequence of the claimed breach of obligations.

The tribunal had ordered Libya to pay US$900 million for “lost profits resulting from real and certain lost opportunities”, while the investor had only invested US$5 million at the time of bringing the case, and construction work in the project never commenced.

The court described the US$900 million compensation to be “unfair” and “excessively unjust”, and to exceed the incurred damage in a “fatal, inappropriate and totally unjustifiable manner”.

The tribunal based its award for lost profits on four reports that Ernst & Young, Prime Global (Khaled El-Ghannam), Habib Khalil El-Masri and Ahmad Ghatour & Partners had prepared at the claimant’s request.

The court observed that the reports lacked credibility, as they were based solely on data and information provided by the claimant which were not independently verified, and which were based on mere ‘abstract assumptions’ and ‘hypothetical speculations’ that lacked factual support.

 

Proportionality of compensation is part of the public policy rules

The Cairo Court of Appeal stated that the principle of proportionality of damages is an integral part of the international public policy rules, and an award should be set aside when the amount of compensation is manifestly disproportionate to the damage incurred.

Reference was also made to Article (9) of the Unified Treaty, which provides that compensation due to investors should be equitable and proportional to the damages incurred.

The arbitral tribunal had held that Article 224 of the Libyan Civil Code (confirmed by Libyan case law) provides for the right to compensation for lost profits if it is “real and certain”.

The Cairo Court of Appeal, however, warned that caution has to be taken when determining compensation for lost profits. The right to compensate for lost profits has to always be “mingled with justice” and not be interpreted or applied “in abstract or in a rigid way”. Compensation for lost profits has to be built upon solid grounds rather than mere “unrealistic aspirations”, “imaginary illusions” or “baseless perceptions”.

The court held that the tribunal had erred in calculating the compensation, as it considered the lost future profits expected over the 83-year period of a “potential” project that was never established to be “certain” and “real”.

The court said that the claimed damage resulted from losing the opportunity was “speculative”, “unrealistic” and too “remote” to be compensated. It did not take into consideration the circumstances of the host country and the fact that it is generally not an attractive touristic destination, in addition to the fact that it is suffering multiple and complicated challenges for foreign investment. These are all clear facts that the tribunal overlooked while calculating the expected lost future profits of the “potential” project.

 

Courts should not be left handcuffed before abuses of arbitral powers

The court considered the compensation amount to entail manifest exaggeration and overindulgences that renders the award extremely “unjust”, “abusive”, and “discriminatory”. It held that although courts’ ability to review arbitration awards is limited, a court may review an arbitration award where arbitrators exceed their powers by issuing an award that is “completely irrational” or exhibits a “manifest disregard of the law”.

The tribunal was described as violating the simplest “equity” and “justice” notions that are among the well-established general principles applicable to international law. The tribunal was further blamed for committing material and prejudicial errors of law, in addition to building the award upon factual findings that were clearly unsupported by the record. The Cairo Court of Appeal therefore decided to annul the arbitral award in its entirety.

 

Conclusion

Egyptian courts have always limited their review of arbitral awards to the exhaustive annulment grounds under Article 53 of the Arbitration Law. These grounds are mainly related to the validity of the arbitral process itself, or the basic procedural rights of the parties or the arbitral mandate (jurisdictional and admissibility issues). There are no express provisions under the Arbitration Law for directly challenging an award on ‘substantive grounds’ such as mistake of law or fact.

One of the annulment grounds, however, is violation of public policy rules, a ground which is wide enough to allow courts to review the merits or substance of an arbitral award.

Egyptian courts have in the past narrowly interpreted public policy ground and usually prevent its use as a backdoor appeal. For example, the Cairo Court of Appeal held that not every violation to a mandatory rule is a violation of public policy; public policy rules are only those related to the organization of the state and its higher values (Cairo Court of Appeal, Judgment No. 124 of 119 JY, 2 February 2010). The Egyptian Court of Cassation also held that the lack of reasoning is not considered a violation of a public policy rule that may lead to annulment of the arbitral award (Court of Cassation, Judgment No. 2698 of 86 JY, 13 March 2018). Also, the refusal by the arbitral tribunal to allow the joinder of the joint debtors was not considered a violation of due process or public policy rules (Cairo Court of Appeal, Judgment No. 70 of 123 JY, 9 March 2011). Generally, Egyptian courts annul an arbitral award on public policy grounds only if it is repugnant to fundamental social, economic and political interests of the society (Court of Cassation, Judgment No. 10132 of 78 JY, 11 May 2010).

The June 2020 Judgment of the Cairo Court of Appeal suggests, however, a possible shift in judicial attitude towards arbitration, as it demonstrates a willingness to review arbitral awards on substantive grounds such as manifest errors of law or fact, or substantive public policy rules.

The June 2020 Judgment is liable to being challenged before the Court of Cassation. It remains to be seen whether Al-Kharafi will continue the series of appeals by challenging it, and how the Court of Cassation will react if this case comes before it yet again.

References   [ + ]

1. ↑ The Arbitration Law entered into force on 22 May 1994. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Rethinking Virtual Hearings

Sun, 2020-07-19 03:00

Conducting all or parts of a hearing in the form of a virtual hearing has become a daily reality for many arbitrators, parties, and witnesses as the COVID pandemic continues to disrupt the legal practice. But as countries gradually ease out of lockdown and find their way into a “new” normal, it may be worth reflecting on whether, and if so how, virtual hearings will replace physical hearings as the default mode of conducting oral hearings in the post-COVID world.

 

Permissibility, Practicality and Effectiveness

The practice of conducting parts of an evidentiary hearing by means of video connection has until recently been reserved for exceptional cases and often been limited to examining witnesses of perceived minor importance. This has changed overnight as the worldwide travel bans in response to the COVID pandemic made virtual hearings an essential part of arbitral practice. This rapid transformation from physical to virtual can be largely attributed to the procedural flexibility of international arbitration, and to the accessibility and effectiveness of relevant technology.

 

Permissibility

Most of the national arbitration laws found in modern states, while specifying the requirement to hold a hearing absent a contrary agreement by the parties, have no specific prohibition against holding these hearings through means of telephone calls or videoconferencing (see, e.g., UNCITRAL Model Law, Art. 24). Meanwhile, the standard practice as envisaged in the rules of major arbitral institutions provides for broad discretionary powers of arbitral tribunals to determine the appropriate method of conducting a hearing, including the power to conduct the hearing virtually, e.g., Article 17 of the KCAB International Rules. In this connection, it is even argued that the requirements of an “in-person hearing” can be complied with by meeting “virtually” in person (see ICC Guidance Note, para. 22) – as paradoxical as this might first sound.

While the New York Convention provides grounds to challenge awards for a violation of a party’s right to equal treatment or its right to be heard (Article V(1)(b))1)See, e.g., Chrome Resources S.A. v. Leopold Lazarus Ltd., Federal Tribunal, Switzerland, 8 February 1978, XI Y.B. Com. Arb. 538 (1986) where the court held that “this provision covers any restriction, whatever its nature, of the parties’ rights. It appears to contemplate, amongst others, the violation of the right to be heard.” jQuery("#footnote_plugin_tooltip_7950_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7950_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, so far there have been no reported cases where the imposition of a video hearing (instead of a physical hearing) in and of itself was found to amount to a violation of these rights. National courts in most jurisdictions tend to set high thresholds for the requirements under Article V of the Convention and the authors are unaware of cases in which courts unduly failed to accord deference to the broad discretion of arbitral tribunals to conduct oral hearings as appropriate under the circumstances.

 

Practicality

Past reluctance to utilize video hearings often may have been due to the inaccessibility of the video-conferencing hardware and prior (bad) experiences with unreliable connections, coupled with the general inertia to change. Since then technology has advanced and people have adapted. An ample supply of low-bandwidth Internet-based conferencing software solutions, such as Zoom or Webex, now provides reliable, high-quality audio and video feeds, easily accessible to new users. For the interested viewers and readers, there are more than enough video tutorials online, as well as a host of protocols, checklists and guidelines on how to prepare for, and conduct a virtual arbitration hearing, including the Seoul Protocol on Video Conferencing in International Arbitration (“Seoul Protocol”). An earlier post discussed the Seoul Protocol in detail. Furthermore, the pool of arbitrators, counsel and parties, has also evolved, as we now see more “digital natives” entering the field, while “early adopters” are quickly learning to adapt to these new IT tools.

 

Hearings in the Post-COVID Era

In an environment that considers them legally possible and technically practicable, will virtual hearings remain the default mode even after the pandemic has subsided and restrictions of movement have been lifted? Or will they be a mere passing fad, going out of fashion after one season like some other over-hyped conference topics before? The probable answer is “neither” in that many will revert to the old ways to some degree while adopting the virtual hearing format in a manner that best fits their needs.

It would be difficult to argue that virtual hearings can fully replicate the nuanced and instantaneous interaction between tribunal, counsel and witnesses which physical hearings can offer. As humans, we have evolved to respond to the surrounding environment by processing an array of verbal and non-verbal cues, and to interact accordingly. Observing a person’s overall demeanor, their surroundings, and the real time reactions of other participants in the room often yields useful information. Concerns such as witnesses reading off notes or being coached off-screen during cross-examination, or arbitrators and witnesses not looking at the correct page of a key document at the right time may constitute additional challenges when planning virtual hearings. The Seoul Protocol attempts to address these challenges that otherwise would, in principle, not occur in physical hearings. These are just a few of the disadvantages and difficulties of virtual hearings – whether perceived or real.

On the other hand, the success stories, as well as experience gained, during the pandemic will encourage more frequent and proactive deployment of the virtual format, even if it only pertains to parts of hearings or some of the participants. Just as we have seen how environmental damage can be mitigated through the temporary slowing of human activities, the “great pause” caused by the pandemic has proven that we can take bolder and more specific steps towards positive changes that address some of arbitration’s perceived shortcomings. Virtual hearings can reduce expenses, spent time, and environmental damage associated with long-haul air travel, and can also ensure that necessary documents and pleadings are always at the fingertips of arbitrators and counsel. It would therefore be a waste not to maximize the benefits associated with virtual hearings, as long as it is ensured that the essential elements of a fair hearing are preserved.2)See, e.g., Markert/Burghardt – Navigating the Digital Maze – Pertinent Issues in E-Arbitration, J Arb. Studies. (2017), pp. 3, 15-16. jQuery("#footnote_plugin_tooltip_7950_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7950_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It can already be anticipated that, at least for procedural conferences, video-conferencing technology will replace the thus far standard telephone conferences.

Both the physical and virtual formats have pros and cons and parties will have to find the right balance for each case.

 

Multiple Hearing Centers as Connecting Points – Hearing Hubs

A middle ground to this dilemma possibly involves the use of hearing centers. Compared to long distance air travel, commuting within a city or to nearby regions will be perceived to be less of a cost/delay factor and more convenient/eco-friendly. Hearing centers in major arbitration locations, in close cooperation with their sister centers in other regional hubs, can provide the necessary infrastructure and common technical support. By way of illustration, one group of participants can congregate in one hearing center of their convenience, while other groups can convene in their own preferred centers. Those multiple “Hearing Hubs”, through a pre-arranged protocol, will take care of everything from testing, providing on-site tech managers, implementing back-up plans, and handling document retrieval and screen-sharing systems between the multiple groups – in addition to providing the physical hearing rooms and relevant onsite services for participants in their respective centers.

That way, arbitrators and counsel can go back to focusing on the substance of the dispute, while a joint team of technicians and logistical experts from the different centers undertake centralized efforts to ensure that the technology, logistics, and cybersecurity are properly addressed. Witnesses giving evidence in a neutral environment where supervision is possible at all times may also give a significant level of comfort to those examining or following remotely.

This method of conducting remote hearings through Hearing Hubs will require some degree of coordination, such as standardization of the technology and proper testing protocols. However, it seems entirely feasible considering the pre-existing good relationships between many of the major hearing centers, particularly in Asia. In any event, it seems a preferable solution to arbitrators and counsel needing to spend substantial time and efforts on creating virtual hearing environments on an ad-hoc basis – rather than fully concentrating on preparing the merits of the case.

 

Rethinking the Need for Hearings

Many would certainly see the essence of an oral hearing as providing the parties a chance to plead their case in front of the adjudicators and the counterparty. This is believed to ensure both parties an equal chance to influence the arbitrators’ views and opinions by engaging in a live, adversarial exchange with the opposing party and by challenging the other party’s witness evidence. It will of course depend on the specific case at issue, but some of these essential traits may be better secured through a physical hearing, while other issues can well be replicated in virtual settings.

Amidst all the focus on how to conduct hearings, it may be useful for parties to pause and think why they are conducted, and specifically whether oral hearings and cross-examinations are essential for every type of dispute. Smaller contract disputes accompanied with sufficient documentation, or single-issue disputes in which facts are undisputed, may sometimes just as well – if not better – be resolved through a carefully designed documents-only procedure.3)See, e.g., Chartered Institute of Arbitrators’ 2015 guideline on documents-only arbitration procedures. jQuery("#footnote_plugin_tooltip_7950_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7950_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Regardless of the specific requirements of a particular matter, the ability to connect individual arbitrators, counsel and witnesses from remote locations simultaneously through virtual hearings, creates a level of flexibility that has hitherto been unseen. The question of how we will manage to preserve the essence of an oral hearing (assuming one is needed) while at the same time incorporating new technologies to streamline procedures, will be the subject of lively discussions in the times to come – whether in physical meetings or by way of the meanwhile ubiquitous webinars.

References   [ + ]

1. ↑ See, e.g., Chrome Resources S.A. v. Leopold Lazarus Ltd., Federal Tribunal, Switzerland, 8 February 1978, XI Y.B. Com. Arb. 538 (1986) where the court held that “this provision covers any restriction, whatever its nature, of the parties’ rights. It appears to contemplate, amongst others, the violation of the right to be heard.” 2. ↑ See, e.g., Markert/Burghardt – Navigating the Digital Maze – Pertinent Issues in E-Arbitration, J Arb. Studies. (2017), pp. 3, 15-16. 3. ↑ See, e.g., Chartered Institute of Arbitrators’ 2015 guideline on documents-only arbitration procedures. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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What Next for Interpreting General Exceptions in International Investment Agreements? Canada’s Non-Disputing Party Submission in Eco Oro Minerals v Colombia

Sat, 2020-07-18 03:00

On 27 February 2020, Canada availed itself of the opportunity provided by Article 827(2) Canada-Colombia FTA (“FTA”) to make a non-disputing party submission 1)Accessing the link requires a subscription. jQuery("#footnote_plugin_tooltip_9332_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9332_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });(“NDPS”) in Eco Oro Minerals v Colombia. The case concerns issues arising out of a mining restriction imposed to establish an environmental conservation zone. It was initiated in late 2016; hearings took place in January 2020.

As the home state of the investor, Canada focused on imparting its views on the interpretation of the expropriation standard, the interaction between the FTA’s different provisions on exceptions, and the relationship between the general exceptions and the treaty’s substantive standards (some of these issues relate to aspects of the ICSID tribunal’s questions that will be addressed in the parties’ post-hearing briefs).

This post will focus solely on the issue of interoperability of the WTO-like general exception in Article 2201 of the FTA2)Article 2201 FTA contains exceptions to both trade and investment chapters. The investment-related clause, Article 2201(3) FTA, is akin to Article XX GATT albeit with investment regime adjustments—the chapeau is modified and only three subparagraphs with policy objectives are enlisted, containing ‘necessary’ as a nexus. jQuery("#footnote_plugin_tooltip_9332_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9332_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); with the substantive obligations.

 

NDPS in investor-state arbitration

NDPSs are generally understood as an aid for tribunals in interpreting an IIA and as a means of ‘enlighten[ing] [them] in their decision-making process’ [¶47]. However, as commented elsewhere on this blog, some tribunals have also held that NDPSs may function as a form of ‘subsequent practice’ under Article 31(3) of the VCLT. In contrast, it has been argued by arbitrator Brower in his Messa opinion [¶30] that interpretations set out in NDPSs cannot be regarded as an authentic interpretation as they would hardly ever differ from the interpretation advanced by the respondent State.

Nevertheless, Alschner and Hui call for investors’ home states to engage more actively in interpreting treaty-based exceptions by filing NDPSs. States have not always made use of such an opportunity. In the Bear Creek case, where a general exceptions clause had been invoked for example, Canada submitted a NDPS in which it omitted to comment on how general exceptions should be applied in the Canada-Peru FTA.

Canada’s submission in the Eco Oro case is particularly relevant because Canada is one of the countries that most frequently inserts WTO-like exceptions in its IIAs. Some authors consider exceptions akin to WTO law as an opportunity for instilling flexibilities into investment treaties normally considered too rigid and pro-investor. Those opposing this view assert that substantive standards inherently contain built-in policy considerations developed through arbitral interpretation. Henckels, for example, explains that the inclusion of a WTO-like exception poses a risk of tribunals construing an exception’s explicitly defined policy objectives as the sole policy space parties agreed on, to the exclusion of standards-embedded considerations.

Mitchell, Munro and Voon further argue, inter alia, that the transposition of WTO-like exceptions into IIAs risks undermining host states’ policy objectives in unintended ways, unless carefully delineated in the treaty alongside clarifications. Newcombe similarly questions what benefit inserting the rigorous ‘necessity’ test from Article XX GATT into investment treaties would bring, other than a more stringent standard of review. Against the backdrop of such concerns, Canada’s submission is seen as a welcomed contribution.

 

The relationship between general exceptions and substantive obligations: general exceptions as a ‘safety net’

While acknowledging that similar considerations related to policy space would apply for exceptions and obligations, Canada’s NDPS in Eco Oro emphasised that ‘whether a measure is justified under [an exception] is a distinct enquiry that must be viewed through a different lens’ from the substantive standards evaluation. It further maintained that ‘legitimate regulatory actions will rarely need to be justified on the basis of the general exception […] because they will not constitute breaches of the investment obligations in the first place.’

The relevance of these statements lies in the fact that Canada recognised a role for policy space considerations as self-standing and independent assessments for both exceptions and substantive obligations. In this way, Canada introduces much needed clarity by indicating the order of operation for the two types of norms—exceptions operate after a prima facie breach of an investment standard has been established; they are triggered after a finding of breach, and operate to inquire if there are grounds for not finding a state liable despite that breach.

This view is commendable as it fosters a sound interpretation of how legal norms operate particularly given that some investment tribunals are known for conflating the operation of exceptions with exemptions. An example of this phenomena is the CMS Annulment Committee’s finding [¶129] that where an exception is to be applied, the substantive obligations would not. This is to say that the Committee saw an exception to function as a carve out, delimiting the scope of the application of substantive obligations, and not as justifying the preliminarily found breach of an investment obligation.

In this respect, Canada’s submission provides an understanding of exceptions that safeguards against conflating exceptions with carve-outs. It also underlines the importance of assessing public policy space as a consideration when applying both substantive standards and exceptions, and not one to the exclusion of the other. Canada summarises such a view by proposing that general exceptions operate as ‘a final “safety net” to protect the State’s exercise of regulatory powers in pursuit of the specific legitimate objectives identified in the exceptions.’

 

Exceptions and the scope of the primary obligations

Canada’s submission also states that the exception ‘cannot be used to broaden the scope of the primary obligation’ as ‘[t]he Parties’ intention was never to limit the scope of legitimate policy objectives that States can pursue and that would not breach the investment obligations in the first place.’ Such a clarification of the intentions of the parties is particularly relevant due to the mentioned risk of arbitrators only considering narrowly enlisted policy objectives of the exception as relevant objectives, to the exclusion of broadly interpreting substantive standards.

This view can be juxtaposed with the finding of a tribunal in the Bear Creek case [¶473] that effectively discarded standards-embedded policy space as soon as it had found the existence of explicit exceptions in the Canada-Peru FTA. The tribunal essentially reduced the public policy space analysis solely to the level of exceptions. Needless to say, the NDPS’s statement by Canada – as one of the parties to a similar treaty – may impact future arbitral analyses construing the public policy space within an IIA’s substantive obligations and exceptions provisions. This should be considered a positive development for safeguarding host state regulatory autonomy.

 

Value of interpretative annexes in safeguarding public policy space

An FTA’s annexes usually provide useful interpretative guides and potential public policy considerations for the application of its substantive investment obligations. Depending on how detailed an annex is, one could argue that it effectively plays the role of an exception, which makes its operation in relation to exceptions stricto sensu unclear. Due to the concerns raised that exceptions might become unusable if a clarifying annex for the expropriation obligation is included, Canada’s explanation as to the applicability of Annex 811.2 FTA vis à vis exceptions and standard of expropriation is valuable.

The submission clarified that the environmental measure in question needs to first be assessed within the ambits of the Annex so as to determine if there is compensable expropriation, after which assessment (and in the case that a breach is found), analysis of the exceptions clause would ensue. Interpreting an investment obligation guided by an annex arguably widens the first stage of analysis of policy space even beyond the breadth of the built-in policy space, before falling onto a ‘safety net’ of any exception. Based on this approach, using annexes could thus be seen as a way of broadening the scope of the preliminary assessment and avoiding potentially narrow exceptions scrutiny altogether.

 

Concluding remarks

Canada’s submission is a constructive addition to the discussion on the operation of WTO-like general exceptions in the investment legal regime. By providing the view of another party to the FTA, in addition to the respondent state, Canada undoubtedly aids the interpretation of the relevant provisions of the Canada-Colombia FTA.

Canada argues for interpreting a regulatory measure in accordance with investment obligations, aided by Annex 811.2 FTA and if need be the exceptions clause. This proposition lays out the interpretative steps to be followed in order to harmoniously assess the public policy space Colombia and Canada originally encapsulated in the FTA. Canada ultimately posits that such an evaluation ‘will not limit the State’s ability to regulate in the public interest for the protection of the environment’.3)It should be noted that material submissions of the parties are not publicly available, and thus, the question of the extent to which Canada’s submission contributes to Colombia’s position in ascertaining the protection of the environment with its measures remains unclear. jQuery("#footnote_plugin_tooltip_9332_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9332_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This allows for tribunals to infer from the NDPS and respondent state’s subsequent comments the intended meaning parties to the FTA attributed to the disputed clauses. The NDPS is therefore invaluable as it clarifies the contours of important concepts and minimises the risks of the tribunal misconstruing the appropriate operation of the exceptions, annexes interpreting substantive norms and the built-in policy space within investment obligations.

References   [ + ]

1. ↑ Accessing the link requires a subscription. 2. ↑ Article 2201 FTA contains exceptions to both trade and investment chapters. The investment-related clause, Article 2201(3) FTA, is akin to Article XX GATT albeit with investment regime adjustments—the chapeau is modified and only three subparagraphs with policy objectives are enlisted, containing ‘necessary’ as a nexus. 3. ↑ It should be noted that material submissions of the parties are not publicly available, and thus, the question of the extent to which Canada’s submission contributes to Colombia’s position in ascertaining the protection of the environment with its measures remains unclear. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Should the ICCA / IBA’s Task Force on Data Protection “Roadmap” address the impact of the GDPR on Video Conferencing in International Arbitration Proceedings?

Sat, 2020-07-18 02:00

Previous posts have already covered various aspects of data protection in international arbitration proceedings and also in view of cybersecurity. Meanwhile, new and crucial data protection aspects have arisen with regards to video conferencing.

The ICCA / IBA’s Joint Task Force on Data Protection (“Joint Task Force”) in International Arbitration Proceedings has joined forces to produce a roadmap on data protection in international arbitration proceedings (“the Roadmap”). The Roadmap aims to provide practical guidance on the potential impact of data protection principles, in particular the European Union’s (“EU”) General Data Protection Regulation (“GDPR”), in international arbitration proceedings. Its main goal is to assist practitioners in identifying the ways in which data protection needs to be taken into account during the course of arbitration proceedings.

 

Why the Roadmap draft consultation paper should address data protection issues arising out of video conferencing

Many of the major arbitral institutions and interest groups have addressed various issues arising from video conferencing, inter alia, the following:

CIArb, the Hague Conference on Private International Law, the ICC, the ICCA, NYC Bar and CPR and ICSID, among other institutions, have released various guidelines regarding online video hearings.

However, most of these institutions fail to specifically address how data protection laws should be applied to proceedings when video conferencing is used. Therefore, it seems imperative for the Joint Task Force to address the relevant data protection issues for remote hearings in international arbitration proceedings. This will also encourage uniform standards to be developed in such area. In the Joint Task Force’s own words (page 1):

“In the absence of specific guidance, it is important to think through the steps of the arbitral process and document the measures adopted in the different phases of an arbitration within the framework of whatever data protection law(s) apply.”

The goal of the draft Roadmap will only be achieved if it also sufficiently addresses all questions pertaining to data protection that will arise during online hearings both now and in the future. In the years to come, we will likely record a significant increase in the use of video conferencing as an essential tool in international arbitration proceedings, as the significant financial and environmental benefits, expected from reductions in travel associated with virtual hearings, are evident. The necessary technologies required are also available at minimal expense – and amount to a fraction of the cost of travel for the arious participants to hearings and accommodation requirements over long periods.

 

Risks associated with video platforms

A number of video conferencing platforms have gained increased popularity in the past few months. While these platforms are most useful in enabling hearings to be held in different locations, the rapid uptake has given rise to various data protection concerns. These concerns were brought into sharp focus recently when some platforms were reported to have been subject to security attacks affecting numerous users.

 

Are video conferencing platforms GDPR compliant?

It is essential to commence a video conference in international arbitration proceedings under the GDPR with the description of the different roles of the parties involved. If the video conferencing software provider is processing any personal data from a party’s use of the service, they will be considered to be a “data processor” under the GDPR. This means that the video conferencing providers must take into account and adhere to the parameters of GDPR if any of the participants of the arbitration are domiciled in the EU or if the provider is established in the EU. In particular, they must ensure adherence to Article 28 of GDPR by having a contract in place setting out the incumbent data processing terms.

Since the Tribunal functions as “data controller”, the GDPR requires the Tribunal to ensure that any processors being used are GDPR compliant and that there is a comprehensive data processing agreement in place, to clarify and understand what the provider does with the data it collects through the software from the Tribunal and the parties.

In essence, the Tribunal should have appropriate technical and organizational measures in place in order to implement the data protection principles and safeguard individual rights with regard to video conferencing. This is also referred to as “data protection by design”, i.e. to consider all data protection issues up-front before the actual hearings commence.

 

The role of the Tribunal with regard to data protection issues when video conferences are held

The first item on the Tribunal’s list should be the selection of an appropriate video conferencing tool. For obvious reasons, the draft Roadmap could not provide recommendations on specific software providers. Tribunals themselves should carry out due diligence regarding the service provider in order to ensure that they are GDPR compliant. Particular attention should be paid as to what the service provider will do with the data that is being collected on behalf of the Tribunal. If such data is processed outside of the EU, the provider has to explain the protections in place to ensure the data security and compliance with the GDPR.

In addition, when choosing a video conferencing system, the Tribunal has to ensure certain technical minimum standards are reached, i.e. the video transmissions should have end-to-end encryption (Art. 32 GDPR). In addition, hearing access should be password protected to ensure that unwanted participants are kept out. Being able to control who is able to join hearings will also help protect the confidentiality of the hearings and prevent unwelcome interruptions. Certification of technical standards (ISO/IEC 27001) also seems desirable.

Further, as controller, the Tribunal must decide how it plans to use the information, recordings, attendee lists that will be received as a consequence of the online hearing, taking into account the GDPR implications especially the lawful basis for processing and the parties’ consent. In this respect, a data protection impact assessment with the parties should be carried out before commencing the hearings.

The GDPR obliges Tribunals to provide information about the use of personal data and to inform users (“data subjects” in GDPR terminology) about their data protection rights (Articles 13 and 14 GDPR). Article 12(1) GDPR further requires that all such information must be concise, transparent, and easily accessible, using clear and plain language and includes evaluating tools, services and resources in terms of their intended use. This could be done during the initial communication with the parties.

Also, the Tribunals should consider whether parties should make use of screen sharing to discuss confidential (or special category) information. The information may be retained as part of the recordings, and for this reason consent should be obtained up-front for such processing of special category data.

To facilitate the Tribunal’s task in making sure that all of the above points are taken into account so that their video proceedings are GDPR compliant, it seems advisable to add a GDPR compliance checklist to the Roadmap.

 

Proposed Addendum to the Roadmap

Currently, the draft Roadmap is divided into two sections – the first section deals with “General Data Protection principles relevant to international arbitration”, the second section addresses “Data Protection Compliance during International Arbitration Proceedings”. Section II(A)(3) (page 34) of the draft Roadmap elaborates further on the “Use of Service Providers”.

As the name “Roadmap” suggests, this document is intended to serve as a comprehensive guideline for addressing all major data protection issues that may come up during the proceedings. Noticeably, since the first draft of the Roadmap, the circumstances in which international arbitrations take place have changed fundamentally as a consequence of the pandemic. Therefore, an addendum to the Roadmap seems necessary.

The authors recommend extending the second section of the Roadmap with a separate header and to address the changed landscape of arbitration proceedings with regard to video conferencing.

 

Conclusion

There is a surge in popularity of the use of video platforms in arbitration proceedings. However, recently some of the major video conferencing platforms have made headlines (e.g. Zoom) and have cast certain doubts on their commitment to data protection laws. In recognition of the need to better understand the role of data protection with regard to video conferences in international arbitration proceedings and to recommend/implement certain standards, it would be highly recommended to include a separate chapter in the ICCA/IBA’s draft Roadmap in relation to data protection issues with regard to video conferencing.

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Noteworthy Points on Limitation Periods Applicable to Award Enforcement in the Chinese Mainland and Hong Kong: A Brief Summary and Update

Fri, 2020-07-17 03:00

For awards issued in cases administered by the China International Economic and Trade Arbitration Commission (“CIETAC”) Hong Kong Arbitration Center, parties can enforce them in the Chinese mainland and Hong Kong out of the many other possible jurisdictions. What they cannot do, however, is to simultaneously enforce the award in both jurisdictions. This is expressly prohibited under the Arrangement Concerning Mutual Enforcement of Arbitral Awards between the Mainland and the Hong Kong Special Administrative Region (the “Arrangement”).

Enforcement of awards in either jurisdiction may take time. Parties need to consider the sequence of enforcement applications in both jurisdictions. Therefore, understanding the many differences in limitation periods can be crucial for parties in their enforcement strategies.

 

Chinese Mainland

Pursuant to Article 239 of the Civil Procedure Law of the People’s Republic of China (Revised in 2017) (the “Civil Procedure Law”), the limitation period applicable to applications for enforcement of awards is two years.

The starting point for the calculation, and the rules on refreshment and suspension of the limitation period, are worth noting.

 

The Starting Point to Calculate Limitation – Statute and Case

Pursuant to Article 239 of the Civil Procedure Law, the limitation period (of two years) shall be calculated from the date of the deadline to perform the orders stated in the award. Where the award does not specify a deadline, the limitation period shall be calculated from the effective date of the award.

That said, the Shanghai courts departed from this default position in Shanghai Jwell Machinery Co., Ltd. v Retech Aktiengesellschaft (2008) Hu Yi Zhong Zhi Zi No. 640-1 (“Jwell v Retech”), a case discussed and passed by the Adjudication Committee of the Supreme People’s Court. In this case, the CIETAC award became effective in September 2006 but no PRC courts had jurisdiction over its enforcement at that time, because neither the award debtor, Retech Aktiengesellschaft (“Retech”), nor its assets were within the Chinese mainland. The award creditor, Shanghai Jwell Machinery Co. Ltd (“Jwell”), subsequently applied for enforcement in Switzerland but in vain. In the summer of 2008, Jwell identified assets belonging to Retech in an exhibition in Shanghai hence it applied for enforcement against those assets.

After finding that Jwell had not been idle in exercising its right to enforce the award, the No. 1 Intermediate Court of Shanghai held that the limitation period for Jwell to apply to a Chinese mainland court for enforcement of the award shall be calculated from the date on which Retech’s assets came within the Chinese mainland. That date was almost two years after the date of the CIETAC award.

 

Refreshment and Suspension

Jwell v Retech is consistent with legislative position of the Chinese mainland on limitation, in that it aims to protect both the procedural and substantive rights of the creditor if he or she has been diligently attempting to enforce the award.

This legislative position is also reflected in the rules on the refreshment or suspension of the calculation of limitation. Article 140 of the General Principles of Civil Law of the People’s Republic of China (the “General Principles of Civil Law”) provides that: “[t]he limitation shall be interrupted if legal proceedings are commenced or if an interested party demands or agrees to fulfilment of its obligations. Calculation of the limitation period shall commence anew from the time of interruption”.

Previously, there were differing opinions on whether enforcement proceedings are considered legal proceedings that will interrupt the calculation of the limitation period. But such doubt was cleared by Article 28 of the Interpretation of the Supreme People’s Court of Several Issues concerning the Enforcement Procedures in the Application of the Civil Procedure Law of the People’s Republic of China (the “Interpretation”). Article 28 states that the calculation of the limitation period will be interrupted on the date of commencement of the enforcement proceedings, the date when the parties reach a settlement, or the date when one of the parties proposes or agrees to enforce.

Both the General Principles of Civil Law and the Interpretation have not clarified when the calculation of the limitation period should restart following the commencement of enforcement proceedings. However, it is commonly understood by academics and practitioners that the period of the enforcement proceedings should not be counted in the limitation period. That is to say, the limitation period shall reset on the date of commencement of enforcement proceedings, but the calculation of the limitation period shall restart only when the enforcement proceedings conclude.

Alternatively, parties are entitled to have the calculation of limitation period suspended if one of the statutory conditions under the General Principles of Civil Law is triggered, e.g. force majeure under Article 139 of the General Principles of Civil Law.1)See also Article 27 of the Interpretation. jQuery("#footnote_plugin_tooltip_7162_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7162_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

On 8 June 2020 the Supreme People’s Court issued the Guiding Opinions on Several Issues Concerning the Lawful and Proper Trial of Civil Cases Involving the COVID-19 (III) Fa Fa [2020] 20, in which it stated that the refreshment and suspension rules mentioned above also apply to Hong Kong or foreign-seated arbitrations in addition to arbitrations seated in the Chinese mainland.

 

Hong Kong

Section 4(1) of the Limitation Ordinance (Cap. 347) (the “Limitation Ordinance”) provides that: “[t]he following actions shall not be brought after the expiration of 6 years from the date on which the cause of action accrued, that is to say… (c) actions to enforce an award, where the submission is not by an instrument under seal.”

If the submission is by an instrument under seal, the limitation period is 12 years according to section 4(3) of the Limitation Ordinance.

For parties seeking award enforcement in Hong Kong, issues arise as to the application of section 4(3) and whether there are similar refreshment or suspension rules under the laws of Hong Kong as those in the Chinese mainland. These two questions have been addressed in Hong Kong case law, as explained below.

 

Execution by Seal

In Wang Peiji v Wei Zhiyong [2019] HKCFI 2593; [2019] HKEC 3446 (“Wang Peiji v Wei Zhiyong”), the award creditor argued that because the award of the Guangzhou Arbitration Commission was executed by seal, the applicable provision was section 4(3) of the Limitation Ordinance which provides for a limitation period of 12 years.

Deputy High Court Judge Hall-Jones rejected this argument. He held that the relevant consideration should be whether the underlying contract, rather than the award, was executed by seal. Therefore, the limitation period of six years under section 4(1)(c) of the Limitation Ordinance applied and the enforcement order made earlier was set aside.

 

No Suspension

There is no legislation in Hong Kong that specifically provides for the suspension or refreshment of the limitation period, for a party who first attempts to enforce the award in the Chinese mainland.

In Wang Peiji v Wei Zhiyong, the award creditor argued that the limitation period should be suspended for the period in which the award creditor was engaged in enforcement proceedings before the Chinese mainland court. In an effort to distinguish the ruling in another Hong Kong case, CL v SCG [2019] 2 HKLRD 144, the award creditor in Wang Peiji v Wei Zhiyong also argued that its enforcement proceedings in the Chinese mainland went on for a fair amount of time and were rather successful, so it could not have been expected to cease its efforts there. Despite these arguments, the Court found that Hong Kong law (which includes the Arrangement) does not provide for limitation periods to be suspended while the successful party attempts enforcement in the Chinese mainland.

References   [ + ]

1. ↑ See also Article 27 of the Interpretation. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Healthy Virtual Hearings

Fri, 2020-07-17 00:00

The travel restrictions and social distancing measures imposed by the COVID-19 pandemic have brought about an exponential increase of virtual get-togethers, including hearings via video conferencing in both litigation and arbitration proceedings.

Courts and tribunals in England and Wales reported an increase of audio hearings by over 500% and video hearings by 340% during the period 23 March – 6 April 2020.  Similarly, arbitral institutions and hearing centres registered a high demand for virtual hearings: Seoul IDRC reported a rise by 500% of virtual hearings and by 460% of days of hearings held virtually.  Also, 85% of the hearings booked in HKIAC cases in April and May 2020 employed remote communication tools.

In a world stunned by COVID-19, the international arbitration community united in its efforts to provide users with nearly-uninterrupted effective dispute resolution services.  The SCC offers its platform free of charge for ad hoc arbitrations; Arbitration Place launched Arbitration Place Virtual, an online platform developed to accommodate virtual hearings; a group of arbitration practitioners developed a resource website, virtualarbitration.info, which compiles news and experiences on the conduct of virtual hearings; the ICC prepared a Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic; Africa Arbitration Academy prepared a Protocol on Virtual Hearings in Africa; a group of six international law firms released a Protocol for Online Case Management in International Arbitration (currently undergoing a consultation process in the community).

Little has been said, however, on the physical and psychological challenges presented by the sudden omnipresence of video conferencing in professional life, particularly for long periods of sustained concentration and focus such as hearings.  These challenges are real, and they are scientifically documented.  According to a survey conducted in March 2020 by researchers at Keio University (Tokyo), 35% of online workers reported that their mental health had deteriorated as a result of working remotely amidst the COVID-19 lockdown.  Amongst the factors that were found to lead to health deterioration were the lack of transition between work and personal lives, as well as reduced physical activity and difficulty in communicating with co-workers.

In a BBC interview published in April 2020 on the topic of video conferencing, Gianpiero Petriglieri, an associate Professor at INSEAD, stated that:

Our minds are together when our bodies feel we’re not. That dissonance, which causes people to have conflicting feelings, is exhausting. You cannot relax into the conversation naturally.”

Professor Petriglieri puts his finger on a crucial factor: the gap between the physical and the virtual, which our minds find unsettling and our bodies exhausting.

Suzanne Degges-White PhD, Professor at Northern Illinois University, in an interview for USA Today added that:

When we’re on all these videos calls all day long, we’re kind of chained to a screen (…) It’s just psychologically off putting. I’ve got to show up again but the thing is, we’re not really showing up anywhere.”

Dr Degges-White echoes another gap: the sentiment of isolation that follows pressing the “Leave meeting” button to find oneself alone and without the informal debriefing that often accompanies the aftermath of more formal gatherings – albeit it is to be expected that this aspect will become less pronounced as social distancing measures are relaxed.

The thoughts underpinning this post are the following:  There is life after COVID-19 and that life will continue to include virtual hearings as an option for the users of arbitration, with attendant costs savings.  It is therefore important to get as comfortable as possible interacting virtually.  Lack of comfort for the legal team during hearings means a struggle to achieve focus and persuasiveness.  Similarly, the quality of the tribunal’s decision-making will suffer from physical and mental fatigue.

High-quality advocacy and decision-making are key to the future of cutting-edge, focused, efficient arbitration proceedings, whether virtual or not.  This hinges on our ability to move seamlessly and with ease from the physical to the virtual.  This process of familiarisation starts by gaining an awareness of the challenges of virtual, video-based proceedings on the body and mind.  We set out some of these challenges below.

 

Issues

  • Physical tiredness

Probably the first challenge experienced by participants in video gatherings is the physical tiredness caused by eye fatigue and a limited ability to move.  In a traditional hearing, attendees have some flexibility to move around the room, turn to their colleagues, or shift their gaze to different focal points.  In a video context, participants become headshot talkers who stare continuously at the screen, concerned to even get up for a cup of coffee for fear of being perceived as distracted or uninterested.

In a video environment, our peripheral vision, which helps us notice objects and movements outside the direct point of vision, is much less used.  Instead, we engage ‘laser vision’, which is focused towards one single area of interest.  This is due to the ‘shrinking of visual data’ from a conference-room size area of visual information to a 19- to 34- inch screen.  We also feel the need to stare at the camera to confirm our engagement in the conversation.

 

  • Mental challenges

Participants in prolonged video calls face additional challenges. Because the camera is focused on the upper body, our minds make extra efforts to read non-verbal clues, searching for the other pieces of the complex puzzle that constitutes physical human interaction.  Our minds naturally look for and rely on those signs in our conversations to process the information that is being received. Since frequent video interaction in a professional setting is still new to most of us, we lack a frame of reference to read into non-verbal behaviour through a screen.  Advocates, in particular, find the screen an obstacle to their traditional tools of persuasiveness: eye contact; facial expressions; even vocabulary need to be simplified so as to ‘go through’ the screen and impact the tribunal. Among other challenges, we note the increased self-awareness from seeing oneself on screen, dry and less engaging conversations or hurdles in coordinating with team members/co-arbitrators.

This phenomenon is exacerbated by the multi-person screens needed in a hearing.  As the visual data is concentrated in a small area, our brain faces an increased cognitive load – reportedly double that of physical face-to-face interaction – presented by the multiple eye stimuli that appear on the screen.  What used to be one single background (the four walls of the hearing room, for example) is now replaced by the impression of being in multiple rooms (with different backgrounds, lightings, qualities of the projected image) at the same time.  This challenges our brain to read multiple stimuli at once and merge the heterogeneous visual parts of a single conversation into a coherent stream.  Julia Sklar describes ‘zoom fatigue’ as follows:

Multi-person screens magnify this exhausting problem. Gallery view—where all meeting participants appear (…) —challenges the brain’s central vision, forcing it to decode so many people at once that no one comes through meaningfully, not even the speaker”.

Conversations by video tend to be a single channel / tunnel communication.  Debates, lively conversation or spontaneous interjections are a challenge given that on video we must take turns to speak.  This leads to a dramatic reduction in human ‘bonding’ cues and to feelings of side-lining within an online group.  Silent pauses present another challenge because they are magnified. They cannot be filled in with gestures, say gestures of understanding (leaning towards someone for example), or comfort.

Coordination with team members/co-arbitrators presents its own challenges.  Often this is done in parallel with the main hearing, with Post-it notes being replaced by instant messaging chat rooms.  This adds to the dissonance, or gap, referred to above: these platforms are usually social, not professional, outlets.  In a recent study by National Taiwan Normal University, involving 429 civil servants using instant messaging as part of their professional work, researchers concluded that the higher the level of online social anxiety of civil servants, the higher their perceived level of information overload and cognitive fatigue, which eventually can lead to reduced job engagement.

Screen/life balance

Our bodies and minds are equipped to adjust to change in their environment – even to radical change such as that brought about by COVID-19.  The practitioners of international arbitration will find a way to cope with the transition of professional life to the (computer) screen.  In order to allow familiarity to ease in and performance to remain high, it is important to recognise that the impact of video hearings on our minds and bodies is tangible and must be heeded.  A good place to start is the case management conference:  including a protocol for video hearing well-being that factors in shorter hours, more regular breaks and an ability to walk away from screens without fear of adverse inferences would address many of the concerns outlined above.  Sticking to that protocol will improve the virtual hearing experience, and its outcome.

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Is There Anything to Draw From “invested by investors”? Parallels Between Serafín García Armas v. Venezuela and Clorox v. Venezuela

Thu, 2020-07-16 03:00

Serafín García Armas and Karina García Gruber v. Venezuela and Clorox Spain v. Venezuela are different in many aspects. García Armas relates to dual nationality, while Clorox relates to protected investment. However, they have a common feature: Article 1(2) of the Spain–Venezuela BIT was key to their developments.

That article defines investments as “any kind of assets, invested by investors […].” From a mundane provision, the Paris Court of Appeals (Paris CA) and the Clorox arbitral tribunal drew subtle distinctions of large implications.

 

García Armas and García Gruber v. Venezuela

In García Armas, the claimants – Mr. Serafín García Armas and his daughter, Ms. Karina García Gruber – were dual nationals of Spain and Venezuela.1)Previous posts have discussed the dispute between the Garcías and Venezuela, which spans across at least three treaty-based arbitrations and issues such as dominant and effective nationality and challenge of arbitrators). jQuery("#footnote_plugin_tooltip_6899_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6899_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Mr. García Armas was born in Spain, but moved to Venezuela at a young age and became a national by naturalization in 1972. Ms. García Gruber, on the other hand, was born in Venezuela in 1980, being a Venezuelan national by birth, and acquired the Spanish nationality in 2003. In 2001, they became shareholders of Alimentos Frisa and Ms. García Gruber acquired shares in Transporte Dole, later becoming its sole shareholder.

In 2012, they started arbitration alleging that, in 2010, Venezuela had expropriated their investments in Alimentos Frisa and Transporte Dole. Venezuela objected to jurisdiction alleging that the claimants were not Spanish nationals when they made the investment in 2001. In regard to Mr. García Armas, Venezuela claimed that he had lost his Spanish nationality because of the Venezuelan 1955 naturalization law, according to which nationals by naturalization could neither use their original citizenship nor obtain another, and reacquired it by virtue of the 2004 Nationality and Citizenship law, which eliminated that restriction. Ms. García Gruber, on the other hand, had acquired the Spanish citizenship only later in 2003.

In the 2014 jurisdictional award, the arbitral tribunal majority held that the claimants’ nationality when making the investment was not relevant. The relevant dates were those pertaining to (a) the alleged treaty breach and (b) the commencement of the arbitration. Venezuela applied for annulment on multiple grounds under the French Code of Civil Procedure, including lack of jurisdiction of the arbitral tribunal (art. 1520, 1).

In 2017, the Paris CA partially set aside the jurisdictional award. Accepting a distinction between “held assets” and “invested assets” (actif détenu and actif investi), the Paris CA concluded that, under Article 1(2) of the BIT, nationality at the time of the investment was relevant for jurisdiction ratione materiae. In February 2019, the French Supreme Court overturned that decision at Venezuela’s request. It held that since the BIT had two cumulative conditions for jurisdiction (nationality of the investor and protected investment) and one of them was lacking, a partial set aside was fraught with logical inconsistency. In April 2019, the arbitral tribunal rendered a final award, deciding that Venezuela had breached the BIT.

In despite of such final award, in line with French law, in June 2020 the Paris CA rendered a new decision in the annulment proceedings to fix the previous error. It reaffirmed its prior interpretation of Article 1(2) of the BIT and extended its reach, setting aside the jurisdictional award in its entirety. The writing style is different (and so is the composition of the three-judge panel), but the underlying reasoning is the same as in 2017. For the Paris CA, it follows from the ordinary meaning of words that protected investments under the BIT are assets invested by investors of the other Contracting Party; hence, jurisdiction ratione materiae requires investors to satisfy the nationality requirement when making the investment. (The interplay between the set-aside of the jurisdictional award and the enforcement of the final award, if any, seems uncharted territory. The decision may have just opened a new chapter in the long-running dispute between the Garcías and Venezuela.)

 

Clorox v. Venezuela

In Clorox, a case initiated in 2015, the claimant was Clorox Spain, a subsidiary of U.S.-based Clorox International. Clorox International had been the sole shareholder of Clorox Venezuela, the local investment vehicle, from the 1990s until April 2011, when Clorox Spain was constituted and immediately assigned all shares in Clorox Venezuela. In the merits, the dispute relates to legislative and administrative measures, adopted as of November 2011, that allegedly curbed Clorox’s ability to establish product prices and conduct business operations, amounting to breach of fair and equitable treatment, full protection and security, and expropriation.

One of the jurisdictional objections presented by Venezuela was that Clorox Spain lacked a protected investment, for Article 1(2) of the BIT requires an active link between investor and investment, usually of cause (investor’s activity) and consequence (investment). More than ownership of assets, an action of investing was needed. In turn, Clorox argued that it was an investor pursuant to the BIT, which only required incorporation in one of the Contracting Parties, and that Venezuela was trying to add non-written requirements – such as substantial business activities, effective control over investment, and denial of benefits – into the BIT.

In the May 2019 award, the tribunal made a two-step analysis of jurisdiction and ultimately sided with Venezuela’s interpretation of Article 1(2) of the BIT. It held that Clorox Spain prima facie had an investment, being the sole shareholder of the locally incorporated company, but that treaty protection was limited to assets “invested by investors”, so an action of investing was also required. For the tribunal, Clorox Spain had not made an action of investing because no real exchange took place in April 2011. Clorox Spain received the shares from Clorox International for the purpose of its own constitution, as contribution in kind for its share capital and premium. No transfer of value occurred between them, as Clorox Spain itself would not exist had it not been for what it received from Clorox International. In addition, there was no evidence that Clorox Spain had made further investments in the local company. In short, the tribunal understood that to make is not the same as to hold an investment and that treaty protection required the former.

In March 2020, Switzerland’s highest court set aside the Clorox award. For the Swiss Federal Tribunal, Article 1(2) is an ordinary asset-based definition of investment – a general clause followed by a non-exhaustive list of examples – known for its openness. Unpersuaded by what it called the “particular importance” given to “invested by investors” (para. 3.4.2.4), the court considered that the arbitral tribunal addressed as investment definition what is actually an issue of treaty shopping. Known problem, but wrong remedy, especially considering that the BIT has neither a denial of benefits clause nor nationality requirements in addition to place of incorporation. On the other hand, the court held that whether there had been abuse of rights in the corporate restructuring is a pending issue that should be decided by the arbitral tribunal, which inevitably reminds of Philip Morris v. Australia and the foreseeable dispute test (previous Kluwer blog posts that have discussed abuse of rights related-issues can be found here, here, here, here and here).

 

Analysis & Conclusion

To say that the Paris CA and the Clorox tribunal’s interpretations are unusual is an understatement. They depart from the view that “invested by investors” is meaningless, little else than just redundant treaty writing, and give the wording important consequences for jurisdictional outcomes. Yet, and perhaps because of that, they raise at least two issues that would welcome further discussion.

First, the Paris CA blurred the lines between jurisdiction ratione personae, ratione materiae and ratione temporis with the understanding that “the jurisdictional criteria established in the BIT are cumulative and indivisible” (para. 56, June 2020 decision). Under that view, these categories are less of separate boxes, which can be checked one at a time, and more of intertwined aspects of jurisdiction. Hence, nationality, at the time the investment is made, is relevant to determine if there is a protected investment. Nationality would be relevant from the beginning, as only investments made by investors are protected.2)The reasoning is different, but the outcome resembles Mr. Orrego Vicuña’s dissenting opinion in Siag v. Egypt (2007). He considered that since Mr. Siag was Egyptian when the investment was made, that situation was not consistent with the ICSID Convention meaning and purpose. Mr. Rodrigo Oreamuno, co-arbitrator in García Armas v. Venezuela, also leans towards that view in his dissenting opinion. jQuery("#footnote_plugin_tooltip_6899_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6899_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); That view contrasts with Article 25(2) of the ICSID Convention and overall practice, in which nationality’s relevant date appears to be on a later stage – date of the alleged treaty breach, date of consent (usually when the request for arbitration is filed by the investor), and date of registration.

Second, the decisions assume that to invest (or to make an investment) cannot be conflated with to hold an investment. That is implied from the Paris CA’s 2017 distinction between “held assets” and “invested assets”, which the 2020 decision does not elaborate further but seems to accept as starting point (para. 51), and more directly affirmed by the Clorox tribunal (paras. 815-816).

The Swiss Federal Tribunal ruling, apart from describing Article 1(2) of the BIT as a broad asset-based definition of investment, did not address that distinction upfront. It seems to have circumvented it, by reasoning that “leaving aside the disputed formula ‘invested by investors’, it must be noted that this definition does not contain any particular restriction or requirement concerning the nature of the protected investments” (para. 3.4.2.5), and by approaching the issue from other angles. Namely, (a) that the true issue being decided was different (origin of funds and, ultimately, treaty shopping), (b) that the BIT had not limitation clauses, such as denial of benefits, and (c) that the tribunal had added non-written conditions to the definition of investment. In the end, it seems that regardless of how novel the Clorox interpretation of “invested by investors” may be, from the standpoint of legal reasoning it still needs a more direct answer as to why it is incorrect – or not.

Despite their differences, the key takeaway from the Paris CA (in the 2017 and 2020 García Armas’s set-aside decisions) and the Clorox tribunal (in the 2019 award), when viewed altogether, is that there may be some meaning to draw from “invested by investors”. Whether, ten years from now, these decisions will be seen as outliers or as precursors of a new trend of interpretation is the ultimate question.

 

All texts in French and Spanish mentioned in this post have been translated into English by the author.

References   [ + ]

1. ↑ Previous posts have discussed the dispute between the Garcías and Venezuela, which spans across at least three treaty-based arbitrations and issues such as dominant and effective nationality and challenge of arbitrators). 2. ↑ The reasoning is different, but the outcome resembles Mr. Orrego Vicuña’s dissenting opinion in Siag v. Egypt (2007). He considered that since Mr. Siag was Egyptian when the investment was made, that situation was not consistent with the ICSID Convention meaning and purpose. Mr. Rodrigo Oreamuno, co-arbitrator in García Armas v. Venezuela, also leans towards that view in his dissenting opinion. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Will the COVID-19 Pandemic Be a Long-Term Game Changer for International Arbitration?

Thu, 2020-07-16 02:00

Travel and other restrictions due the COVID-19 pandemic have meant that virtual hearings have become the “new normal” for international commercial arbitration, and even perhaps for investor-state arbitrations. But what are the longer-term prospects for virtual hearings or “e-arbitration” more generally, and even for the relative popularity of arbitral seats, in the wake of the pandemic?

Back in March, during the early phase of the pandemic, Gary Benton suggested that some arbitration filings and hearings would be delayed, with conferences or meetings often being cancelled. He also saw the shift already to remote hearings a “sea change” that could be a turning point in bringing online dispute resolution to international arbitration. Four months later, we can take stock and consider some further predictions.

 

Proliferating Webinars

Larger arbitration-related events have mostly indeed been cancelled or deferred, or occasionally moved completely online, but we have witnessed a plethora of webinars offered by arbitral institutions or associations. At least so it seems. It could be rather that we are more aware of such seminars (“availability bias”) or want to join even online community events during our worrisome times, quite apart from the intrinsic importance of their subject matter. Many webinars have in fact focused on the logistical and legal aspects of virtual hearings. These all typically cover the common question of whether arbitrators can require a virtual hearing even if one party objects. Some also touch upon the interesting conceptual problem of whether they can do so even if all parties prefer to await a physical hearing.

Interestingly, such webinars, and sometimes other expert-led discussions or virtual networking opportunities, are almost always free of charge, thereby expanding accessibility for the younger generation or those from lower-income countries. This makes us wonder why pre-pandemic arbitration-related events were quite often charged for, especially the larger ones, directly or via annual fees for members. Was that to defray the costs of refreshments or physical venue space, and/or because participants pay more for the opportunity for networking in person? It is also intriguing to compare how active different institutions are in offering webinars, their scope, and diversity in the presenters. The Asian International Arbitration Centre in Malaysia has recorded remarkable numbers and breadth, out of 49 events over April-June, with videos also uploaded via Facebook.

Another great benefit of the webinars is that many are recorded and then made publicly available. This provides a valuable and enduring resource not only for arbitration practitioners, but also for learners and researchers. Yet, will this endure beyond the pandemic, or will future webinar content start to disappear behind members-only paywalls? Arbitration institutions and organisations need to fund their activities. The Australian Centre for International Arbitration (ACICA) has reduced registration filing fees for arbitrations over May-October 2020. But the Australian government’s comparatively large support package for pandemic-affected businesses is scheduled to be phased out from October.

Alongside the many webinars around virtual hearings, many organisations are issuing provisions or guidelines on how to manage “e-arbitrations”. Many of those, and a brief overarching Joint Statement on “Arbitration and COVID-19” issued in April by major arbitral institutions to urge flexibility and collaboration, are listed (at pp. 4-5) in a Protocol for Online Case Management in International Arbitration. This Protocol was released for public consultation by consortium of large international law firms in July 2020, although an earlier draft pre-dated the pandemic.

Such documents are often more detailed than some early initiatives, which flew largely under the radar in the pre-COVID era. For example, the world-wide arbitration community seems to have been largely unaware of or uninterested in the ACICA draft Procedural Order for the Use of Online Dispute Resolution Technologies, finalised in 2016 and now being updated. There was some wider commentary (including on this Blog) around the Seoul Protocol on Video Conferencing in International Arbitration, unveiled in 2018 for discussion at the 7th Asia Pacific ADR Conference, but hardly any detailed analysis in the main refereed arbitration law journals.

 

Long-term Legacy from E-Arbitration Experiences

Nonetheless, if and when this pandemic passes and travel restrictions ease, what will the long-term impact of this dramatic shift towards holding virtual hearings and meetings in and around international arbitration be? The most optimistic view is that stakeholders will realise that it is possible to embrace new approaches that can dramatically reduce delays and especially costs – concerns that had re-emerged over the last decade – despite the growth of arbitration around Asia, which otherwise promises a lower cost base for services compared to Europe and North America. Parties may therefore push their lawyers, arbitrators and arbitral institutions to adopt other procedures to make arbitration more time- and cost-effective.

Some procedures are already found in most Rules, such as documents-only arbitrations, but perhaps only as an option after proceedings commence. Other innovations are only found in some or none, such as Arb-Med (allowing or even requiring arbitrators to actively promote settlement) or the 2018 Prague Rules on the Efficient Conduct of Proceedings in International Arbitration as an alternative to the IBA Rules on evidence-taking. The JCAA’s Interactive Arbitration Rules 2019 (Article 56) already go beyond the Prague Rules by requiring the tribunal to express preliminary views on key facts and legal issues before deciding on whether to hold hearings, rather than just trying to reduce challenges around the neutrality of arbitrators choosing to do so (Prague Rules Article 2.4).

However, a second possibility is that lawyers in particular will resist such further innovations. This may be because lawyers become very risk-averse when it comes to their own clients, and carry over such conservatism when serving on Rules drafting committees or boards of arbitral institutions. They (and some arbitrators) may also suffer from “change fatigue”, after being forced to move to virtual arbitrations during the pandemic this year, and even be worried about associated declines in fee revenues. Nonetheless, especially if the travel restrictions continue for many more months or even years, so many (including users) gain knowledge and experience concerning virtual hearings, these may indeed become the norm rather than exception – at least for smaller and mid-sized international arbitration proceedings.

A third scenario, also quite possible, is a partial but significant “reversion to them mean” – to physical hearings and even some paper-based arbitrations. There may be similar supply-side pressures and incentives pushing in that direction. On the demand side, at least some users (perhaps more risk averse and/or occasional parties to arbitrations) may also be willing to pay again a premium for that more traditional style of arbitration.

A fourth and most pessimistic outcome would be a complete reversion to the (current) norm, with virtual hearings becoming again an exception. This seems improbable, given so much “show and tell” already regarding e-arbitrations. Yet it is not completely inconceivable. Many disaster studies show how communities do largely go back to the comfort of old ways. International arbitration also retains a built-in advantage over litigation as a potential competitor, given the enforceability of arbitration agreements and awards under the New York Convention – with little uptake yet of the 2005 Hague Choice of Courts Convention, despite the recent establishment of various international commercial courts. The 2018 Singapore Convention on Mediation will only come into force from 12 September 2020, for a few smaller economies, and anyway does not cover enforcement of agreements for cross-border mediation. In addition, the confidentiality still often associated with arbitration, but with variants for example around the Asia-Pacific region, is a double-edged sword. It can encourage more robust decision-making in arbitration. Yet confidentiality can also make it harder for users to assess the quality of services provided by lawyers and (perhaps now less so) arbitrators, and thus reduce the incentive for them to maintain innovations.

 

Long-Term Legacy for Arbitral Seats

A related question is: what will be the impact on arbitral seats, including across the Asia-Pacific region? One possible scenario is a dramatic shift, because physical hearings often took place at the seat (although this was not required, and a different location could be agreed upon), but virtual hearings are essentially delocalised. More geographically remote seats, like Australia or even Japan, may become a more attractive choice.

However, a second outcome seems more likely: these seats will become more popular if their local courts are similarly capable of holding virtual hearings and generally managing proceedings remotely. This aspect will be crucial in the short-term, where for example parties may need to approach seat courts for assistance in their arbitrations (e.g., for interim measures or, more rarely, arbitrator challenges). But it will also be important if and when the pandemic passes so such approaches can be done again in person. In particular, the seat’s court experience itself with virtual hearings (including for regular litigation) may colour its assessment of any challenges relating to due process during an e-arbitration, even at the award enforcement stage. This suggests that more geographically challenged seats may gain in popularity in the subset of jurisdictions where courts are well-funded and/or organised for information and communication technology – including perhaps Australia, say compared to Japan.

A third scenario is an even more subdued relative rise in popularity or diversity in arbitral seats. Some emerging jurisdictions may even see a reversal in fortunes, if for example their courts are less open for virtual hearings. Broader political developments, perhaps related to the pandemic but not necessarily, may also dwarf much significant shift in arbitral seat popularity related to the current emergence of e-arbitrations. A case in point is the renewed upheaval in Hong Kong – a new version of “big trouble in little China”.

The fourth possible scenario is also quite plausible: no significant change in relative popularity of seats. After all, arbitral institutions and practitioners across all credible arbitral seats are all busily presenting themselves as viable candidates in our brave new COVID-19 narrative world. Pandemic responses provide a new field for arbitral institutions to engage in a curious and evolving mixture of cooperation (to keep expanding the arbitration pie) and competition (trying to gain a bigger slice). Surveys and other research also tell us that many factors impact on the choice of seat, even path-dependence or “status quo bias”. More broadly, entropy may be particularly common in legal environments.

In conclusion, the prognosis is further complicated because the long-term legacy for international arbitration from the two main questions raised above, each generating four possible scenarios, are clearly inter-connected. They are worth thinking about as the COVID-19 pandemic keeps unfolding, even though as various sages (including possibly Niels Bohr, Mark Twain and Yogi Berra) have warned us over the decades: “It’s tough to make predictions, especially about the future”.

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