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Recognition of Summary Procedures under the ICC Rules: Considerations, Comparisons and Concerns

Mon, 2017-12-04 06:00

Kartikey M. and Rishabh Raheja

On 30 October 2017, the ICC Court announced yet another measure to tackle the twin problems of time and costs in arbitration, through the immediate disposition of manifestly unmeritorious claims commonly known as summary determination. The ICC Court implemented this measure in the form of an update to its Practice Note to Parties and Arbitral Tribunal on the Conduct of Arbitration (the “Practice Note”), and has thus joined other institutions like the Singapore International Arbitration Centre (“SIAC”) and the Stockholm Chamber of Commerce (“SCC”) in explicitly recognising the arbitral tribunal’s power of summary determination. However, as we describe below, the ICC’s procedure for summary determination − while possibly inspired by its counterparts − varies in some key aspects, thus warranting further analysis.

 

Background

 

Barring the ICSID rules, there has been some reluctance among institutions in recognising tribunals’ power to dispose claims in a summary manner. In fact, a 2007 ICC Task Force report on “Evidence, Procedure and Burden of Proof” advised against the recognition of the power of summary dismissal in the ICC Rules, concluding that “[it is] likely a summary judgment vehicle would not work in the ICC context and culture”. This was followed by the conspicuous absence of a provision on summary dismissal in the ICC rules of 2012 and 2017.

 

However, tribunals and courts dealing with the ICC rules have affirmed this power as inherent in a tribunal’s decision-making capacity (see ICC Case No. 11413 (2001) and ICC Case No. 12297 (2003)). The English High Court in Travis Coal v. Essar Global [2014] EWHC 2510 (Comm) also cited Article 22 of the ICC rules in upholding an ICC tribunal’s power to deal with the case before it by way of summary determination – an aspect that has been endorsed by many arbitration practitioners dealing with ICC rules.

 

More recently, the tide has tilted heavily in favour of expressly recognizing this power under the rules of various institutions due to the increasing dissatisfaction of parties with the length and costs of institutional arbitration, particularly in the context of straightforward and low-value claims. Thus, in August 2016, the SIAC introduced a new set of rules with provisions on summary dismissal, with the SCC following suit on 01 January 2017, followed by the SIAC once again − in its Investment Arbitration Rules. Thus, the express recognition of this power by the ICC comes as no surprise, and foreshadows more such measures in the procedures of other institutions, with the HKIAC too now contemplating the possible introduction of summary dismissals.

 

Features

 

The summary determination procedure under the ICC rules − like its SIAC and SCC counterparts − contemplates the disposition of both claims and defences that are manifestly unmeritorious upon the application of either party. This is much broader than the the ICSID rules, which only provides for the summary disposition of claims, and not defences. Further, unlike the ICSID rules which contain a deadline for the making of such an application, the ICC, SIAC, and SCC rules either provide no specific deadline for submitting a summary determination application or state that it should be filed ‘early’ and ‘as promptly as possible after the filing of the claims or defences’. Further, tribunals under the ICC, SIAC, and SCC Rules may consider relevant circumstances and deny a hearing on such applications by way of either an order or award.

 

Leaving aside the above similarities, there are some key differences. First, is the form of recognition of the tribunal’s summary determination power. Whilst the SIAC and SCC have introduced provisions on summary dismissal, the ICC Court has identified this power as forming part of a tribunal’s broad case-management powers under Article 22 of the Rules – a proposition endorsed by Travis Coal and some ICC tribunals (see above). Moreover, the fact that this procedure is not explicitly stipulated in the Rules, emphasizes the tribunal’s inherent power − and responsibility − to dispose of disputes in the most efficient and appropriate manner possible, thus highlighting the adaptiveness of the ICC’s summary dismissal procedure.

 

Second, the flexibility of the summary determination process − right from the application through to the award. The Practice Note stipulates neither any application formalities nor any procedural deadlines, stating instead that the tribunal “shall adopt the procedural measures it considers appropriate, after consulting the parties… and shall decide the application as promptly as possible.” On the other hand, the SIAC Rules requires an elaborate application process and a decision on the outcome of the summary application to be rendered by the tribunal within 60 days of the application (unless the Registrar extends this period due to exceptional circumstances). Fixing a deadline undoubtedly makes the SIAC procedures more attractive to clients as it prioritises the expeditious dismissal of manifestly unmeritorious claims in all scenarios. To others, however, a deadline could appear rigid as it fails to account for the peculiarities of each case, thus undermining the tribunal’s discretion and, possibly, even the wishes of the party applying for early dismissal. It is here that the ICC rules may be seen as preferable for its flexibility. The SCC procedure takes a similar approach to the ICC.

 

Third, there appears to be a difference among the three institutions in the scope of matters that can be determined summarily. The SCC rules authorises applications for summary determination to be made on “issues of jurisdiction, admissibility or the merits”. The SIAC rules allows applications for the early dismissal of claims and defences that are “manifestly without legal meritor “manifestly outside the jurisdiction of the tribunal.” Whereas, the ICC rules allow applications on claims and defences that “are manifestly devoid of merit or fall manifestly outside the arbitral tribunal’s jurisdiction.” Thus, on a plain reading, the SCC rules appears to contemplate the widest scope of matters that could form the basis of a summary dismissal− merits, jurisdiction, and admissibility. Meanwhile, the SIAC and ICC summary dismissal procedures have a conspicuous absence of issues concerning ‘admissibility’. It remains to be seen whether tribunals constituted under these rules would read the terms ‘merits’ and ‘jurisdiction’ expansively to accommodate matters of admissibility. It also remains to be seen whether the SIAC summary procedure will apply solely to issues of ‘legal merit’ as it specifies, or whether the term is interpreted more broadly to accommodate issues of factual merit as well.

 

Last, is perhaps the most crucial point of comparison between the ICC, SIAC, and SCC procedures− enforceability. Summary determination may raise due process concerns. Thus, in order to prevent the risk that this poses to summary awards, the ICC, SIAC, and SCC procedures require tribunals to grant the parties a fair and reasonable right to object to summary dismissal.

 

Where the ICC differs from its other counterparts is that it provides for expeditious scrutiny of orders and awards rendered under the summary determination process – “in principle within one week of receipt by the Secretariat”. The ICC Court’s duty to scrutinize the awards has been established as an important safeguard for checking the form of the award and even ensure that an award does not fall foul of ‘due process’ concerns. A detailed scrutiny mechanism on the lines of the ICC is absent in the SIAC and SCC Rules.[1]

 

Whilst the ICC summary procedure tries to placate any enforcement concerns by providing for scrutiny of summary awards, it cannot be said that such awards will be free of such concerns per se. For example, some users may perceive the summary procedure as a backdoor entry of truncated proceedings even in situations where the parties have chosen the full arbitral process by opting out of the ICC Expedited Rules. The Rules contemplate a remedy to this situation in Article 22 itself, which requires the tribunal to ensure that the procedure adopted by it is “not contrary to any agreement to the parties”. Although the summary dismissal procedure is technically not contrary to an agreement to opt out of the Expedited Rules, tribunals will be well-advised to examine the parties’ intentions in opting out before allowing such applications, lest they face challenges for exceeding their authority and the scope of the arbitration agreement.

Important differences can be summarized as follows:

 

  ICC SIAC SCC ICSID Summary disposition of Claims and Defences Claims and Defences Claims and Defences Claims Time limit for application As promptly as possible after filing of claims or defences No No No later than 30 days after the constitution, and in any event before the first session Application may pertain to Merits and jurisdiction Legal merits and jurisdiction Merits, Jurisdiction and Admissibility Legal Merits Time Limit for Award As promptly as possible 60 days No At its first session or promptly thereafter Form of Decision Award/Order, reasons as concise as possible Award/Order, summary form Award/Order Award Scrutiny of Award Yes, within one week In select cases Not applicable* No

 

Conclusion

The procedure under the ICC rules for summary determination aims to promote flexibility and efficiency in arbitration. Although, it may pose some concerns in relation to enforcement, such problems can be safely avoided by appropriate application of Article 22 of the ICC rules and the Practice Note by tribunals depending on the facts of each case. With regard to the question of which institution’s summary dismissal procedure is better suited, the answer is, much like the ICC rules, adaptable− depending on the expectations of the parties and the circumstances of the case.

[1]               SIAC has its own scrutiny mechanism but as a matter of practice, draft awards are typically only referred to the SIAC court (unlike the ICC) if they present complex or novel issues, see John Savage and Simon Dunbar, SIAC Arbitration Rules, Rule 28 (The Award), in Loukas A. Mistelis (ed), ‘Concise International Arbitration’ (Kluwer Law International, Second Edition, 2015) p. 811.

* The SCC does not have a scrutiny process equivalent to ICC but when the SCC Secretariat identifies obvious miscalculations or similar mistakes, then it usually notifies the arbitral tribunal, see Öhrström, SCC Rules at p. 847, available here.

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Old Issues, New Horizons: Third-Party Funding in Morocco

Sat, 2017-12-02 22:56

Othmane Saadani and Julia Joseph-Louisia

Young ICCA

Third-party funding has become a subject of major discussion over the past few years. It is clear that third-party funding is here to stay, and thus the question today is not whether it is going to grow, but rather where the opportunities are likely to be.

Third-party funding: Definition and objectives

Third-party funding is an arrangement between those who are party (or may be party) to contentious proceedings and funders who undertake to pay the legal costs of the proceedings, in return for a share of the proceeds, in the event the funded party’s claims are successful and result in compensation. Third-party funders will therefore bear the financial risk of potentially unsuccessful claims, insufficient compensation, or even difficulties in enforcement. In addition, this mechanism concerns not only the claimant but also the respondent in the proceedings, which might eventually make well-founded counterclaims. The need for this financial solution increased substantially with the 2008 economic crisis, as seemingly worthy claims lacked funding due to the economic downturn.

Such funding mechanisms have become more and more common in arbitration proceedings, as they can give access to justice to claimants with meritorious claims but lacking sufficient financial resources. Third-party funding is particularly interesting for claimants in emerging economies, which play a major role in international commerce. The Kingdom of Morocco is a good example in which multinational companies regularly insert arbitration provisions in their transaction documents when dealing with small to mid-size companies, but may not always have the financial capacity to pursue costly, but meritorious claims.

Third-party funding in arbitration proceedings in Africa and Middle East: A lack of regulation

Many African and Middle Eastern countries do not have any prohibition against funding litigation and arbitration. Moreover, arbitration is more and more common in the continent as evidenced by the last ICSID Caseload Statistics, in which Middle Eastern and African countries represent no less than 26% of all the cases registered or administered by ICSID as of June 30, 2017, under the ICSID Convention and Additional Facility Rules.

More specifically regarding the use of third-party funding in arbitration proceedings, many international arbitral institutions around the world, such as the ICC in its Commission Report on Decisions in Costs in International Arbitration published in 2015, acknowledge this tool and have taken steps to promote its use. Regarding its regulation, many demand the implementation of at least some guidelines on the subject. In this context, a draft Report for Public Discussion of the ICCA-Queen Mary Task Force on Third Party Funding in International Arbitration was published on September 1, 2017 and remained open for public comment until October 31, 2017.

The sole obstacle remaining could pertain to the regulation of the seat of arbitration. If the latter’s legislation does not prohibit third-party funding, in the near future, regulation will come, inevitably, to eliminate malpractices that have already been witnessed in other jurisdictions. Concurrently, the Dubai International Financial Centre (DIFC) Court has been leading in this regard and has formally adopted a Practice Direction on March 14, 2017 (PD 2/2017) providing for the recognition of the legitimacy of funding arrangements. These developments bring legitimacy to third-party funding in arbitration proceedings, and will likely spark a renewed interest in favor of third-party funding in the region.

This is not the case in other countries within the region, and until this time comes, the playing field is untested and unexplored by funders. The good news is that, while some domestic laws limit or even prohibit third-party funding, for most African or Middle Eastern countries, third-party funding is not restricted by domestic legislation. For example, in the Kingdom of Morocco, funding may be provided by anyone and the arbitral tribunal has no ground to question the origin of the funding to the proceedings. While a codification of Moroccan arbitration laws is currently ongoing and at the consultation phase, some members of the Moroccan arbitration community are taking this opportunity in order to call for the recognition of third-party funding and the enshrinement of an adapted framework to enable this practice.

Third-party funding in Morocco: The growing opportunities

In Morocco, third-party funders will increasingly turn their attention towards arbitration. The lack of regulation discussed above is one of the reasons why third-party funding in arbitration, especially in Morocco, will be in the spotlight in the near future.

The Kingdom of Morocco is a contracting state to the New York Convention and is also one of the first countries that signed and ratified the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID Convention), which entered into force in the country on June 10, 1967. The first ever arbitration claim administered by an ICSID tribunal was introduced against the Kingdom of Morocco in 1972 (Holiday Inns S.A. and others v. Morocco – ICSID Case No. ARB/72/1).

Moreover, investors can rely on more than fifty Bilateral Investment Treaties (BITs) signed by the North African state, currently into force, and providing for arbitration to settle the disputes arising between the country and foreign investors. There is also a notable evolution with respect to future cases from Morocco: the Kingdom is becoming one of the most important investors in the African continent. Therefore, third-party funders should consider a foreseeable caseload coming from Moroccan investors in the continent. “[W]hen analyzing case law in Morocco we see that the Moroccan Courts are arbitration friendly”, according to Emmanuel Gaillard who spoke at the last Casablanca Arbitration Days of November 2017, sponsored by Casablanca Finance City (CFC), a financial and services hub set up by the Moroccan government.

The absence of regulation concerning third-party funding for the moment should not be seen as an impediment. To the contrary, as third-party funding in Morocco is not different from third-party funding elsewhere in the world, it should be seen as a fertile ground entirely exploitable to fund appealing claims. Therefore, now is the time to invest in Morocco, not only for equity investors, but also for third-party funders of arbitration cases searching for a gateway to the African market.

CFC can be a strategic host for third-party funders wishing to set foot in Africa and to conduct business in a country already investing economically and politically in the continent. CFC is particularly interesting because it has created a major ecosystem for international law firms, financial and services institutions and has already began to rival other international financial centers for leadership, particularly as a source of investment in Africa.

As major progress has been made in regulating enforcement and arbitration, third-party funders have an opportunity and should be encouraged to embrace the emerging needs of funding for arbitration proceedings in the region. Not doing so would be wasting tremendous opportunities in a market recognized for its rapid growth for the past decade. In addition, the parallel developments endorsing the use of third-party funding for claims heard before the DIFC court also suggest that the use of funding will continue to grow in the region, providing increased opportunities for third-party funding in African and Middle Eastern markets.

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NAFTA Negotiations: Are U.S. Energy Companies Being Left to Their Fate?

Fri, 2017-12-01 23:49

Enrique Jaramillo

On the campaign trail, and throughout his term in office, President Trump has not been shy to express his discontent with the North American Free Trade Agreement (NAFTA), vowing he will either renegotiate it or “tear it up.” As a result, in August 2017, the United States, Canada, and Mexico (the Parties) officially began renegotiation talks in Washington D.C.

The United States, whose main goal is to reduce its goods trade deficits of about $63 billion and $12 billion (2016) with Mexico and Canada, respectively, has lately been focusing on NAFTA’s dispute resolution mechanisms. The Trump Administration now aims at eliminating Chapter Nineteen, which allows the private sector to challenge antidumping and countervailing duty rulings. It has also proposed to allow Parties to opt in-on a voluntary basis-to the dispute resolution system established in NAFTA Chapter Eleven, which allows foreign investors to challenge government actions in violation of international law.

Either terminating or renegotiating NAFTA has the potential to affect several sectors of the U.S. economy. Some of the most affected companies, for example, would be those exporting natural gas to Mexico, who because NAFTA requires national treatment for trade in natural gas, benefit from a provision in the Natural Gas Act (NGA) exempting them from certain public interest and environmental reviews.

A review of all potential effects, however, would turn out to be too great an enterprise for this article. The following sections, consequently, will focus only on the implications to American energy companies doing business in Mexico.

NAFTA and the Energy Industry

Under NAFTA, the Parties are required to grant national treatment to goods of another Party, and are prohibited from imposing border taxes on such goods.

NAFTA Chapters Six and Eleven are particularly relevant to this article because they address the energy industry, and the protection of investments. Chapter Six mandates Parties to award national treatment to energy goods coming from other Parties, and generally restricts the imposition of export taxes or any measure restricting imports.

Chapter Eleven, on the other hand, contains several substantive provisions protecting a company’s investment by, for example, requiring fair and equitable treatment, and ordering fair compensation for nationalized property. It also gives companies from one of the Parties the prerogative to initiate arbitration against the government of the other Parties, and establishes that awards issued by Chapter Eleven Arbitral Tribunals are final and directly enforceable, meaning that such awards must be enforced by local courts as if they were final judgments of a court of that Party.

It is worthwhile to notice, however, that Mexico excluded certain Oil and Gas (O&G) activities, such as exploration and exploitation, from the scope of NAFTA (Mexico’s Reservation).

The End of an Era: Mexico’s Energy Reform

The Reservation stemmed from Mexico’s tradition of resource nationalism. This sentiment was expressed in Mexico’s Constitution, which established that “in the case of petroleum[] and . . . hydrocarbons no concessions or contracts will be granted. . . .” and that “the Nation shall carry out the exploitation of [hydrocarbon] products. . . .”

In 2013, however, Mexico engaged several reforms directed at allowing the participation of the private sector in the Energy industry (“Energy Reform”). The Energy Reform allows private investors to participate in O&G activities by bidding for certain contracts, i.e., service contracts, production-sharing, profit-sharing, and licenses.

The current legal framework has, unsurprisingly, boosted American investments in Mexico. The bidding rounds for O&G contracts in Mexico have been quite a success. By 2016, bidding rounds had already secured an investment of $7 billion, which is expected to increase to $40 billion, once the final round is concluded. So far, over twenty-six international oil companies have applied for the bidding rounds, including several U.S. companies, e.g., Chevron, ExxonMobil, and Anadarko.

A Degeneration of French Law: Mexico’s Rescisión Administrativa

Although the Energy Reform has been undoubtedly beneficial for the industry, there is one piece of legislation that might make investors lose sleep. Under the Mexican Hydrocarbons Law of 2014, the Government is entitled to resort to what is known as rescisión administrativa, which grants it the power to rescind exploration and exploitation contracts with private investors without paying any compensation. Domestic law also removes any dispute arising from such a rescission from the scope of international arbitration, thereby providing Mexican Federal courts with exclusive jurisdiction.

The rescisión administrativa, which can be triggered by limited circumstances, e.g. an unauthorized transfer of interest, has rather severe consequences, for example, the reversion of the contractual area to the Mexican government, including all assets used for the development of the corresponding fields. In other words, the expropriation of investors’ rights and assets, without any kind of compensation.

The risk of expropriation is particularly relevant for energy companies doing business in Latin America. The very Petróleos Mexicanos (PEMEX), for example, is the result of the expropriation of large foreign oil investments. Another good example is the case of Argentina, which, in 1992, privatized State-owned YPF only to renationalize it again ten years later.

Rescisión administrativa, however, is not a product of the relatively new Hydrocarbons Law. It was already established in pre-reform legislation, such as in the Public Works Law of 2009. It is based on the French law institution of the contrat administratif, as used in Mexico and in various Latin American countries. One relevant difference among such jurisdictions, however, is that French law imposes indemnification obligations on the Government, whereas the Mexican law does not, hence producing fertile ground for investment arbitration. The COMMISA case is an example of the kind of disputes that may arise in this scenario.

COMMISA, a subsidiary of the American company KBR, contracted with PEMEX for the construction of two offshore platforms in the Gulf of Mexico. Disagreements surged between the parties leading to arbitration and to PEMEX applying rescisión administrativa to the contract. Although an ICC tribunal ruled in favor of COMMISA in Mexico, the claimant could not enforce the award because it was annulled by Mexican courts, claiming that the decision was contrary to Mexican law. The award was eventually recognized by a U.S. court, claiming, among other things, that rescisión administrativa was akin to expropriation without compensation and, hence, “repugnant to United States law.” This recognition, however, turned out to be a rather pyrrhic victory because PEMEX does not have sufficient assets in the U.S. on which COMMISA can enforce the award. Eventually, KBR started NAFTA proceedings against Mexico but the case was dismissed for non-compliance with the treaty’s requirement to waive other remedies.

Fear Not, For NAFTA is Here

NAFTA has the potential to shield American energy companies from the rescisión administrativa of their exploration and exploitation contracts because NAFTA Articles 1110 and 1120 prohibit expropriation without compensation, and grant such companies access to international arbitration tribunals, respectively. These provisions trump the Hydrocarbons law because, under both Mexican law and the Vienna Convention, Mexico cannot invoke its internal law as justification for its failure to perform a treaty.

A very similar situation was discussed in the case of Occidental Petroleum Corporation and Occidental Exploration and Production Company v. Republic of Ecuador, ICSID Case No. ARB/06/11, Award (October 5, 2012). As Mexican legislation, the Ecuadorian Hydrocarbons Law provided for caducidad in cases of unauthorized transfers of interest in petroleum contracts. Occidental, nevertheless, farmed-out a 40% economic interest in its contract without the required approval, which led to the termination of such contract. An ICSID tribunal ruled in favor of Occidental deciding that, although appropriate under Ecuadorian law, caducidad was a measure tantamount to expropriation and contrary to Ecuador’s obligation to provide fair and equitable treatment to foreign investors.

Granted, Mexico´s energy reform has given birth to a number of opposing opinions as to whether Mexico’s Reservation is still in force or not, which, in turn, casts some doubts as to whether NAFTA protects American energy investments in the southern nation. It is worth to notice, nevertheless, that under NAFTA Article 1108, Parties are not allowed to include NAFTA Article 1110 in their reservations. Consequently, even if Mexico’s Reservation were still in place, a strong argument can be made claiming that the treaty prevents the Mexican Government from expropriating U.S. investments without being required to pay any sort of compensation.

Caveat Investors!

The Parties are currently in a race against time, which they do not seem likely to win. Not much consensus has been reached so far, yet they intend to conclude negotiations prior to Mexico’s 2018 presidential election. The rush is produced, among other things, by an eventual victory of current front-runner Lopez Obrador, who has been characterized as a populist socialist, making the survival of NAFTA even less likely.

In the face of Mexico’s rescisión administrativa, as well as the legal and political uncertainty as to NAFTA’s applicability and continuity, companies investing in Mexico are well advised to carefully structure their investments, taking into account other investment protection treaties that give them the assurances that, at this time, NAFTA cannot.

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Consolidation Of Arbitrations – Where Is India Headed?

Fri, 2017-12-01 03:20

Anchit Oswal

Multi-party arbitrations arising out of multiple agreements between multiple parties containing different arbitration clauses give rise to complex issues to be answered by arbitral tribunals and Courts. While negotiating an agreement, parties rarely take into consideration the impact on the dispute resolution mechanism because of subsequent agreements with new parties. In a multi-party multi-agreement scenario, parties often seek a composite reference of all the disputes arguably arising out of a single transaction. Request for joinder of parties is also often made to avoid multiplicity of proceedings and to keep costs of arbitration under control.  In the absence of an express agreement allowing consolidation,  the tribunals and courts are called upon to decipher the intention of the parties and the permissibility of such consolidation under the applicable law before ruling on the possibility of consolidation.

This post endeavours to analyse the Indian position on consolidation of arbitrations.

Typically, three scenarios may be envisaged:

  1. Multi-contract, multi-party international arbitration;
  2. Multi-contract, multi-party domestic arbitration; and
  3. Multi-contract, multi-party having some contracts between a foreign party and a domestic party and others between two domestic parties bringing it under the domain of both – international arbitration as well as domestic arbitration.

The above three scenarios could further fall into three sub-categories:

  1. Agreements with same/ similar arbitration clauses;
  2. Agreements with substantially different arbitration clauses; and
  3. Agreements with arbitration clauses in only some of the agreements.

Indian Supreme Court has answered issues around joinder/consolidation of arbitrations in a few cases. The question of consolidation of disputes and a common reference to arbitration in the context of multiple domestic parties arose before the SC in Sukanya Holdings (P) Ltd. v. Jayesh H. Pandya; (2003) 5 SCC 531 (Sukanya Holdings). In Sukanya Holdings, the SC held that when the subject matter of dispute may be covered under arbitration as well as a suit and if there are non-signatory parties involved in the list, the Court cannot bifurcate the cause of action and therefore cannot make a partial reference to arbitration.  Before the 2015 amendments to the 1996 Act, the SC has held that a civil court exercising such power cannot refer a suit to arbitration, unless all the parties to the suit agree for such reference (See Afcons Infrastructure Ltd. v. Cherian Varkey Construction Co. (P) Ltd, (2010) 8 SCC 24).

In P.R Shah, Shares and Stock Brokers Private Limited v. B.H.H Securities Private Limited and Others; (2012) 1 SCC 594 (PR Shah), the question arose whether a single arbitration is permissible in respect of member and non-member under the bye-laws and regulations of the Bombay Stock Exchange. SC, interestingly, held that if A had a claim against B and C and if A had an arbitration agreement with B and A also had a separate arbitration agreement with C, there is no reason why A cannot have a joint arbitration against B and C. The SC further observed that when A has a claim jointly against B and C, and when there are provisions for arbitration in respect of both B and C, there can be a single arbitration.

In the case of Chloro Controls India (P) Ltd. v. Severn Trent Water Purification Inc.; (2013) 1 SCC 641 (Chloro Controls), the Indian counterpart filed a suit and sought an injunction against two non-signatories. The Indian counterpart inter alia relied on Sukanya Holdings to contest that parties ought not to be referred to arbitration since there are non-signatory parties involved in the dispute.

The SC held that shareholders’ agreement is the mother agreement and all other agreements were to facilitate implementation of the mother agreement and that multiple agreements are part of one composite transaction. Further, the SC observed that signatories to these multiple agreements are all related companies and the interests of these companies are not averse to the interest of the joint venture company.  The Court held that even a non-signatory party can be referred to arbitration subject to proving that it is claiming through or under the party signatory to the arbitration.

Recently in M/s Duro Felguera S.A. v. M/s Gangavaram Port Limited (GPL) (2017 SCC OnLine SC 1233) (Duro), the SC was called upon to rule in cases of multi-contract, multi-party having some contracts between a foreign party and a domestic party and some contract between two domestic parties bringing the disputes under the domain of international arbitration as well as domestic arbitration. Duro, argued that each agreement is a sperate agreement containing a standalone arbitration clause and the parties had no intention to consolidate arbitrations. It resisted consolidation by arguing that if a holistic reference is made it would amount to clubbing of international and domestic arbitration and in such a case, FGI, the Indian subsidiary of Duro may lose the opportunity of challenging the award under Section 34(2A) of the 1996 Act, arguably a wider provision, available only in a domestic arbitration.

The SC distinguished Chloro Controls judgment on facts holding that in the said judgment the words “under and in connection with” appearing in the arbitration clause in the principal agreement was broad to cover the third parties under the arbitration agreement contained in the mother agreement. SC did not refer to PR Shah in the Duro case.

The SC held that since there a mix of domestic as well as international arbitrations, a ‘composite reference’ of disputes will not be proper. The SC constituted six separate arbitral tribunals with common arbitrators. Out of the six, two tribunals to arbitrate disputes under as international arbitral tribunals and other four as domestic arbitral tribunals.

The judicial block created by Sukanya Judgement in referring non-signatories to arbitration has been done away with by the 2015 Amendments to 1996 Act. Post-2015 Amendments, in a domestic arbitration, even a non-signatory party, who is claiming through or under the signatory party can seek reference of disputes to arbitration. However, what remains to be tested is the scenario wherein a non-signatory moves the court/arbitral tribunal to be impleaded as a party on the strength of 2015 Amendments. Such a non-signatory may argue that if a non-party can seek reference of disputes to arbitration, it can also be a part of the arbitration as a necessary party, subject to satisfying the “through and under” test. The reverse proposition, i.e., compelling a non-signatory in a domestic arbitration, to take part in arbitration and its impact on enforcement of the resultant award, post the 2015 amendments remains to be tested.  Further, the issue of allowing/ refusing a non-signatory party to an arbitration if decided by a Court may operate as res judicata and may therefore not impact enforcement of the resultant award. However, if such a determination is done by an arbitral award, it is likely that the Court deciding the enforcement/ objection to the resultant award may take a contrary view to that taken by the arbitral tribunal. The issue of whether two Indian parties can opt for a foreign-seated arbitration may arise and will be required to be answered by the SC in view of the conflicting judgments of High Courts on the issue.

The adjudicating authority dealing with the request to consolidate arbitrations may be called to answer multiple side issues before ruling on the such a request. Questions that may arise are:

  1. Whether there is an express clause permitting consolidation?
  2. Whether there is an implied consent of parties for consolidation?
  3. The permissibility of request to consolidate would be decided as per which law?
  4. Whether all the disputes are covered under the arbitration agreement?
  5. Who would be a ‘party’ to arbitration?
  6. Whether all the parties are signatories to the arbitration agreement?
  7. Whether the arbitration clause is incorporated by reference into another agreement?
  8. Whether non-signatories can be compelled to arbitrate?
  9. Is there a novation of the original agreement due to subsequent agreements?
  10. Whether the disputes are categorised as a domestic arbitration or an international arbitration or both?
  11. Whether the interests of all the parties, including the right to confidentially, cost sharing, etc., would be protected if consolidation is ordered?
  12. Whether consolidation would be against the public policy of India?

Further, consolidation of arbitrations may not bode with other concepts like confidentiality, party autonomy, and consensuality. Therefore, the forum adjudicating the request to consolidate arbitrations may have to answer some of the above questions before allowing a party to be joined in an arbitration or refusing to consolidate arbitral proceedings. The best shot for a party seeking consolidation will be by establishing express or implied agreement for the same. Alternatively, if the party can satisfy the court with respect to the test laid down in PR Shah, consolidation may be possible. Insofar as cases where there is a mix of domestic and international arbitration, consolidation may be difficult as has been held in the Duro case. However, where there are multiple agreements, all in the domain of international arbitration, essentially flowing from a main/ mother agreement, parties can seek consolidation on the strength of Chloro Controls judgment.

The views expressed are those of the author only.

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Reminder: The 2018 Queen Mary and White & Case International Arbitration Survey

Wed, 2017-11-29 16:38

Adrian Hodiș

In a previous blog post from October 27, 2017, the launch of the 2018 QMUL and White & Case International Arbitration Survey was announced.

Since it was launched, hundreds of respondents have completed the online questionnaire and a significant number of arbitration users have been interviewed. On behalf of the QMUL School of International Arbitration and our partner in this endeavour, White & Case LLP, Professor Stavros Brekoulakis and I wish to thank all of those who have already participated in our research.

For those of you who are yet to take, or to finish completing, the survey, there is still time to get involved! The online questionnaire can be accessed until Sunday, 17 December 2017.

For all the relevant information about the survey, as well as for the link to the online questionnaire, please access the following webpage: http://www.arbitration.qmul.ac.uk/research/2018/index.html.

If you have any queries or would like to participate in a short interview, please contact me at [email protected] All input will be kept confidential.

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ISDS in NAFTA – and ISDS alternatives

Tue, 2017-11-28 23:07

Catherine H. Gibson (Assistant Editor for North America)

Debates about the propriety of investor-state dispute settlement (ISDS) were revived by a recent letter by U.S. academics, which urged the abandonment of ISDS in the renegotiated North American Free Trade Agreement (NAFTA). This letter repeated arguments that are familiar from prior ISDS debates, such as that ISDS “grants foreign corporations and investors rights to skirt domestic courts” and that ISDS permits suits against sovereign governments which will be decided by “tribunals of three private-sector lawyers.” Such anti-ISDS sentiments do not enjoy unanimous support in the United States, however, as both pro- and anti-ISDS statements were submitted in response to the U.S. government’s June 2017 request for comments on the NAFTA renegotiation. Moreover, particularly in light of the support that ISDS enjoys, it is clear that curtailing or eliminating ISDS in NAFTA will not actually end disputes between investors and host states, but rather simply channel those disputes through alternative mechanisms.

Previous comments on ISDS in NAFTA renegotiation

Calls for the abandonment or curtailment of ISDS, similar to those made in the recent letter, were made by a number of groups in June 2017, in response to the Administration’s request for comments on the NAFTA renegotiation. For example, a June 2017 comment from the Center for Tobacco Control Research and Education at the University of California, San Francisco called for the elimination of ISDS, citing the negative effects of NAFTA claims against the United States, as well as non-NAFTA claims related to tobacco plain-packaging laws. In a joint statement, several members of congress also called for the elimination of ISDS in NAFTA, and opined that “NAFTA’s Chapter 11 makes it less risky and cheaper for U.S. firms to relocate offshore by guaranteeing privileged treatment for firms in Mexico and Canada and by providing for the enforcement of these new rights through the Investor-State Dispute Settlement (ISDS) mechanism.” Finally, a number of individuals also submitted comments critical of ISDS in connection with the Administration’s request for comments on the NAFTA renegotiation. For example, Phila Back of Kutztown, Pennsylvania described ISDS as “elevating foreign corporations to the status of sovereign nations” and stated that ISDS provides “a huge incentive for corporations to off-shore production or the corporation itself by means of inversion.”

A number of others submitting comments regarding the renegotiation of NAFTA have favored ISDS, however. In its June 2017 submission, the National Association of Manufacturers (NAM), for example, emphasized the importance of ensuring that ISDS is broadly available to “all industries” and for “all core violations and contract rights.” Comments by the Securities Industry and Financial Markets Association (SIFMA) similarly called for “[e]nhancing the investor protections in the investor-state dispute settlement mechanism” of NAFTA, and in particular “ensur[ing] that the financial sector has the same broad coverage of investor protections, and ISDS as the enforcement mechanism, as afforded to other sectors.” The American Petroleum Institute also wrote favorably about ISDS, and suggested incorporating into the modernized NAFTA provisions of the 2012 U.S. Model BIT. In an August 2018 letter to U.S. NAFTA negotiators, leaders of various U.S. business associations similarly emphasized the “critical importance” of ISDS in NAFTA and stated that ISDS “upholds the same fundamental due process and private property guarantees protected by [the U.S.] Constitution, and it obligates other countries to uphold these precepts as well.”

As these comments make clear, a number of U.S. stakeholders continue to support ISDS, even as others criticize the mechanism in a manner similar to the letter recently prepared by law professors. Updated NAFTA negotiating objectives released by the U.S. government in November 2017 do not provide clear guidance as to the position of the U.S. negotiators on the issue, however, and state the the U.S. supports “meaningful procedures for resolving investment disputes,” which will “ensur[e] the protection of U.S. sovereignty and the maintenance of strong U.S. domestic industries.”

ISDS Alternatives

Even if anti-ISDS views were to prevail, and ISDS was eliminated or curtailed in the renegotiated NAFTA, disputes would continue between investors and the foreign states that host their investments. For U.S. investors, a number of alternative mechanisms exist under U.S. law that, in certain circumstances, could be applied to permit government retaliation for acts that harmed U.S. investors and their investments. Such ISDS alternatives include, among other avenues, Section 301 of the U.S. Trade Act of 1974 and Section 337 of the Tariff Act of 1930.

Under Section 301 of the Trade Act of 1974 the U.S. government may investigate whether a foreign country has denied rights under a U.S. trade agreement or violated a trade agreement, or whether a foreign country has engaged in conduct that is unreasonable or discriminatory, as well as burdensome or restrictive to U.S. commerce. Section 301 investigations may be initiated either by third-party petitions or by the U.S. government itself, and the statutory timeline for the completion of an investigation is typically 12 months. If a violation of Section 301 is found, U.S. law permits unilateral retaliation in response to the offending conduct. Although Section 301 has been used infrequently in recent years, the current U.S. Administration has already initiated a Section 301 investigation into China’s policies related to technology transfer, intellectual property, and innovation. In a recent interview, the U.S. Trade Representative described Section 301 as a very effective tool that the Administration was willing to use.

Another alternative avenue that American investors could use to air their grievances, if ISDS were eliminated or curtailed, is Section 337 of the Tariff Act of 1930. Section 337 declares unlawful “unfair methods of competition and unfair acts” in importation which have the threat or effect of destroying or substantially injuring an industry in the United States, preventing the establishment of a U.S. industry, or restraining or monopolizing U.S. trade and commerce. Section 337 investigations most often involve allegations of patent infringement, but can also concern claims of false designation of origin; copyright, trademark, or trade dress infringement; or other unfair acts. Section 337 investigations may be initiated by private parties and include discovery and trial proceedings before an administrative law judge and review by the U.S. International Trade Commission (ITC). If a Section 337 claim is successful, the remedies imposed may include exclusion orders that stop offending imports from entering the United States, and cease and desist orders against named importers and others engaged in unfair acts that violate Section 337.

Although these alternatives for airing investment disputes are not the same as ISDS—and notably would not permit claims against the U.S. government—these mechanisms could serve as alternative bases to resolve disputes between U.S. investors and other governments and impose retaliatory actions, should ISDS eliminated from NAFTA or other U.S. agreements. Moreover, the existence and use of such tools under U.S. law could spark the enactment or pursuit of similar policies by other governments, leading to further expansion of ISDS alternatives for resolving disputes.

*             *             *

In brief, criticism of ISDS in NAFTA is neither new nor unanimous, and comments of U.S. stakeholders have been both pro- and anti-ISDS. Moreover, even if ISDS were eliminated or curtailed in the renegotiated NAFTA, numerous alternative avenues exist for the airing of disputes that might otherwise go to ISDS. Accordingly, the elimination of ISDS in NAFTA would merely shift the framing of such disputes, rather than eliminating their existence particularly as numerous organizations have emphasized the value of such dispute settlement mechanisms.

 

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A Model for Business and Human Rights through International Arbitration under the Bangladesh Accord: The 2017 Decision on Admissibility Objection in Industrial Global Union and Uni Global Union

Mon, 2017-11-27 21:28

Diane A. Desierto

ITA

The first publicly available decision issued under the international arbitration process provided for under the Accord on Fire and Building Safety in Bangladesh (‘Bangladesh Accord’) (note that Roger Alford previously summarized the Bangladesh Accord’s dispute resolution clause here) was issued through the 4 September 2017 Decision on Admissibility Objection in Industrial Global Union and Uni Global Union (Permanent Court of Arbitration Case No. 2016-36). This Decision rejected the respondents’ (certain global fashion brands) objection to jurisdiction and admissibility, thus permitting the claims brought by both unions against the respondents to remediate their facilities to ensure fire and building safety as provided for in the Bangladesh Accord, and to provide hazard pay for workers.

For those looking at various alternatives and models of reform current investor-State dispute settlement mechanisms, this Decision lends unique insights into the possible antecedent functional role of an intermediate standing ‘Steering Committee’, a committee of seven members, composed of three representatives from trade union signatories, three representatives from company signatories, and a representative chosen by the International Labour Organization as “a neutral chair and independent advisory member” (Bangladesh Accord, Article 1, Governance). In Industrial Global Union and Uni Global Union, the Tribunal notably acknowledged the unique hybridity of public interests and private concerns in arbitrations under the Bangladesh Accord:

“In the Tribunal’s view, this case cannot be characterized either as a classic ‘public law’ arbitration (involving a State as a party) or as a traditional commercial arbitration (involving private parties and interests), or even as a typical labor dispute. A number of features distinguish the Accord from such characterizations, including (a) the creation of the Accord in the wake of the Rana Plaza tragedy; (b) the number of signatories to the Accord (over 200 as at the date the arbitrations commenced; (c) the number of supplier factories affected by the Accord (over 1600); (d) the number of workers in the Ready-Made Garment industry protected by the Accord (over 2 million); (e) the involvement of international organizations in the negotiation and governance of the Accord (including the ILO); (f) the involvement of States and State entities in the negotiation and oversight of the Accord (including the government of Bangladesh); (g) the involvement of Bangladeshi and non-governmental organizations as witnesses to the Accord and in an advisory capacity; and (h) the public nature of the Accord itself and many associated documents, as well as detailed information about factory remediation under the Accord. These factors give rise to a genuine public interest in the Accord, including on the part of other stakeholders who would have a direct interest in its interpretation.” (Industrial Global Union and Uni Global Union 2017 Decision, paras. 93-94).

The respondents in Industrial Global Union and Uni Global Union had argued, in gist, that the claims were inadmissible because the deadlocked Steering Committee (with the ILO representative repeatedly declining to cast a vote) did not produce a “majority decision”, which, in their view, is the only Steering Committee decision that can be “appealed to a final and binding arbitration process” (Bangladesh Accord, Article 3, Dispute Resolution).
The arbitral tribunal rejected this interpretation through a textual and structural reading of the Bangladesh Accord, finding in the cases before it that the Steering Committee nevertheless went through the required “deliberative process(es) and arrived at a ‘decision’ for each charge within the meaning of Article 5 [of the Accord]”. (Decision, para. 57.) The tribunal stressed:

“…At this point, there is nothing further that the Claimants could do to pursue their petition except to refile it with the Steering Committee. But that body has already given it the consideration contemplated in Article 5. Hence, the only way to release the petition from Steering Committee limbo would be for one of the union or brand representatives – presumably here, one of the union representatives – to ‘cross the floor’ and vote to reject it, which would then produce the majority vote that the Respondents contend is the condition to invoking arbitration. The Accord signatories could not have intended to promote that kind of gamesmanship as the only way to access arbitration in the event of an evenly divided Steering Committee. Equally, they could not have intended to deny a claimant access to arbitration in the event of a tie but make it available if the claimant lost by a majority or unanimous vote.” (Industrial Global Union and Uni Global Union 2017 Decision, para. 61. Emphasis added.)

The Tribunal further clarified that the role of the Steering Committee, while technical in allowing interested stakeholders the first chance of examining the subject-matter of alleged violations of safety standards in the Accord, was ultimately preliminary and not at all intended to be fully exhaustive on fact-finding:

“…By providing for initial consideration of a petition by industry representatives on an Accord-established body (the Steering Committee), by a process that would generally be expected to take a limited amount of time (21 days), the Accord provided for a serious examination in the first instance by actors with knowledge of, and a stake in the success of, the Accord, but one that fell short of a full-blown arbitral proceeding. If that limited process did not result in a disposition, either by amicable agreement or by acceptance by the unsuccessful party of the rejection or acceptance of the petition, that party had a right to pursue arbitration, with all the rights and procedures that a right to arbitration would carry. The purpose of the initial procedure before the Steering Committee is neither achieved nor compromised in any way by the circumstance whether the Steering Committee vote is in favor of the petitioner or respondent, or as here, an equal vote. Here, the Claimants did not secure from the Steering Committee the relief they sought, and it matters not that the result followed from a majority vote against them or an equal vote…

…Here, considering the non-legal, industry-based character of the first level of decision-making, there is every reason to believe that the Accord signatories considered that the ‘arbitration’ to which that initial decision could be ‘appealed’ would involve the full fact-finding and law-deciding authority of standard arbitral processes.” (Industrial Global Union and Uni Global Union 2017 Decision, paras. 60 and 63. Emphasis added.)

There is certainly some policy significance to considering a preliminary, stakeholder-driven, and non-legal procedure, such as that before a standing body (the Steering Committee) created under an agreement involving States, companies, and labor unions, recognizing the interfaces of public interests and private concerns before resort to arbitration. This model recalls early proposals by the United Nations Conference on Trade and Development to embed dispute prevention policies in investment contracts, well before the institution of formal investor-State arbitration procedures. It has the additional virtue of deliberately engaging specialized international organizations such as the International Labour Organization (ILO), especially for the technical determination of international labor safety standards and company accountability practices prescribed in the Bangladesh Accord. Moreover, by widening the scope of the Accord to State and non-State stakeholders as partners in ensuring consistent fire and building safety practices of supply chain operators such as those in garment manufacturing in Bangladesh, the Accord recognizes both the private and the public functions of international arbitration, in contrast to frequent criticisms of the current investor-State arbitration system, which to date, only marginally provides for inputs from non-disputing parties through amicus submissions, (and which are often all too dependent on obtaining the prior consent of the parties to their amicus participation).

The Industrial Industrial Global Union and Uni Global Union 2017 Decision stands in contrast to the recent Urbaser v. Argentina arbitral award. Urbaser has been hailed in various quarters for having recognized international human rights norms as part of the fabric of international laws regulating the conduct of States and that “international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce” (Urbaser v. Argentina award, para. 1195). However, the Urbaser award still fell short of crucially operationalizing international human rights law in the foreign investment contract, at least enough to allow human rights stakeholders to have a meaningful part in the investor-State dispute settlement process. Indeed, the Urbaser tribunal ultimately denied the counterclaim filed by Argentina that was anchored on alleging the investors’ breach of the right to water, stressing that “the mere relevance of this human right [to water] under international law does not imply that [the investor and its shareholders] were holding corresponding obligations equally based on international law. No human rights obligation to provide access to water existed on the part of the claimants before they entered into the concession..” (Urbaser v. Argentina award, para. 1212). Bruno Simma and I proposed, several years ago, that there should be some space to involve international specialized organizations such as the Committee on Economic, Social, and Cultural Rights, in the technical fact-finding and determinations of human rights impacts arising from the conduct of investors and host States in foreign investment transactions. To date, investor-State arbitrations hardly refer to reports of such international specialized organizations, but routinely engage independent financial experts for damages valuations. It is certainly baffling that, to this day, investor-State arbitral tribunals do not seek assistance from specialized international organizations, at least to illuminate on issues of quantification of damages asserted by investors, especially where they may also have been corresponding human rights impacts to local populations of host States from the acts of investors.

While the Urbaser decision illustrates the practical limits of broadly recognizing human rights norms in investor-State arbitration and how to achieve the meaningful broader participation of all public and private stakeholders in the enforcement of all legal norms (public and private) governing foreign investment, it is at least promising that a new model may have feasibly arisen for the meaningful participation of specialized international organizations and non-State stakeholders under the Bangladesh Accord, as seen through the lens of the 2017 Decision on Admissibility Objection in Industrial Union and Uni Global Union. The future of investment treaty and investor-State dispute settlement reform may well be recognize the full universe of actors, stakeholders, and participants in foreign investment contracts.

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What Have We Learned from the Global Pound Conferences?

Mon, 2017-11-27 05:29

Thomas J. Stipanowich

ITA

In the forty years since new visions and challenges for the administration of American justice were offered at the 1976 Pound Conference, a Quiet Revolution has altered the landscape of public and private dispute resolution around the world. (See Living the Dream of ADR)

Recently, a series of day-long meetings styled as the Global Pound Conferences, conducted in cities worldwide, offered diverse stakeholders an opportunity to register perspectives on the current state and future of commercial dispute resolution. Each gathering brought together in-house lawyers and clients, external lawyers and consultants, providers of dispute resolution services, educators, government servants and others in order to elicit perspectives and encourage dialogue on dispute resolution, public and private.

The prime artefacts of the “Global Pound” are recorded perceptions of 2,878 individuals polled during conferences at one of twenty-eight venues, or who responded to an online poll. These individuals were mainly dispute resolution professionals, outside counsel, consultants, educators and other individuals who derive a livelihood from the resolution of conflict. However, fifteen percent identified as “parties”—commercial users of dispute resolution services; in reality, they were primarily in-house counsel. Though business clients and corporate counsel are notoriously difficult to convene or poll, their perspectives as users and consumers of dispute resolution services are naturally of exceptional value.

In the interest of efficiency and simplicity, the organizers took some shortcuts in polling. Participants were lumped into five broad groupings, which meant that the responses of public judges were lumped together along with those of private arbitrators and representatives of provider organizations under the umbrella of “adjudicative providers.” Those playing multiple roles, including dispute resolution professionals or institutions engaged in adjudicative as well as non-adjudicative activities, were required to self-identify by a single primary activity.

Some of the questions and answers were subject to multiple interpretations, or so broadly framed as to embrace a range of possible circumstances. Respondents were limited to ranking their top three choices among a range of answers, and to rank those choices in order of priority; it was not possible to accord equal rank to selected responses.

Despite these limitations, the Global Pound Conference poll leaves us with a number of general impressions about current dispute resolution practice, and raises several tantalizing prospects for future evolution. As you read the following summary, please be aware that in tabulating results for each question, respondents’ top-ranked answers were accorded 3 points, their second-ranked answers were given 2 points, and third choices were given 1 point. The published data for each question lists answers in order of the total number of points they received. In addition, each answer received a “percentage ranking” based on the percent of the total possible points that a particular answer received.

1. Efficiency and cost-effectiveness are a primary concern in commercial dispute resolution, and will drive future policy-making.

According to Pound participants, efficiency—that is, the time and cost entailed in resolving a dispute outcome—was the most influential factor in choosing among dispute resolution processes (with a 61% ranking for the entire group, and 65% for “parties” (mainly in-house counsel). Financial or time constraints were the primary obstacle or challenge faced by parties in the resolution of disputes (with a 59% ranking). In addition, reduced costs and expenses (with a 50% ranking among all respondents and 49% for commercial parties) ranked first among the perceived achievements of mediation or conciliation.

Participants expected demand for increased efficiency of dispute resolution processes, including through technology, to have the most significant impact on future policy-making in commercial dispute resolution. This factor received a 64% ranking among all participants and 65% among parties. (However, reflecting an abiding tension among the priorities of commercial parties, 52% of those polled saw the demand for certainly and enforceability of outcomes as a key influencer in the future.)

2. Party control is a priority.

Next to reducing costs and expenses, permitting parties to retain control over the outcome was viewed as the important result of mediation and conciliation (as reflected in the votes of 46% of all participants, and 38% of business parties / in-house counsel). Control over process and outcome is a common theme of comments by corporate counsel.

3. Improved or restored relationships are often a goal.

Although the poll indicated that parties tend to come to dispute resolution wanting damages or or injunctive relief, a sizable minority (a 28% of all participants, and 33% of parties) indicated that parties may be looking to mend or end a relationship. Relational concerns were sometimes an important factor in selecting dispute resolution processes; thirty-nine percent of participants thought improved or restored relationships were among the most likely achievements of mediation or conciliation.

4. Advice from counsel, guidance from dispute resolution providers and educational programs are all potential sources of information on process choices.

Insufficient knowledge of available options for the resolution of commercial disputes is another primary obstacle or challenge for participants (with a 52% ranking among all those polled). Lawyers, external and in-house, were most often viewed as having responsibility to ensure parties understand process options and their potential consequences; external lawyers received a 59% ranking, in-house lawyers 55%. “Lawyer advice” was also a key factor in the selection of dispute resolution options, with a 58% ranking among all participants, and 46% among parties. More cynically, the group identified the impact on costs and fees lawyers can charge as among the top three influences on lawyer advice-giving (with a 40% ranking). The view that the primary role of lawyers was “working collaboratively with parties to navigate the process” predominated with a 60% ranking.

When asked what role parties involved in commercial disputes envisioned for providers of dispute resolution services, sixty-one percent of participants indicated that parties prefer to “seek guidance from the providers regarding optimal ways of resolving their dispute.” The question lacks clarity, however, and the “guidance” referred to might refer to mediators’ affirmative directions on dispute resolution options, a “fleshing out” of arbitration procedures facilitated by arbitrators, or even menus of procedural options on websites of institutional providers.

When asked which methods would be most effective in improving parties’ understanding of their options for resolving commercial disputes, most participants (64%) pointed to educational programs in business or law schools or the broader business community.

5. Outcomes reflect an interplay between rule of law, consensus/party interests, and general concepts of fairness.

Participants indicated that the top three factors determining the outcome of a commercial dispute were consensus (based on the parties’ subjective interests) (63% ranking), findings of fact and legal or other norms (58% ranking), and general principles of fairness (49% ranking). These diverse determinants arguably reflect, or explain the common resort to, approaches in which parties move back and forth between adjudication and negotiation during the course of resolving a dispute—exemplified by Mark Galanter’s term “litigotiation.”

6. The most effective approaches may rely on multiple processes.

Pound participants viewed combinations of adjudicative and non-adjudicative processes, such as mediation and arbitration or mediation and litigation, as the most effective process option. (It was ranked by 49% of participants and 50% of parties). This is perhaps a reflection of the common practice of negotiating (with or without a mediator) against the backdrop of adjudication. Combinations of approaches were also perceived as one of the highest priorities for the future by 50 percent of commercial parties and 45% of all participants.

7. Pre-dispute or pre-escalation processes, collaboration and conflict prevention are emerging trends in managing commercial conflict.

Along with combinations of adjudicative and non-adjudicative processes, business parties viewed “pre-dispute or pre-escalation processes to prevent disputes” as the most effective process for addressing commercial disputes. (50% of parties identified each approach.) Commercial parties saw these approaches as the top priority for the future (55%), as did participants generally (51%).

Participants expected “greater emphasis on collaborative instead of adversarial processes” and “changes in corporate attitudes to conflict prevention” to be the most significant influences on the future of commercial conflict resolution (with rankings of 57% and 51%, respectively.)

8. Governments and ministries of justice have the greatest potential to influence change; outside counsel are most resistant to change.

Participants viewed governments and ministries of justice as most likely to influence change in commercial dispute resolution (41% ranking)—a logical choice given the importance the leading role governments and court systems have played in promoting mediation. Although commercial parties / in-house counsel, outside counsel and adjudicative providers each ranked themselves as potentially the most influential stakeholders, it should be noted that corporate counsel are often in a particularly advantageous position to influence process choices (including consensual private approaches) on the company and transactional level.

Participants perceived external lawyers (67%) and adjudicators (judges and arbitrators) (39%) as most resistant to change.

Conclusion

It remains to be seen how much influence the Global Pound Conferences will have on the pace or direction of change. However, the extant data from GPC polling offer considerable fodder for discussion and debate regarding trends in conflict management.

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Arbitration of Labor Disputes in India: Towards a Public Policy Theory of Arbitrability.

Sat, 2017-11-25 16:12

Smaran Sitaram Shetty

In India, the Arbitration and Conciliation Act, 1996 does not address the question of which categories of disputes are capable of resolution by arbitration, and those that are not. Instead, this question has arisen before and been decided by Indian courts, in a variety of different contexts. In recent times, Courts have determined arbitrability claims in the context of fraud (see here and here), disputes arising out of and implicating trusts and disputes concerning shareholder and intellectual property litigation. Despite the consistent attention the issue of arbitrability in India has generally received, there has been little commentary on the specific issue of whether labor and industrial disputes are arbitrable under the Arbitration and Conciliation Act, 1996. This issue warrants specific commentary for two reasons. First, two High Courts have been faced with this very question and have independently arrived at the conclusion that industrial and labor disputes are not arbitrable. Second, these judgements call into question the rising practice of inserting arbitration clauses in employment agreements and are therefore instructive for practitioners.

 

In this post I first begin by discussing the cases that have dealt with and decided the arbitrability of labor disputes. I argue that these cases reach the right conclusion. I also address the potential these cases have for theorizing about arbitrability, that departs from the dominant paradigm currently used to address that question.

 

  1. Captain Prithvi Malhotra and Rajesh Korat

 

The arbitrability of labor disputes first arose in Kingfisher Airlines v. Captain Prithvi Malhotra and others (“Captain Prithvi Malhotra”). This case arose out of various labor recovery proceedings instituted by pilots and other staff members of the now defunct Kingfisher Airlines. The proceedings were instituted before the specially empowered labor courts for recovery of unpaid wages and other salary benefits. In these proceedings, Kingfisher Airlines contested the jurisdiction of the labor court by relying on the arbitration clause in the employment agreements. To that end, Kingfisher filed an application invoking Section 8 of the Arbitration and Conciliation seeking reference to arbitration in terms of the employment agreements. The labor court rejected the application and retained jurisdiction over the proceedings.

 

Kingfisher thereafter moved the Bombay High Court to challenge the correctness of the order passed by the labor court. The Bombay High Court affirmed the order of the labor court and held that labor disputes were not arbitrable under the Arbitration and Conciliation Act, 1996. The Court holds that the inquiry is not solely whether the claim being urged is in personem or in rem (as was held by the Supreme Court in Booz Allen & Hamilton v. SBI Home Finance), but whether the resolution of the claim has been exclusively reserved for adjudication by a particular court or tribunal for public policy reasons. The Court holds that the resolution of labor and industrial disputes has been reserved for resolution before the judicial fora constituted under the Industrial Disputes Act, 1947. By drawing upon the preamble of the Act as well as the scheme of resolution of labor disputes, the Court holds that strong public policy reasons support such a conclusion.

 

The Court in Captain Prithvi Malhotra also goes further than merely determining the arbitrability of labor disputes. It examines the scheme of the Industrial Disputes Act, 1947 and concludes that the Act provides for a unique process for arbitration of collective labor claims. It therefore concludes that if there were to be adjudication of labor and industrial claims outside of the courts and tribunals constituted under the Act, the reference to and resolution by arbitration would have to be governed by the specific provisions of the Industrial Disputes Act, 1947 (and the attendant rules made thereunder) and not the Arbitration and Conciliation Act, 1996. The Court therefore concludes two crucial issues: claims under the Industrial Disputes Act, 1947 are not arbitrable under Arbitration and Conciliation Act, 1996 and by extension, where it is arbitrable, it must be in conformity with the requirements and procedure under the Industrial Disputes Act. It is therefore important to remember that labor and industrial claims are not per se non-arbitrable, but are instead only arbitrable in the manner and to the extent permitted by the Industrial Disputes Act, 1947.

 

A similar question arose five years later in Rajesh Korat v. Innoviti (“Rajesh Korat”) before the Karnataka High Court. In this case, when an application for reference to arbitration was made before the labor courts, the application was allowed and parties were referred to arbitration in terms of the arbitration agreement (in contrast to Captain Prithvi Malhotra where the labor court rejected the application and retained jurisdiction).

 

The reasoning in Rajesh Korat greatly resembles the reasoning in Captain Prithvi Malhotra. The Court concludes that there are strong and compelling public policy reasons to ensure that labor and industrial disputes are exclusively resolved by courts and tribunals under the Industrial Disputes Act. In Rajesh Korat, the Court goes slightly further in concluding that the Industrial Disputes Act is a self-contained code, and to that extent the Arbitration and Conciliation Act, does not have any application to matters governed by the Industrial Disputes Act. Although it does not expressly address this question, Rajesh Korat impliedly endorses the proposition that any arbitration of labor disputes would have to be in conformity with the procedure under the Industrial Disputes Act, 1947 and not the Arbitration and Conciliation Act, 1996.

 

  1. Evaluating Captain Prithvi Malhotra and Rajesh Korat

 

Captain Prithvi Malhotra and Rajesh Korat are both decided correctly and they independently reach the right conclusion. Both decisions examine the nature and larger scheme of the Industrial Disputes Act and pay close attention to the various categories of judicial and quazi-judicial fora established under the Act. After undertaking this analysis both decisions correctly conclude that labor and industrial claims are non-arbitrable under the Arbitration and Conciliation Act, 1996, and where they can be submitted to arbitration, such reference and resolution must be in compliance with the procedure under the Industrial Disputes Act.

 

Importantly, both decisions are attentive to the asymmetry in bargaining power inherent in labor disputes. In large part the Industrial Disputes Act (and labor legislation generally in India), are meant to address this issue. Part of this remedial function is achieved through the creation of specialized courts and tribunals under the Industrial Disputes Act, 1947. A closer reading of both Captain Prithvi Malhotra and Rajesh Korat would reveal that the Court was persuaded in large part by the consequences of relegating labor disputes to private arbitral tribunals.

 

If these cases were decided the other way and labor disputes were held to be arbitrable, it would mean that individual and collective labor disputes would have to be resolved by way of private arbitration where employers would potentially have the sole authority to appoint arbitrators, employers could refuse to participate in the appointment process forcing employees to follow the procedure under Section 11 of the Act and/or could also have the power to designate arbitral institutions, which would beyond the reach and means of industrial workers. In sum, the Courts seem convinced that holding labor disputes to be arbitrable would place undue burdens on aggrieved workers in accessing and thereafter participating in private arbitral proceedings under the Arbitration and Conciliation Act, 1996. The public policy arguments for holding these categories of disputes non-arbitrable, is then both compelling and on the face of it, accurate.

 

Beyond the correctness of these decisions, lie important lessons for practitioners. Increasingly, employment agreements are being reduced into writing and have arbitration clauses for settlement of disputes that arise out of the employment relationship. These decisions should then educate practitioners about the perils of such a trend and the reality that these agreements are unlikely to be enforced if the employers seek to compel arbitration.

 

  1. Theorizing arbitrability

 

In view of the Arbitration and Conciliation Act’s silence as to the issue of which disputes are capable of private arbitration, it is helpful to think through a possible theory of arbitrability. This is especially useful in the Indian context where the legal and regulatory landscape continues to develop, and question of whether certain kinds of disputes and claims are arbitrable are likely to continue to arise well into the foreseeable future.

 

In light of the Supreme Court’s decision in Booz Allen & Hamilton, the primary paradigm of thinking about arbitrability has been the characterization of claims involved. Simply put, Booz Allen & Hamilton tells us that where the claim is in the nature of a right in rem, such claims are not amenable to arbitration under the Arbitration and Conciliation Act, 1996. However, where the claim is characterized as a right in personem, such a claim may be arbitrable. Although this formulation is helpful starting point (and has in fact been used by subsequent judgements to decide arbitrability claims), it does not help us develop a robust understanding of arbitrability.

 

It is for this reason that the decisions in Captain Prithvi Malhotra and Rajesh Korat are helpful. They collectively advance the proposition that even where the claim in question is a right in personem, it would be still rendered non-arbitrable in view of public policy reasons expressed in the statute that otherwise regulate the exercise of the claimed right whether it be in personem or in rem. This is an interesting and compelling understanding of arbitrability, one that focusses our attention not only on the nature of the claims or the relationship between the parties, but also the consequences for allowing private arbitration. It allows us to examine whether the statutory framework of legislation either exhibits or has inherent within it, certain limitations to private arbitrations and potential reasons for such legislative policy choices.

 

To be sure, I do not argue that these decisions present a holistic and comprehensive theory of arbitrability. Instead, they help only partly in diversifying our understanding of arbitrability and pushing our understanding from the holding in Booz Allen & Hamilton. In fact, a complete and exhaustive theory of arbitrability may be both illusive and undesirable.

 

[Disclosure – the author was involved in the Rajesh Korat v. Innoviti case. Any views expressed here are solely personal and do not reflect the views of the counsel or the parties to the case.]

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How do You Tax the Costs of International Arbitration Proceedings?

Fri, 2017-11-24 21:33

Colin Liew

YSIAC

Introduction

Section 10 of the Singapore International Arbitration Act (“IAA”), allows a party to challenge an arbitral tribunal’s determination of its jurisdiction. Section 10(7) further provides that, where the Court rules under section 10 that the tribunal has no jurisdiction, it may make an order as to the costs of the arbitral proceedings.

I was recently involved in a case where, upon a successful challenge to the tribunal’s jurisdiction under section 10, the Court made an order under section 10(7) of the IAA for the costs of the arbitration to be “taxed by the Registrar of the Supreme Court if not agreed”.

The subsequent taxation proceedings were far from straightforward and threw up a number of issues which have yet to be fully resolved by the courts.

How are the costs of the arbitration to be taxed?

The precise procedure to be adopted by the Registrar of the Supreme Court (the “Registrar”) in taxing the costs of the arbitration is not stated in the IAA, but is left to the Rules of Court (the “Rules”). Although the position is not entirely clear, it appears that the procedure for taxing the costs of the arbitration is regulated by Order 59 of the Rules (pursuant to Order 59, rules 2(1) and 12(1)(c)).

To what extent is taxation in the Registrar’s discretion?

Typically, subject to the provisions of Order 59, the amount of costs to be allowed in taxation is in the discretion of the Registrar, which is to be exercised having regard to the principle of proportionality as well as all the relevant circumstances: Order 59, rule 31(1) read with paragraph 1(2) of Appendix 1 to Order 59.

This is similar to how arbitrators are expected to approach the issue of costs under various institutional rules. For instance, Article 38(5) of the International Chamber of Commerce Arbitration Rules provides that, in making decisions as to costs, the tribunal “may take into account such circumstances as it considers relevant”.

However, in taxation proceedings, the application of the principle of proportionality can result in significant sums being taxed off a Bill of Costs (“Bill”). Indeed it is quite possible for a successful litigant’s party and party costs to be taxed down by more than 75%.

Such drastic discounts have been justified on the basis that there is a public interest in controlling the costs of litigation in order to ensure adequate access to justice: Lin Jian Wei v Lim Eng Hock Peter [2011] 3 SLR 1052 at [77].

By contrast, there is no similar public interest in controlling the costs of private arbitration: VV v VW [2008] 2 SLR(R) 929 (“VV”) at [31]. Perhaps as a result, in practice, successful parties in arbitration tend to recover a larger proportion of their costs as compared to successful parties in litigation.

Hence, where an order is made by the Court under section 10(7) of the IAA that the costs of the arbitration are to be taxed by the Registrar, it is not obvious that the procedure prescribed by Order 59 of the Rules is well-suited to this exercise, since it is predicated upon the different principles which apply in a taxation of litigation costs.

For instance, given that international arbitration practitioners are not necessarily regulated by the Legal Profession Act, it is possible for the Registrar to be confronted with a Bill containing legal fees of a quantum or nature that would not typically be permitted in taxation, e.g. contingency fees.

The issue is even more complicated if the tribunal has already assessed the reasonable costs of the arbitration. Although in theory the tribunal’s assessment has no legal effect since it was, ex hypothesi, made without jurisdiction, in practice the Registrar has no realistic basis upon which to disagree with the tribunal’s assessment.

This then begs the question of whether an order under section 10(7) of the IAA that the costs of the arbitration be taxed serves any useful purpose, if the reality is that the Registrar will not second-guess the tribunal’s assessment of reasonable costs.

Indeed, given that the costs of the taxation proceedings themselves are frequently heavily taxed down in “Section 2” of the Bill, the only result of such an order appears to be to unjustly penalise a party who successfully invokes section 10 of the IAA.

Costs in a different currency?

Taxation of the costs of the arbitration is even less helpful when those costs have been incurred in a foreign currency, as they were in my case. Not only is it then difficult for the Registrar to determine whether such costs are reasonable, of the more fundamental issue is whether and how costs can be dealt with in a foreign currency.

Damages can of course be ordered in a foreign currency, and there appears to be some authority that so can costs: Elkamet Kunststofftechnik GmbH v Saint-Gobain Glass France SA [2016] EWHC 3421 (Pat) at [11].

However, as a matter of procedure, in taxation the Bill must be accompanied by a summary which, like the eventual Registrar’s Certificate, is composed electronically through the eLitigation platform (Paragraph 95(1) and (4) of the Supreme Court Practice Directions), which only permits the inclusion of figures in Singapore Dollars.

As such, I had to submit the costs of the arbitration, although incurred in a foreign currency, for taxation in Singapore Dollars, which raised the issue of the appropriate date of conversion.

In theory, the date of conversion ought to be the date on which the costs were incurred, but this was impracticable given that different costs were incurred on different dates. A more convenient date was the date of the tribunal’s award, but the date of the order under section 10(7) of the IAA seemed more principled, since that was the date my client’s entitlement to the costs of the arbitration crystallised.

Having said that, the reasonable costs which the successful party is entitled to are not finally quantified until the taxation hearing, and on that basis the date of conversion arguably ought to be the date of the taxation. However, this presents a problem if the taxation hearing is part-heard (as it was in my case): it seems unacceptable that a party’s recoverable costs should fluctuate based on exchange rate movements in the intervening period.

Conclusion

As successful jurisdictional challenges under section 10 of the IAA have been rare, the practical implications of an order under section 10(7) of the IAA that the costs of arbitration proceedings be taxed have not yet been fully worked out.

However, it seems likely that section 10 of the IAA will be resorted to with greater frequency, and with more success. If section 10(7) of the IAA is to provide an effective means of providing for the costs of the arbitration proceedings, it will be necessary for the courts to explain exactly how the taxation of such costs is to work.

For further comments on the topic, please see the September 2017 issue of the Singapore Law Gazette.

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Come in, Let’s Arbitrate: The Rise and Rise of Arbitration in Nigeria

Fri, 2017-11-24 02:23

Adebayo Adenipekun

Arbitration practice is on the rise in Nigeria. On the 3rd of November, 2017, the Nigeria Branch of the Chartered Institute of Arbitrators (UK) inducted 219 Associates, 58 Members and 20 Fellows into the branch. The branch also boasts a burgeoning class of Chartered Arbitrators. The expectation is that the number of inductees will continue to go up yearly (associate inductees were only 69 in the year 2010). A number of things are responsible for a pick in the pace of interest in arbitration some of which are discussed here.

Increase in the number of qualified practitioners: Although arbitration is not specific to legal practice, its practice in Nigeria is dominated by the legal profession. With legal practice being so broad as to include so many subsets that are not dispute-related, only a small percentage of legal practitioners take an interest in arbitration. However, the number of legal practitioners qualifying annually to join the bar is also on the rise. In the year 2017, 1,393 practitioners were admitted to the Nigerian bar in July with a set of 4,285 set to be called to the bar in December. Last year, 2,257 were admitted to the bar in July while 4,178 reportedly were called to the bar in November. Even if the percentage of practitioners who take an interest in arbitration stays fixed, the numerical number will continue to rise as practitioners qualify in astronomical growth.

A rise in specialised arbitration law firms and practitioners: Nigeria boasts a pool of highly skilled arbitration lawyers and arbitrators. Law firms have more and more skilled and seasoned arbitrators and arbitration practitioners in their ranks. Furthermore, many Nigerian law firms boast an array of seasoned arbitration practitioners who have international arbitration training, experience and placements such as Members of the Permanent Court of Arbitration, Presidents of the Nigerian Institute of Chartered Arbitrators (NICA), members of the Chartered Institute of Arbitrators (UK), Judges of the LCIA, etc. on staff in major Nigerian metropolises (such as Abuja, Lagos, Port Harcourt and Ibadan). There are also arbitral associations (such as the Maritime Arbitrators Association of Nigeria) which focus mainly on arbitration in specialised fields. An increase in the number of local arbitration experts has the effect of keeping arbitrations local – as opposed to the days when arbitrations on Nigerian disputes were resolved overseas by foreign counsel and with marginal involvement of local lawyers. Such practitioners also increasingly advise clients to include and invoke arbitration clauses in their transactions.

Increasing commercial activity: Although the media may not project that narrative, Nigeria is doing big business and the time to do big business in Nigeria is now. With a major Lagos-Ibadan Expressway project valued at $838m, a Lagos-Ibadan light rail project valued at $1.488bn, a Dangote refinery project with an estimated cost of $12b, and the Mambilla power project estimated to cost $5.79bn, to name a few, investment in Nigeria is on the up-and-up. As is usual, investments come with an attendant risk of disagreement and considering the need to urgently resolve disputes and return to the project, investors recognise arbitration as the way to go.
Rise of Arbitration institutions and Associations: Nigeria has a considerable cluster of arbitration institutions. Nigeria has the MAAN, the Chartered Institute of Arbitrators, the NICA, the Lagos Regional Centre for International Commercial Arbitration (LRCICA), the International Chamber of Commerce, the Lagos Court of Arbitration (LCA) and the International Centre for Arbitration and Mediation Abuja (ICAMA). These institutions not only provide trainings, sensitisations, workshops and lectures in arbitration, they serve as repositories of directories of seasoned and competent arbitrators to the ends of which they are often designated in many agreements as first/default arbitrator appointers. Institutions like the LCA, LRCICA and ICAMA further provide venues, registrars and support personnel for arbitral references.

Legal framework supportive of arbitration: Nigeria has (arguably) a judicial system that understands the reasoning behind arbitration and the need to let arbitration thrive upon the terms of arbitrators and users. The Arbitration and Conciliation Act (ACA), the federal law on arbitration, although not a very modern law, captures the basics of arbitration and provides sufficient material for smooth arbitration practice – provided the parties cooperate. Its schedule also contains a domestication of the New York Convention. Lagos State has the Arbitration Law of 2009 which is widely credited as being an adoption of modern arbitration trends and an improvement on the provisions of the ACA.

A recent exciting development is the enactment, on the 30th of October, 2017, of the Oyo State Multi-Door Courthouse Law, 2017 (the Oyo Law). That law has not been assented to by the Governor of Oyo State, but it is expected that it will in the coming days – the state’s Attorney-General (who is a part of the Governor’s Executive Council) was on hand to witness and hail the bill’s passing and has disclosed that a building has already been identified and earmarked to house the Oyo State Multi-Door Courthouse (OYSMDC) in the immediate. By the Oyo Law, the OYSMDC will be an independent and non-profit body. The OYSMDC has the mandate to apply arbitration to disputes referred to it by the Court or any dispute resolution organisation or which come to it “by way of walk-in”. Commercial transactions without arbitration clauses can thus be referred by the Court to arbitration per the Oyo Law. The OYSMDC is also empowered to render assistance to ad hoc references as well as maintain a panel of suitably qualified arbitrators. To ensure qualitative service delivery, the OYSMDC is to be supervised by a Board whose Chairman is to be a respectable and renowned professional of at least 20 years’ practical experience in a chosen field while its Chief Executive Officer must possess a minimum of 10 years’ post-call experience. The Law requires the Chief Judge to designate ADR Judges and Magistrates to give support to the OYSMDC and parties who neglect to appear before the OYSMDC may be summoned before any of these Judges who may then issue directives. To preserve the mandate of the OYSMDC over disputes submitted to it, the Oyo Law prohibits Judges and Magistrates in Oyo State from assuming the role of mediator during Pre-Trial Conferences. The OYSMDC is required to keep hard and virtual records. The OYSMDC is tax exempt and unless fraud is involved, OYSMDC panel members are immune from suit in relation to arbitrations they conduct.

The value of the Oyo Law is unquantifiable. Firstly, the Oyo Law lays the foundation for the establishment of a Court of Arbitration in Oyo State. Secondly, it serves as a reasonable precursor to the enactment of an Oyo State arbitration law which mirrors or surpasses Lagos’. The establishment of an arbitration Court in Oyo State and the enactment of an arbitration law will firmly cast Oyo State as the winsome dispute resolution hub it is currently shaping up to be. Already, Oyo State provides a convenient alternative to Lagos as an arbitration venue – Oyo State is just two states away from Lagos and about 2 hours away by interstate road travel. The Expressway (already being utilised) and Light rail projects mentioned above which connect Lagos to Ibadan, the capital of Oyo State will open the state up for persons to work in Lagos but live in Ibadan and vice versa (this is already the case and many practitioners have thriving interstate practices). To add to its desirability, while Ibadan is the largest city in Africa with a size of 3,080 square kilometres comparable to Lagos’ 999.6 square kilometres, it houses only 3.5m people compared to Lagos’ 9m. Ibadan thus has less population density, larger and less-expensive land mass, and sparse vehicular gridlocks. It is also more affordable to live in, house arbitrators, counsel, witnesses and support staff in and it presents choice arbitration venues that are intimate, tucked away from the bustle of Lagos and are less pricey than those in Lagos – and yet, parties can maintain their proximity to Lagos, which they may cherish for any number of reasons such as access to an international airport or their corporate headquarters.

Arbitration in Nigeria is around for the long haul spreading to fresh territories and is increasingly taking on dynamic colorations just as disputes continue to shift shape. Investors can come in and arbitrate.

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The Role of the IBA Guidelines on Conflicts of Interest in Arbitrator Challenges

Wed, 2017-11-22 21:09

Margaret Moses

ITA

The IBA Guidelines on Conflicts of Interest focus on when an arbitrator should disclose potential conflicts, as well as when he or she should simply not accept appointment. For the most part, they do not specifically address the potential disqualification of an arbitrator. Nonetheless, the Guidelines, even though non-binding, have become quite influential in the face of increasing challenges to international arbitrators and awards on the basis of arbitrator conflicts. The Guidelines are frequently viewed by courts and arbitral institutions as providing relevant criteria for assessing the impartiality and independence of a challenged arbitrator.

Recent surveys indicate that the Guidelines generally are held in high regard by the members of the arbitration community. A Kluwer Arbitration Blog survey on soft law instruments in 2014 found that the Guidelines, although less well-accepted than the IBA Rules on the Taking of Evidence, constituted the second most popular instrument in the survey, with 44.4% of respondents stating that they use them always or regularly.1)Elina Mereminskaya, Results of the Survey on the Use of Soft Law Instruments in International Arbitration jQuery("#footnote_plugin_tooltip_7228_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Guidelines were particularly well-accepted in North America, with 71.4 % of respondents saying they use them always or regularly.

Another survey, the 2015 International Arbitration Survey (White & Case and Queen Mary University), noted that most users perceive the Guidelines as effective. This survey found that the Rules on Taking of Evidence and the Guidelines on Conflicts of Interest were the two most highly-rated soft law instruments, with the Rules being rated effective by 69% of respondents, and the Guidelines being rated effective by 60%.2)Id., at 36 jQuery("#footnote_plugin_tooltip_7228_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Arbitral institutions, however, have tended to view the Guidelines with a certain agnosticism. The ICC International Court of Arbitration is perhaps the institution that has provided the most extensive discussion of the Guidelines. The ICC has made clear that when an arbitrator’s confirmation is subject to objection, or when an arbitrator is challenged, any reference by the Secretariat of the ICC Court of Arbitration to the ICC Court as to an article in the Guidelines does not bind the Court, and does not mean the Court is applying the Guidelines.3)Jason Fry and Simon Greenberg, Appendix: References to the IBA Guidelines on Conflicts of Interest in International Arbitration When Deciding on Arbitrator Independence in ICC Cases, ICC INTERNATIONAL COURT OF ARBITRATION BULLETIN, Vol. 20 No. 2 p. 33 (2009). jQuery("#footnote_plugin_tooltip_7228_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Rather, such references are for information only. In an examination of cases handled between 2004 and 2009, the ICC considered how often a particular article in the Guidelines was referred to, and how often the situations at issue were not covered by the Guidelines. It found that out of 187 challenges and contested confirmations, at least one article of the Guidelines was referred to in 106 cases. In the remainder of cases, no article of the Guidelines was referred to as being relevant. Even though the ICC has asserted that it is not applying the Guidelines, the mention of a Guideline with reference to approximately 57% of the ICC cases suggests that the Guidelines provide an important baseline in many confirmation and challenge decisions.4)In a more recent study of the challenges filed with the ICC Court between 2012 and 2015, reference was made to the IBA guidelines in only 28.4% of the cases, although the ICC notes that reliance on the Guidelines is still “relatively frequent.” “Arbitrator Challenges Under the ICC Rules and Practice, p. 8, ICC DIGITAL LIBRARY. jQuery("#footnote_plugin_tooltip_7228_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Issues of an arbitrator’s conflicts of interest can also surface at the award enforcement stage. The Guidelines influenced a decision by the Supreme Court of Colombia when it was asked to enforce an ICC award rendered in Tampico Beverages Inc. v. Productos Naturales de la Sabana S.A. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. The Respondent, Alqueria, opposed enforcement of the award, arguing that enforcement would violate public policy because Tampico’s party-appointed arbitrator had not disclosed that it had previously served as counsel in a case in which Tampico’s current counsel was an arbitrator. Although the court acknowledged that enforcement under these circumstances might violate Colombia’s domestic public policy, it concluded that the country’s international public policy was different, and that the court should look to international authorities to determine if there was a violation. The court then turned to the 2014 IBA Guidelines as representative of international practices, and specifically mentioned as evidence of broad international usage the ICC survey showing references to the Guidelines in 106 out of 187 ICC cases. The Court rejected Alqueria’s position, finding that the non-disclosure objected to by Alqueria did not demonstrate lack of independence or lack of impartiality under any of the Guidelines.

Thus, despite the ICC’s careful language about not actually applying the Guidelines, the frequency of the mention of the Guidelines in ICC cases was enough to persuade the Supreme Court in Colombia that the Guidelines are widely accepted in international practice, and are to be considered in determining whether enforcement of an arbitration award would violate a country’s international public policy.

In the case of W Ltd v M SDN BHD ([2016] EWHC 422) the English Commercial Court also closely considered the Guidelines. Like the Colombian court, the English court rejected a challenge to award enforcement on the grounds of arbitrator conflict. However, the English court did so by rejecting a Guideline rather than relying upon it. The English case involved a challenge to the enforcement of an award based on a “serious irregularity” under section 68(2) of the English Arbitration Act. Claimant objected to enforcement on the grounds that the alleged conflict of interest was covered by paragraph 1.4 of the Non-Waivable Red List. That list sets forth situations where the conflict is so grave that the arbitrator should simply not accept appointment, and so grave that even with knowledge of the conflict, parties cannot waive it. Paragraph 1.4 provides that an arbitrator must not accept appointment in this situation:

The arbitrator or his or her firm regularly advises the party, or an affiliate of the party, and the arbitrator or his or her firm derives significant financial income therefrom.

In this case, a challenge was brought asserting apparent bias based on an alleged conflict of interest. Claimant learned after two awards had been made that the law firm of the sole arbitrator had provided legal services to a company affiliated with the Defendant, and had derived significant income from these services. However, the arbitrator had operated as a sole practitioner within the firm and was treated for compensation purposes as a separate department within the firm, relying on the firm for secretarial and administrative assistance. At the time of the arbitrator’s appointment, there was no conflict, but a few months later, an affiliate of Defendant acquired the company served by the arbitrator’s law firm. The law firm’s conflict check system did not show this conflict and the arbitrator had not been alerted to it.

Although in this case, Mr. Justice Knowles commended the 2014 IBA Guidelines for a distinguished contribution in international arbitration, he considered that the situation described in Paragraph1.4 was “classically appropriate for a case-specific judgment.”5)([2016] EWHC 422), ¶36. jQuery("#footnote_plugin_tooltip_7228_5").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); He took issue with the “categoric position” in General Standard (2)(d) that states that “justifiable doubts ‘necessarily exist’ as to the arbitrator’s impartiality or independence in any of the situations described in the Non-Waivable Red List.”6)Id. at ¶38. jQuery("#footnote_plugin_tooltip_7228_6").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Applying the test for apparent bias under English law, Mr. Justice Knowles concluded that a fair minded and informed observer, having considered the facts, would not conclude that there was a real possibility that the tribunal was biased. He also stated, however, that even though the decision was made under English law, he had considered the IBA Guidelines and had explained his different view of the Guideline at issue because the arbitration was international and “the role of [the] Court has an international dimension.”7)Id. at ¶44. jQuery("#footnote_plugin_tooltip_7228_7").tooltip({ tip: "#footnote_plugin_tooltip_text_7228_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The significant attention that the courts in each of these cases paid to the IBA Guidelines is indicative of the stature the Guidelines have achieved in the arbitration field. There have been concerns expressed that the use of the Guidelines varies so greatly among courts that it undercuts any possibility of developing uniform standards. However, the two cases discussed above indicate that courts take the Guidelines very seriously, whether or not they view them as dispositive. Even if not uniformly applied, the existence of the Guidelines as a uniform baseline against which concepts of arbitrator conflicts can be tested promotes a thoughtful international dialogue on how best to ensure an arbitrator’s independence and impartiality.

References   [ + ]

1. ↑ Elina Mereminskaya, Results of the Survey on the Use of Soft Law Instruments in International Arbitration 2. ↑ Id., at 36 3. ↑ Jason Fry and Simon Greenberg, Appendix: References to the IBA Guidelines on Conflicts of Interest in International Arbitration When Deciding on Arbitrator Independence in ICC Cases, ICC INTERNATIONAL COURT OF ARBITRATION BULLETIN, Vol. 20 No. 2 p. 33 (2009). 4. ↑ In a more recent study of the challenges filed with the ICC Court between 2012 and 2015, reference was made to the IBA guidelines in only 28.4% of the cases, although the ICC notes that reliance on the Guidelines is still “relatively frequent.” “Arbitrator Challenges Under the ICC Rules and Practice, p. 8, ICC DIGITAL LIBRARY. 5. ↑ ([2016] EWHC 422), ¶36. 6. ↑ Id. at ¶38. 7. ↑ Id. at ¶44. 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: Compendium of International Commercial Arbitration Forms
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The House Always Wins Remarks on AG Wathelet’s Opinion in the C-284/16 Achmea Case

Wed, 2017-11-22 02:52

Elżbieta Buczkowska, Patrycja Treder and Wojciech Sadowski

The Opinion delivered on 19 September 2017 by Advocate General Wathelet in the case C-284/16 Achmea has already been widely commented on in the international arbitration community. The views are either critical or approving, but so far, they have mostly been focused on whether a particular legal point made by the Advocate General was right or wrong.

In this post we propose taking a different approach. We see the Opinion in the Achmea case as a game-changer and a turning point in the approach that the European Union may be taking towards investment treaty arbitration. As a consequence, we submit that focusing on individual detailed aspects of the Advocate General’s Opinion may be off the mark. The Opinion is a one-package deal and it should be considered as a whole.

The simple reality is that the EU institutions can in principle take one of the two contrasting approaches to intra-EU investment treaty arbitration. They can either delegalize it or approve it.
The first approach had so far been pursued by the European Commission. In this respect the Commission insisted that the Member States should terminate intra-EU bilateral investment treaties and also prosecuted some of them for failing to do so. The European Commission in addition purported to intervene before investment treaty tribunals in numerous intra-EU investment treaty arbitrations or oppose the enforcement of certain intra-EU awards.

These efforts cost time, resources and money. Moreover, as it was rightly pointed out by Advocate General Wathelet in the Achmea opinion, the legal position of the European Commission and certain Member States opposing the validity of the intra-EU treaties was seriously flawed and their approach lacked coherence. Another key factor for consideration is that none of the investment treaty tribunals confronted so far with the objections against the validity of the intra-EU BITs actually found for the European Commission. The European Commission, it transpires from between the lines of the Advocate General’s reasoning, was fighting a lost cause.

The sentiment across the European Union has also changed since 2015. In addition to Brexit, numerous other cracks have appeared in the European structures. Adherence to the rule of law principle by certain Member States has been doubted. The independence of national courts, which are the primary channel of enforcement of the EU rules and principles, has come under attack in some Member States. Even the Court of Justice of the EU recognized that in certain matters (if only exceptional), the principle of mutual trust between courts in different Member States can be suspended. In other words, it now seems that the intra-EU investment treaty arbitration may still have a vital role to play also in the intra-EU dimension as the private enforcement mechanism of fundamental economic freedoms.

So what the Advocate General Wathelet actually does in the Achmea Opinion is to propose a radical departure from the line previously defended by the European Commission. The proposed deal is to recognize the conformity of the intra-EU bilateral investment treaties with the EU law. As any deal, however, it comes at a price.

The price is to subject intra-EU investment treaty tribunals to the fundamental principles of the EU law, and ultimately, to the supreme jurisdiction of the Court of Justice of the European Union. The Advocate General purports to achieve this objective in three steps.

Firstly, he proposes to recognize that neither the intra-EU bilateral investment treaties, nor the investor-state dispute resolution clauses contained in these treaties, are against the EU law. This ‘legalization’ of intra-EU investment arbitration is a pragmatic necessity, and a logical requirement for the proposed deal. Legal purity of reasoning in the Opinion on this point, accordingly, should be neither expected nor required, although admittedly, most arguments given by the Advocate General are compelling.

Secondly, the Advocate General proposes to recognize investment treaty tribunals as the “courts or tribunals of the Member States” in the sense of Article 267 TFEU. This principally means that the intra-EU investment treaty tribunals should be entitled to refer questions on the validity or interpretation of the EU law to the Court of Justice of the European Union.

What the Advocate General’s Opinion does not spell out expressly, however, is that such investment treaty tribunals should also be regarded as the courts or tribunals against whose decisions there is no judicial remedy under national law in the sense of Article 267 third indent TFEU. This means that the investment treaty tribunals should actually be obliged to refer such questions to Luxembourg.

This implies that in the Advocate General’s proposal, investment treaty tribunals would have to recognize the supreme jurisdiction of the European Court of Justice and follow the answers they receive.

Thirdly, the Advocate General is clear that if investment treaty tribunals want to operate in the intra-EU context, they will have to recognize the supremacy of the EU law, including over the bilateral investment treaties, and the supremacy of the European Court of Justice. This plea was made openly in para. 134 of the Opinion:

“In that case, [i.e. if they are courts or tribunals of a Member State in the sense of Article 267 TFUE – annotation added] the arbitral tribunals are required — and if they failed to do so their awards would be null and void on the ground that they would be contrary to public policy — to respect the principles set out by the Court […], including, in particular, the primacy of EU law (99) over the laws of the Member States and over every international commitment given between Member States, the direct effect of a whole range of provisions applicable to their nationals and themselves, mutual trust between them in the recognition of common values on which the Union is based and the full application of and respect for EU law.”

If the Opinion of the Advocate General is accepted by the Court, the choice before the investment treaty tribunals in Europe will be a hard one. They will have to agree to the terms and conditions of this licence to practice investment treaty arbitration in the EU as proposed by the Advocate General, and thus accept the limitations of their own supremacy and independence. Otherwise, the courts of the Member States of the EU will have clear instructions to set aside, or refuse the enforcement of non-conforming awards.

Either way, under the Advocate General’s proposal, the House always wins.

***

This post is an abridged version of a forthcoming publication on the same topic which should be finalized in the next months.

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M&A Arbitration: Pre-Closing Disputes and Letter of Intent

Mon, 2017-11-20 18:54

Nahila Cortes

The complexity of M&A

In recent years there has been an increase in M&A disputes. These are often complex because the underlying dispute can involve complicated business transactions between big companies that merge, are acquired, or form a joint venture. And more importantly, they can have a significant impact on the market (for example, the recent deal of United Technologies to buy Rockwell Collins amounted to US$30 billion).

In the context of the Argentine path to recovery from years of economic crisis and recession -which led to countless claims from foreign investors against the state- it is expected that there will be an increase in M&A, and foreign investors are likely to participate in these proceedings. Since the Argentine market seems to be gaining strength again, it is worth taking a close look at disputes that might arise in the context of international M&A disputes and how international arbitration can play a role to resolve them, especially when they arise at an earlier stage of the transaction.

Pre-closing disputes

The entire process of an M&A transaction can last several months, starting from the early negotiations until the end of the survival period or the expiration of statute of limitations. The parties involved in the transaction may initiate disputes based on different causes of action that are generally related to representations and warranties, earn out clauses, price adjustment provisions, indemnity clauses, and put and sales options, which arise at a post-closing phase.

However, disputes can also arise during the pre-closing phase. Such disputes are generally related to the breach of confidentiality or exclusivity provisions agreed in pre-contractual documents, or to other provisions and obligations arising out of the letter of intent (hereinafter “LOI”).

Concerning the LOI, it could be the source of conflicts at the early stage of the M&A. The LOI is commonly understood to be non-binding document, used to express a tentative intention of the parties to enter into negotiations or to pursue negotiations for the conclusion of a contract. If signed, this document will govern throughout the negotiation stage until the final execution of the contract.

Yet, the binding effect of the LOI is controversial. Although the parties generally state therein that their sole intention is to outline their will by stating “this LOI has no binding effects” or “they are subject to a contract,” most LOIs might probably have legal implications that arise from (i) the intention of the parties, (ii) the laws that governs the LOI, or (iii) a court decision that could impose binding obligations although they were not foreseen by the parties.

In this context, the first question that arises is whether the LOI is really a non-binding document and whether the parties must comply with minimum duties during the pre-contractual stage. Since there is not a uniform way to approach this matter, the parties negotiating a LOI in cross border transactions should acknowledge the degree of enforceability of the LOI according to the applicable law to it.

In Argentina, the Civil and Commercial Code (“C&CC”) expressly states that the LOI is an instrument by which a party, or all the parties, express their consent to negotiate over issues related to a future contract. Under the C&CC the LOI is subject to a restrictive interpretation, and it will have the binding effects of an offer if it fulfills the necessary requirements to be considered as such. Moreover, under Argentine law the parties have the duty to negotiate in good faith (sections 9, 961, and 991 C&CC) as well as the duty to inform, to protect confidential information, and to cooperate between the parties.

On the other hand, in common law jurisdictions the issue of the binding effect of the LOI is complex, and in the case of the U.S., there is no uniformity among States. In principle, the LOI is an agreement to enter into negotiations with no binding obligations arising out of it, however, depending on the jurisdiction, the courts may determine that the parties are bound by their terms by looking to the language of the LOI or to the conduct of the parties.

Regarding additional duties imposed to the parties that were not expressly agreed, the Uniform Commercial Code (“UCC”) and the Restatement (Second) of the Law of Contracts state that the duty to negotiate in good faith only applies in the contractual stage and the parties could waive it. However, U.S. case law shows that the different States have yet to reach a uniform ground regarding the enforceability of the duty to negotiate in good faith. Some states recognize this duty, such as Pennsylvania (see Bennet and Chanel Home Centers Div.), Delaware (see SIGA Technologies), and New York (See Vacold LLC); others do not.

Having said this, the binding effects of the LOI will be determined on a case-by-case basis and it is likely that litigious matters related to it may appear. In this context, the second question that arises is whether an arbitration clause included in the LOI is enforceable. Fouchard, Gaillard, and Goldman explain that an international arbitration agreement is an agreement in which two or more parties agree that a dispute which has arisen, or which may arise between them, and which has an international character, shall be resolved by one or more arbitrators. Shortly, the parties contractually agree to submit the dispute or the future disputes to an arbitral tribunal excluding the state courts jurisdiction.

The enforceability of the arbitration clause will depend on its validity as analyzed under the applicable rules. According to the 1958 New York Convention, the validity of the agreement will be analyzed under the law to which the parties have subjected it or, failing any indication thereon, under the law of the country where the award was made (Article V.1.a).

In the event that the arbitration agreement is governed by Argentine law, the C&CC will govern its formalities and substance. Section 1650 of the C&CC states that the arbitration agreement should be in writing and consented by all the parties. It could be included in a contract, in an independent agreement, in a bylaw, or in a rule of procedure.

Hence, under Argentine law, an arbitration clause included in an LOI will be enforceable, provided that all the parties consent to it. In the event there is a unilateral LOI, the other party will have to unconditionally accept the terms of the LOI including the arbitration clause. In the U.S., the situation will be similar. Notwithstanding the non-binding nature, we must keep in mind that the arbitration clause inserted is severable from the underlying contract or document in which it is contained. Therefore, a dispute under the LOI containing an arbitration clause should be resolved by arbitration.

Drafting arbitration clauses in an LOI

It is important to bear in mind that if the parties decide to include an arbitration clause in their LOI, the drafting will play an important role. Poorly drafted clauses may be unenforceable or cause unnecessary delays. That is why parties may want to analyze the type of clause they will insert, and it will depend, among other things, on the type of binding provisions agreed to in the LOI, the amount of money involved, the structure of the transaction, and the stage of the pre-closing phase in which the clause will have effects.

There are many elements to consider when drafting the clause (see the IBA Guidelines for drafting arbitration clauses). For a clause to be inserted in an LOI, the following elements should at least be considered, since at this stage of the M&A the parties might not want to spend a lot of time and money in the dispute or might want to reconduct their relationship.

First, the expedited procedure provided in ICC rules, as well as in other institutions such as SIACHKIACSCC is a good option to expedite the resolution of the dispute and reduce costs. A fast resolution could help the parties to reconduct negotiations. Also, this procedure will be effective when the transaction involves a small amount of money, or if that is not case, when there are not many and fundamental binding provisions in the LOI.

Second, a multi-tiered clause is also another good element to include providing for mediation, negotiation or other form of alternative dispute resolution, before resorting to arbitration. This will give the parties an opportunity to settle their claims in a less “litigious” environment and reconduct their transaction.

Third, the scope of the arbitration clause should not be limited, unless there are very good reasons to do it. Since it is hard to foresee all the types of disputes that can arise at the negotiation phase of M&As, it is better to keep it simple and broad. As stated in the IBA Guidelines, less inclusive language invites arguments about whether a given dispute is subject to arbitration.

Conclusion

M&A transactions are complex. Although many disputes arise after the closing, they can also come up during the pre-closing phase. The LOI is commonly used by the parties to express their intention, and in principle is a non-binding document. Notwithstanding this, depending on the applicable law and the jurisdiction, it is likely that provisions will be considered as binding. In this sense, resorting to arbitration to solve the dispute is a possibility and a good option. However, the parties must be careful in the drafting in order to adequate the dispute provisions to the structure of the transaction and have an effective clause aligned with their intentions.

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

 

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Revisiting the Chagos Decision: Search for a Rationale

Mon, 2017-11-20 06:00

Ritwik Bhattacharya

In 2012, the Permanent Court of Arbitration [“PCA”] in the  Chagos Decision entertained a challenge to an arbitrator’s impartiality in an inter-state arbitration between Mauritius and the United Kingdom (“UK”) (analyzed here) . The PCA had to decide the appropriate standard for impartiality of arbitrators, and in the process, deal with the novel question of whether inter-State arbitration should be considered more like private commercial arbitrations or State-to-State permanent tribunals (like the International Court of Justice (“ICJ”) or the International Tribunal for the Law of the Sea (“ITLOS”)). While it decided in favour of the standard applicable to the latter, this post will examine whether the Tribunal’s decision is supported by a clear rationale.

 

The Two Viewpoints and the Tribunal’s Decision

Mauritius argued that inter-State arbitration should be treated like any other arbitration. Thus, the higher standard of appearance of bias was “applicable to all arbitrations,” and there was “no justification in law or policy for a different or lower standard of arbitral ethics in inter-State arbitrations.” It further argued that inter-State arbitration could not be considered akin to State-to-State permanent tribunals like the ICJ or the ITLOS for three reasons: first, the views of a particular judge carry far lesser weight in the ICJ or the ITLOS as the number of judges is higher; second, judges of the ICJ or the ITLOS are elected as opposed to being appointed in inter-State arbitrations and third, the likelihood of a dispute involving the home state of the elected judge in the ICJ or the ITLOS is very small.

The UK considered any reliance on the law and practice applied in international commercial and investment protection arbitrations to be “misleading” and “wrong” since inter-State arbitration does not involve “repeat arbitral appointments, whether by the same party or by the same law firm; potential for influence where arbitrators may be perceived as worrying about where their next appointment will come; [and] cross-overs, where individuals repeatedly switch between the roles of counsel and arbitrator […]”. It argued that the standard derived from the rules and practice of the ICJ and the ITLOS, which envisages a lower threshold, should be applied.

The Tribunal supported the UK’s viewpoint. In doing so, the Tribunal did not consider that the principles “developed in the context of international commercial arbitration and arbitration regarding investment disputes” had any relevance to the present dispute. To buttress its conclusion, it relied on the UK’s argument regarding inter-State arbitration being an alternative to the ICJ and the ITLOS, stating that “it cannot have been the intention behind that framework that different conditions would apply to the independence and impartiality of adjudicators in the third forum (arbitration under Annex VII) in comparison with the ICJ or ITLOS.”

 

The Search for a Rationale

The Tribunal did not directly address the submissions made by Mauritius and the UK about why inter-State arbitration should be treated like international commercial arbitration/investor-State arbitration, and State-to-State permanent tribunals respectively.

The Tribunal’s only reason was that inter-State arbitration in the instant case was an alternative to the ICJ and the ITLOS, because of which different rules cannot apply to impartiality and independence of arbitrators. First, it is not always necessary that inter-State arbitration is presented as an alternative to the ICJ or the ITLOS. It is possible for inter-State arbitration to exist as a standalone option, say in a Friendship, Commerce and Navigation (“FCN”) Treaty, where this reasoning is not tenable. Second, in any event, it is not necessary that alternative options for dispute resolution must be subject to the same procedural constraints. This was explicitly pointed out by Mauritius when it said that the mere availability of three alternative judicial bodies “doesn’t meld them or merge them in their procedures. There is no common set of procedural rules for bodies exercising jurisdiction under Part XV. […] To take an example, there is no provision for intervention before Annex VII Tribunals. There are different provisions for intervention before the court and before ITLOS.”

It is also not clear why the standard in international commercial arbitration/investor-State arbitration is irrelevant in the present case. In paragraph 151, the Tribunal recognized that the standard for impartiality in the PCA’s Optional Rules, while not adopted by the parties to the dispute, “has been adopted in a number of PCA administered arbitrations” and “can be considered to form part of the practice of inter-State arbitral tribunals.”  The explanatory notes to the text of the PCA’s Optional Rules clearly state that they “are based on the UNCITRAL Arbitration Rules,” with certain modifications. The articles to which such modifications have been made are enumerated in the notes to the text at page 64. None of the modifications concern the standard of impartiality under Rule 10, PCA’s Optional Rules. Therefore, it can be inferred that decisions applying UNCITRAL rules and supporting the appearance of bias standard, would arguably be relevant to the standard of impartiality, even in inter-state arbitrations.

Lacking a clear rationale by the Tribunal for its decision, some authors have speculated what the rationale behind this decision could be. Annalise Nelson has stated that a potential rationale could be the “diplomatic culture or sensitivity that pervades inter-State disputes and sets them apart from other forms of arbitration.” This, combined with the low frequency of inter-State arbitrations, means that “arbitrators are therefore less likely to focus their careers and income streams around securing future state-to-state arbitration appointments than other kinds of arbitration.” That, by itself, is not a very strong reason since it does not explain why the perception of the integrity of the dispute resolution process is any less important in an inter-state arbitration. Furthermore, it could be argued that an arbitrator could potentially be seen as favouring a State in inter-State arbitrations, so as to procure future appointments in other kinds of arbitrations.

 

A Question of Practicality

Some authors have focussed on more practical considerations that may have played on the mind of the Tribunal. Chiara Giorgetti posits that the decision to employ a low threshold for impartiality was taken deliberately to disincentivise challenges to arbitrators, which have become common and unnecessarily increase the cost and length of arbitration proceedings. Annalise Nelson argues that if a stringent threshold is applied, it will make it difficult to find arbitrators, as most arbitrators who are appointed in inter-state arbitrations tend to come from “a tiny pool of candidates.” These practical considerations need to be weighed against the strong principle of preserving the integrity of the judicial decision-making process where justice should not only be done but should manifestly and undoubtedly be seen to be done. Further, the practical implications of this decision must also be considered.

Broadly, there are three impacts that flow out of the Chagos Decision. First, while the Tribunal disregarded the appearance of bias standard, it did not provide an alternative standard beyond stating that there must be no prior involvement in the subject matter of the case and there must not be justifiable doubts about the impartiality of the arbitrator. Lack of prior involvement in a subject matter cannot be the only criterion for bias. The “justifiable doubts” standard is an unhelpful truism since it does not provide any guidance as to what conditions can lead to these “justifiable doubts.” Therefore, as one author has noted, “the contours of the applicable standard adopted remain unclear.” Second, challenges to arbitrators will undoubtedly reduce. While this will help in saving time and costs in arbitration, it also means that parties will deter from challenging arbitrators in legitimate cases. In the Chagos Decision, Mauritius was careful to repeatedly emphasise its “respect for the probity and standing of Judge Greenwood.” However, parties must now show that the concerned arbitrator is actually biased, which can prove detrimental from a strategic viewpoint if the challenge fails and arbitrator proceeds to adjudicate the case. Third, a practical consequence peculiar to inter-state arbitration would be the likelihood of state parties considering the arbitration as illegitimate and refusing to accept its consequences, as can be seen in the case of China in the South China Sea. This danger is more aggravated in the context of inter-state arbitral awards since no direct enforcement mechanism exists and this can potentially undermine the faith in inter-state arbitration as a viable means of dispute resolution. For the sake of clarity of the law and viability of inter-state arbitration as a dispute resolution mechanism, it is imperative that appearance of bias threshold be applied even to inter-state arbitrations or in the alternative, compelling reasons be provided for applying a lower threshold.

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A New, BLEU-based Objection to Intra-EU Energy Charter Treaty Claims

Sat, 2017-11-18 23:24

Danilo Ruggero Di Bella

Currently, several dozen arbitral claims have been lodged by investors from an EU Member-State against another EU Member-State based on the Energy Charter Treaty (ECT). These so-called intra-EU ECT-based arbitrations seem to be increasing, despite attempts by the European Commission to halt them. So far, neither the Respondent-States nor the Commission (as amicus curiae) have succeeded in convincing an arbitral tribunal of intra-EU jurisdictional problems with such claims.

This post argues a new potential objection to intra-EU ECT-based claims based on is the parallelism between the ECT and the Belgo-Luxembourg BITs, or in other words, between the superseded European Economic Community (EEC) and the Belgo-Luxembourg Economic Union, coupled with the principle of systematic integration. To understand this comparison, it is first necessary to recall the background of these treaties.

The 1957 Treaty of Rome set forth in article 210 the international legal personality of the EEC and granted the Commission competence to conclude treaties in name of the EEC. In 1991, the Commission signed, on behalf of the EEC (and also the ECSC and the EURATOM), the European Energy Charter – the treaty establishing the ECT’s political foundations – whose signature is a precondition for joining the Energy Charter Conference and acceding to the ECT. In 1993, following the entering into force of the Maastricht Treaty, the European Union (EU) was established and the European Economic Community became the European Community (EC) to reflect its new wider scope of action. Consequently, in 1994 the ECT was signed as a mixed agreement by the Commission on behalf of the back then European Communities – the ECSC, the EURATOM, and the EC – and by the Member States, falling the Energy Charter Conference related areas within the mixed competence. Once the Treaty on the Functioning of the EU (TFEU) entered into force in 2009, the EU replaced and succeeded the EC by amending the EEC Treaty and relabeling it as the TFEU. Nowadays, of the three Communities that signed the ECT in 1994, only EURATOM is still operating and is a Contracting Party to the ECT just as the EU is.1)BALTAG Crina, The Energy Charter Treaty: The Notion of Investor, Kluwer, 2012, p.57-63. jQuery("#footnote_plugin_tooltip_2715_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2715_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); All the way from the drafting of the European Energy Charter to the negotiation of the ECT, the role of the European Commission has been crucial to the ECT’s adoption and entrance into force in 1998. The three European Communities, on one hand, as well as, the EU and EURATOM, on the other, when signed and entered into the ECT, respectively, did so as a Regional Economic Integration Organisation (REIO) pursuant to article 38 of the ECT, which allows REIO to become a Contracting Party to that treaty. Simultaneously, the EU Member-States signed and ratified the ECT (the value of these signatures and ratifications will be put in perspective down below through the lens of the Belgo-Luxembourg BITs).

Let us turn now to the intriguing Belgo-Luxembourg Economic Union (BLEU). The BLEU was constituted in 1922 by the entrance into force of the 1921 Convention establishing an Economic Union between Belgium and Luxembourg. This Convention established a Regional Economic Integration Organisation primarily based on a common external trade-investment policy and customs-excises union – where the territories of the Member-States are to be considered as forming one single territory –, and on a monetary association, too. Overtime the 1921 Convention has been adapted to the new circumstances – such as the founding of the Benelux Economic Union, the EEC and, later, the EU – through Protocols up to the negotiation of a new Convention, which entered into force in 2005. The new Convention confirmed and strengthened the preferential relations between Belgium and Luxembourg within the legal framework of the BLEU2)SOMERS Eduard, Belgium-Luxembourg Economic Union, Max-Planck. jQuery("#footnote_plugin_tooltip_2715_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2715_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This preferential relation is acknowledged by the Benelux and the EU in Article 94 of the Benelux Treaty and Article 350 of the TFEU, respectively. The EU recognizes so much the special bound between Belgium and Luxembourg that at times it considers the Belgo-Luxembourg Economic Union as a single Member-State (e.g., the “whereas (2)” of the EC Regulation No. 2771/1999). As regards the institutions of this Economic Union, they closely recall the structure of the EU itself for their functions as well as their names. The BLEU is, indeed, administered by the Mixed Administrative Commission, that is entrusted with tasks similar to those of the European Commission, being the executive arm of the Economic Union and ensuring on a permanent basis the application of the Convention and a regular liaison between the Governments of the two Member-States. Whereas the Council of the European Union closely resembles the BLEU’s Committee of Ministers, which is regularly summoned to adopt legal instruments, and coordinate common policies, just as the Ministers do in the Council. And just like the EU Commission proposes the legislation to be adopted by the Council of the EU and the EU Parliament as well as supervises its application, the BLEU Commission prepares proposals to be submitted to the Committee of Ministers for decision making, and oversees the implementation of the Convention.

It is noteworthy that, long before the EU, the BLEU has guaranteed nationals of its Member-States – both natural and juridical persons – freedom of movement and establishment, equal treatment in respect of the exercise of professional occupations and salaried employments.

As the similarities highlighted above make clear, although it is well-known that the Benelux is presumably the forerunner of the European Economic Community, the true forerunner of the Benelux (and consequently of the EEC, the EC and the EU) is the Belgo-Luxembourg Economic Union itself.

Investment protection is one of the BLEU’s areas of action, conducted through a peculiar bilateral investment treaty model, that is usually offered to the prospective third High Contracting Party for its acceptance (a third Party with respect to the Union). On behalf of the Economic Union, the BLEU has entered into approximately 100 BITs. Now, these Belgo-Luxembourg BITs concluded by the BLEU share many of features with the ECT concluded by the EU, primarily for two reasons:

1) the EU and the BLEU are both Regional Economic Integration Organizations (undoubtedly, as illustrated above, with a lot in common, as one inspired the other);

2) the way these treaties have been negotiated, signed and ratified by the Parties (as explained below).

Due to the mixed nature of the competences necessary to authorize its entrance into force, the ECT was negotiated, signed and ratified by the EU Commission on behalf of the EU, by each EU Member-State and, of course, by third State Parties. Curiously enough, BLEU BITs are no exception to it, and not only vis-a-vis Luxembourg. Again, because of the very same reason (the mixed nature of the competences necessary to authorize their entrance into force), BLEU BITs are signed not only by the representative of the Economic Union, but also by representatives of Luxembourg, Belgium, and by representatives of each Belgian region. The fact that a region of Belgium signs a BIT does not give that region an independent legal standing under that treaty, of course. After the signature, Luxembourg and Belgium are each responsible to ratify the BIT to ensure its implementation. Hence, in our parallelism, the signature of the representative of the Economic Union is comparable to the EU Commission’s signature in the ECT, whereas the signature of the representative either of Walloon Region or Luxembourg is equivalent to the signature of Italy or Spain representatives on the ECT.

So, if it is clear that a Belgian investor cannot rely on a BLEU BIT to file an arbitration against Luxembourg, why is it not equally clear that a French investor may not resort to the ECT to launch an arbitration against Italy? It flows from the above mentioned analogy that this ought not to happen. After all the BLEU has significantly influenced the shape of the EU and its activities, so why should this influence have been absent during the drafting and signing of the ECT? That’s why it is sensible to suggest that the ECT should be read in the light of the older and consolidated BLEU BITs tradition to prevent intra-EU arbitrations just like intra-BLEU arbitrations.

Avoiding inconsistencies in international law – resulting from allowing intra-EU arbitrations while denying intra-BLEU arbitrations – calls for cross-applying the principle of systematic integration to Economic Integration Organizations in investment arbitrations. Tribunals have frequently construed the particular international investment agreement (IIA) at issue based on other IIAs in a manner that brings coherence to the system of investment law. The weight accorded to other treaties in understanding the applicable IIA may be seen as proportionate with the degree of similarity among equivalent texts. Accordingly, given the high affinity between the ECT and the BLEU-BITs, when interpreting the status of the EU or its Member-States under the ECT, BLEU BITs may offer interpretative guidance as to the legal standing of an Economic Integration and its Contracting Parties to an IIA by contextualizing and redefining their peculiar contours.

References   [ + ]

1. ↑ BALTAG Crina, The Energy Charter Treaty: The Notion of Investor, Kluwer, 2012, p.57-63. 2. ↑ SOMERS Eduard, Belgium-Luxembourg Economic Union, Max-Planck. 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: Compendium of International Commercial Arbitration Forms
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Access to Justice: Rebalancing the Third-Party Funding Equilibrium in Investment Treaty Arbitration

Fri, 2017-11-17 22:02

Ylli Dautaj and Bruno Gustafsson

Third-party funding remains a hot topic in arbitration, which is understandable considering its complexity and that its accompanying issues often have major implications for arbitral procedure. This fall, the ICCA-Queen Mary Task Force on third-party funding in international arbitration released its “draft,” touching upon a number of contemporary issues vis-á-vis third-party funding, all of which ought to be of high interest to practitioners, scholars, and students alike.

The third-party funding market exceeds billions of dollars and various actors are involved by way of funding, getting funded, and as brokers/intermediaries.1)Chapter 3: “Litigation Funding in International Arbitration”, in Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 75-76. jQuery("#footnote_plugin_tooltip_9570_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9570_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); One of the primary reasons for seeking third-party funding is the lack of “access to justice.” In the context of third-party funding, “access to justice” refers to all tools and resources that implicate a party’s opportunity to defend or enforce a legal right. In other words, lack of “access to justice” can be roughly equated to a lack of resources to litigate properly. Notwithstanding, this reason alone is changing and third-party funding is more and more being used by claimants to allocate risks and costs while continuing its business operations with a steady cash flow. However, with competition being the hallmark of the western economy, businesses being able to compete while simultaneously litigating for justice is ipso facto the essence of real “access to justice.”

In “Gamblers, Loan Sharks & Third-Party Funders“, Catherine Rogers wrote that investment arbitration has attracted funders’ attention due to massive potential recoveries. However, she raised an important point in that critics are concerned that ”significant new funding in investment arbitration cases will aggravate an already exploding caseload that creates a disproportionate burden on States.” Although funders can, in theory, fund the respondent party, too, there is no real incentive to do so and ”[f]or this reason, the arrival of third-party funders may well alter the entire landscape by significantly increasing the number of claims, as investors whose claims were considered too costly to pursue are able to obtain financing.” Furthermore, she wrote that ”[t]he resulting concern is that third-party funding will further distort perceived disparities in investment arbitration that favor investors over States.” It can be said that Catherine was right in her analysis and most probably the near future will shed further light on the otherwise bullet-proof analysis.

This view makes it easy to overlook certain important features vis-á-vis access to justice, e.g. that some states might also lack sufficient expertise and resources to litigate properly, and thus “access justice.” Two important issues come to mind. First, that the overwhelming majority of funding goes – either directly or indirectly – to the claimant, and perhaps reasonably so. Second, the decision of whether to fund or not is primarily based on the merits of the case, the benefit-cost analysis, and the enforceability of the award. It is in light of this latter calculus that a third-party funder, privileged with the expertise of well-known arbitration scholars and practitioners, could potentially weigh in a less developed country’s lack of resources to prepare and litigate a case as a factor in its analysis. The calculus might culminate in, for example, that a less developed state would be more amenable to reach a quick settlement for an otherwise vexatious or frivolous claim.

On September 6, 2017, a new “investment support programme for the least developed countries” was released. The program is designed to provide a number of less developed countries (and there “under-resourced” law firms) with, among other things, advice and support in investment-related negotiations and to assist in dispute settlement, such as international arbitration.

It is true that third-party funding enhances the access to justice and that it is a good thing for the equality of arms and for the overreaching principles of procedural fairness and justice. However, less developed countries, too, have shortcomings vis-á-vis realizing real access to justice. If third-party funders do factor in the less developed states’ resources, experience, and knowledge in its calculus (which is likely), it is with anticipation that we wait to see whether the investment support programme (or similar projects) will be a factor of consideration in the third-party funding calculus. If it does become so, it is a welcome feature in rebalancing the contemporary one-sided regime of third-party funding in investment treaty arbitration.

References   [ + ]

1. ↑ Chapter 3: “Litigation Funding in International Arbitration”, in Jonas von Goeler, Third-Party Funding in International Arbitration and its Impact on Procedure, International Arbitration Law Library, Volume 35 (Kluwer Law International; 2016) p. 75-76. 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: Compendium of International Commercial Arbitration Forms
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A Possible Objection, Not Yet Raised, to Intra-EU ECT Claims before the ICSID: Terra Raf Trans Traiding Ltd. v. Kazakhstan Versus Eiser v. Spain

Thu, 2017-11-16 22:54

Danilo Ruggero Di Bella

In an interesting post published on Kluwer Arbitration Blog by Eric Leikin and Martina Magnarelli, it is described in a very comprehensive manner the state of play as regards the soundness of Respondents and European Commission’s arguments refusing the jurisdiction of arbitral tribunals in intra-EU ECT claims.

Among these arguments (all rejected by the tribunal on duty), the Respondent in Eiser v. Spain put forward the following line of reasoning: any Investor coming from an EU Member State is divested of its national character and becomes predominantly an Investor of the EU, because its home country is also an EU Member State and subject to EU law, consequently, the EU Investor and the Respondent, an EU State, are found in the same “Area” – the area of the EU – so that the diversity required by Article 26(1) and (2) does not occur.1)Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, para. 195. jQuery("#footnote_plugin_tooltip_3117_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The tribunal in response to this argument replied that there can be no “EU Investors” under Article 1(7)(a)(ii) of the ECT, because there is no trans-national body of European law regulating the organization of business units, which remain subject to member countries’ domestic law.2)Eiser v. Spain, para. 196. jQuery("#footnote_plugin_tooltip_3117_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Now, a counter-argument to the finding of this tribunal may come – funnily enough – not from an intra-EU ECT-based precedent, but from a non-intra-EU ECT-based one, namely an ECT-based arbitration where a Gibraltarian company faced (together with Romanian and Moldavian investors) the Republic of Kazakhstan.

In that case the exception raised by the Respondent was that the ECT did not apply to Gibraltar, because even if the UK – when it signed the treaty on 17 December 1994 – made a declaration to the effect that provisional application under Article 45(1) of the ECT shall extend to Gibraltar, the UK did not reiterate the inclusion of Gibraltar as to the territorial scope of the ECT, when it ratified the ECT on 13 December 1996. Consequently, according to Kazakhstan, the entry into force of the ECT put an end to its provisional application in respect of the UK and its territories, therefore, Gibraltar was to be found cut out of its application (provisional and definitive), and, accordingly, the Gibraltar-based company could not have relied on the ECT as an UK investor could have.3)Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan (SCC Case No. 116/2010), para. 734. jQuery("#footnote_plugin_tooltip_3117_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, in that arbitration the tribunal came to the conclusion that it did not have to rule on whether (as the Respondent argued) the provisional application of the ECT were ceased or not in respect of Gibraltar, because the tribunal found that “the ECT applies to Gibraltar on the basis that Gibraltar is a part of the European Community, which is itself party to the ECT.” Indeed, pursuant to Art. 52 of the Treaty on the European Union, Art. 355 of the Treaty on the Functioning of the European Union, and declaration number 55 to the Treaty of Lisbon made jointly by the United Kingdom and the Kingdom of Spain, Gibraltar is included in the EU territory. Therefore, the Tribunal concluded that the Gibraltar-based company qualifies as an [EU] investor under the ECT.4) Stati v. Kazakhstan, SCC Case No. V (116/2010), paras 746-747. jQuery("#footnote_plugin_tooltip_3117_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

So, if in Terra Raf Trans Traiding Ltd v. Kazakhstan the tribunal applied the ECT to Gibraltar, not because it is a UK-dependent territory, but because it is a part of the European Union’s territory, then a contrario sensu the ECT shall not apply to an EU investor coming from a EU territory (like for example, Germany or Luxemburg) and investing in the same EU territory (like Spain or Italy), as this investment cannot be qualified as foreigner. This is particularly true in the context of the ICSID Convention because of its Article 25(2)(a). But before delving into the exception to the ICSID jurisdiction ratione personae drawn from Terra Raf Trans Traiding Ltd v. Kazakhstan and based on Article 25 of the ICSID Convention, few premises are necessary:

1) according to Article 20 of the Treaty on the Functioning of the EU (TFEU), every person holding the nationality of a Member State shall be a citizen of the Union. Such citizenship of the Union is additional to and does not replace national citizenship,5)For a deeper understanding of the EU related implications, please see Crina Baltag, The Energy Charter Treaty: The Notion of Investor, Kluwer Law International, 2012, p.57-67 jQuery("#footnote_plugin_tooltip_3117_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and there is no procedure in place to renounce only the EU citizenship without also relinquishing the national citizenship of a Member State (which means no “Pey Casado-like trick” is allowed to the extent that you cannot renounce your national citizenship just to file an investment arbitration against your former country). For the purpose of international law, Article 20 of the TFEU may well be regarded as the municipal law pursuant to which a natural person’s nationality is to be determined by the arbitral tribunal seized of the matter (according to its discretion, of course).6)Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award 2004, § 55 and 84. jQuery("#footnote_plugin_tooltip_3117_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });;

2) in a declaration regarding article 25 of the ECT dealing with the Economic Integration Agreements, the European Communities and their Member States recalled that companies or firms formed in accordance with the law of a Member State shall be treated in the same way as natural persons who are nationals of Member States. Therefore, also companies are to be deemed holding the citizenship of the European Union, being treated as natural persons for the purposes of the ECT, as they enjoy the right of establishment pursuant to Part Three, Title III, Chapter 2 of the Treaty establishing the European Community;

3) under Article 25(2)(a) of the ICSID any natural person with double nationality is excluded from bringing a claim under the Convention if that person had also the nationality of the Contracting State party to the dispute.

From the above it follows that every EU claimant has a double nationality (its Member State’s and European’s nationality), every EU claimant is equated – under the ECT – with a natural person (regardless of being a juridical person), namely, a natural person with dual nationality, who therefore cannot bring a claim before the ICSID – because of Article 25(2)(a) – against either its country of origin or the UE and/or any territorial constituent part thereof (like Italy or Germany).

Whenever the Claimant is not a foreign investor to the Area where it invested, being the investor a EU national and belonging that Area to the EU territories, arguably, an ICSID Tribunal lacks jurisdiction ratione personae. Consequently, each and every arbitration pending before the ICSID against the Kingdom of Spain and the Italian Republic, launched by an EU investor relying on the ECT, might be dismissed on this jurisdictional dual-national-exclusion exception, which is, as explained above, based on a salient ECT-based precedent (Terra Raf Trans Traiding Ltd.et alius v. Kazakhstan), the ICSID Convention (Article 25.2.a), and the ECT itself (to be precise, the declaration with respect to Article 25 and Article 26 of the ECT).

Despite there is no obligation of stare decisis incumbent on arbitral tribunals, the Terra Raf Trans Traiding case is relevant in the current (as well as future) ICSID arbitrations because investment arbitration tribunals have repetitively relied upon previous decisions and awards in their findings, thus establishing a de facto case-law and creating a coherent corpus of investment law.7)See e.g. Reinisch August, The Role of Precedent in ICSID Arbitration, Austrian Arbitration Yearbook 495-510 (2008). jQuery("#footnote_plugin_tooltip_3117_7").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Although the Terra Raf Trans Traiding case is not an ICSID case (since it was administered under the auspices of the SCC), its persuasive impact on the current arbitrations pending before the ICSID is not weakened at all. Indeed, what tribunals tend to look at to gauge the relevance of a precedent is the basis of jurisdiction (rather than the procedural rules) of the previous tribunal that rendered it, since each BIT or MIT is to be interpreted autonomously8)AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 28. jQuery("#footnote_plugin_tooltip_3117_8").tooltip({ tip: "#footnote_plugin_tooltip_text_3117_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. And in the Terra Raf Trans Traiding case as well as the current ICSID cases pending against Spain and Italy, the basis of jurisdiction is the same MIT, the Energy Charter Treaty. That is why, if the Respondents in those proceedings rely on this SCC ECT-based precedent to object to the jurisdiction of those ICSID tribunals, those tribunals will have two soft-obligations:

– Firstly, to take into consideration that precedent;
– Secondly, in case those arbitrators were of a different opinion, they should expressly motivate the reasons of their departure from that precedent.

The views expressed in this article are those of the author and DO represent those of the law firm Bottega DI BELLA.

References   [ + ]

1. ↑ Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, para. 195. 2. ↑ Eiser v. Spain, para. 196. 3. ↑ Ascom Group S.A., Anatolie Stati, Gabriel Stati and Terra Raf Trans Traiding Ltd. v. Republic of Kazakhstan (SCC Case No. 116/2010), para. 734. 4. ↑ Stati v. Kazakhstan, SCC Case No. V (116/2010), paras 746-747. 5. ↑ For a deeper understanding of the EU related implications, please see Crina Baltag, The Energy Charter Treaty: The Notion of Investor, Kluwer Law International, 2012, p.57-67 6. ↑ Hussein Nuaman Soufraki v. The United Arab Emirates, ICSID Case No. ARB/02/7, Award 2004, § 55 and 84. 7. ↑ See e.g. Reinisch August, The Role of Precedent in ICSID Arbitration, Austrian Arbitration Yearbook 495-510 (2008). 8. ↑ AES Corporation v. The Argentine Republic, ICSID Case No. ARB/02/17, Decision on Jurisdiction, 26 April 2005, para. 28. 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: Compendium of International Commercial Arbitration Forms
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International Arbitration of Business and Human Rights: A Step Forward

Thu, 2017-11-16 02:25

Claes Cronstedt, Jan Eijsbouts, Adrienne Margolis, Steven Ratner, Martijn Scheltema and Robert C. Thompson

International arbitration is taking a giant step forward as part of the global movement to protect human rights. A drafting team, with expertise in international investment, arbitration, human rights, supply chains and other issues, is being assembled to prepare a set of rules. The project is the culmination of several years of work exploring the use of arbitration to resolve business and human rights disputes. It is being funded by the City of The Hague and supported by the Netherlands Foreign Ministry. Bruno Simma, former judge of the International Court of Justice and a respected international arbitrator, will chair the drafting team. A wide range of stakeholders will provide input through a network of “sounding boards”. Once drafted, the rules will be offered to the Permanent Court of Arbitration and other international arbitration institutions. The new rules could also be used in arbitration proceedings that the parties manage themselves on an ad hoc basis.

Arbitration – Filling a Gap in Victim Protection

Current remedies for business-related human rights abuses such as trafficking in persons, child labor, violence against labor protestors, unsafe and unhealthy working conditions, land seizures, and multiple others are patchy, unpredictable, often ineffective and fragile. This fails both victims, who have little access to justice, and businesses, which often operate in environments of legal uncertainty and where participants are not competing on a level playing field.

The Working Group on International Arbitration of Business and Human Rights has undertaken more than three years of consultations with stakeholders. It has concluded that international arbitration has the potential to handle human rights abuses in many regions where courts and other mechanisms have failed. Arbitration may also be an attractive alternative to court litigation even where competent courts are available, offering speedier procedure and awards that are potentially enforceable throughout the world under the New York Convention.

Multinational businesses face growing pressure to ensure that they and their business partners are not involved in human rights abuse. A number of highly publicized cases have fueled public indignation, prompting concern among businesses that being tainted with human rights abuse can harm their reputation and weaken their social license to operate. International initiatives such as the United Nations Guiding Principles on Business and Human Rights are influencing business policy. The Guiding Principles’ third pillar stresses the necessity of a remedy for victims of corporate human rights abuses, and human rights arbitration represents one form of remedy. In addition, the World Bank’s Performance Standards and the Equator Principles are providing human rights guidelines for lenders and investors. National legislation is contributing, for example the recent UK Modern Slavery Act and the new French due diligence law.

Advantages of Human Rights Arbitration for Business and Victims

The Working Group has frequently been asked why businesses would agree to arbitrate human rights disputes. There are many reasons. Arbitration provides a forum in which businesses and those who accuse them of human rights abuses can impartially resolve their disputes no matter where the abuses might occur. When a corporation’s reputation is questioned by NGO campaigns, management might prefer speedy resolution of a dispute, rather than lengthy litigation in court. Instead of submitting cases to judges chosen by “the luck of the draw,” parties would choose neutral arbitrators who have business and human rights expertise. An expeditious and fair hearing would limit reputational damage. Proceedings can be less adversarial than in court litigation, preserving working relationships.

A business could also choose arbitration to prevent future human rights abuse in its supply chains by inserting human rights commitments and arbitration clauses into its contracts. These contracts could contain perpetual clauses that require each member of a supply chain, in turn, to insert such clauses in contracts with its own suppliers. An entire supply chain could be covered by an arbitration arrangement that allows the originating business to instigate arbitration against any supplier in the chain that breaches the commitment to observe human rights. This would not be expanding its own liability, only exposing any breaching supplier to relatively prompt enforcement.

Businesses that develop projects such as airports, highways, plantations, and mines could place arbitration clauses, human rights commitment clauses and perpetual clauses in their development contracts. This would commit those working on the project to avoid human rights abuses and would be directly enforceable by the multinational, since the actors violating human rights would be subject to arbitration.

Multinationals could increase the deterrent effects of their supply chain and development contracts by enabling victims of abuse to invoke the arbitration clauses, thus becoming third party beneficiaries. Giving rights to victims can be a highly effective compliance tool, as shown in environmental programs where statutes provide for so-called “citizen suits.” Victims have historically shown great interest in vindicating their own rights, as numerous cases brought under domestic tort law in various jurisdictions indicate. A supplier or subcontractor is likely to think twice before committing human rights abuse when it faces binding arbitration instigated by the multinational company, the victims, or both.

The victims’ side has much to gain by choosing to arbitrate. The lack of available courts in many regions of the world and jurisdictional bars in multinationals’ home states mean that arbitration could be the sole source of justice for most victims. Hence, any development that offers arbitration, such as business contracts containing third party rights, would be welcomed.

The Need for New Arbitration Rules and Model Arbitration Clauses

If international arbitration would be acceptable to both the business side and the victims’ side, why are revised arbitration rules needed? The UNCITRAL and other commercial arbitration rules are not flexible enough to accommodate human rights disputes. Human rights arbitration is fundamentally different from, for example, investor-state arbitration and has special requirements that the drafting team will need to examine.

The first requirement is that the arbitrators who handle human rights disputes will need to have expertise that is currently lacking. Human rights NGOs have made clear to the Working Group that, in their view, commercial arbitrators have neither the expertise nor the sensitivity to human rights matters to enable victims to feel comfortable coming before an arbitral tribunal. Hence, the Working Group is recommending that arbitration institutions adopting the new rules should create special rosters of human rights arbitrators, as the Permanent Court of Arbitration has established a special roster of arbitrators for environmental matters. The new rules should also allow the parties, especially the victims’ side, to appoint qualified arbitrators who are not on the official rosters.

The second requirement is that the arbitration proceedings are transparent. Hearings should not be held in secret, and awards should not be unpublicised. Human rights NGOs and many others believe that human rights issues are of public concern. Transparency will also allow the public to hold arbitrators accountable for making fair and impartial rulings.

The third requirement relates to the participation of victims and their representatives in human rights proceedings. In many cases of abuse, multiple victims will be presented. Special provisions are needed to qualify such victims as legitimate claimants and allow for joinder of their claims. Additionally, particularly in countries with repressive governments, witness protection arrangements will be required. The arbitrators may need special powers to allocate costs and legal fees to winning victims, in order to overcome the “inequality of arms” that victims face when litigating with well-funded businesses. Finally, human rights awards may require long term monitoring and supervision, along the lines of the environmental rules adopted by the Permanent Court of Arbitration.

In addition to new rules, standardized or model contract language is needed so that businesses can implement the program with suppliers and subcontractors. The Working Group is inviting national and international bar associations to collaborate to draft human rights commitment clauses, escalation clauses and perpetual clauses.

Next steps

This arbitration proposal is in the early stages of development. The Working Group envisions that once the new rules are in place, business leaders will begin to support them. Others will follow. Lenders, investors, and government agencies could also play a role in encouraging the use of international arbitration to resolve business and human rights disputes.

For additional information, including the composition and background of the Working Group, see here.

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Arbitration in the CIS Region: from Soviet Roots to Modern Arbitration Laws

Tue, 2017-11-14 16:09

Yarik Kryvoi & Kaj Hober

Over the last years, European arbitration institutions show the increasing number of arbitration cases involving Russian and other former Soviet Union countries, most of which are members of the Commonwealth of Independent States (CIS).

Russian parties were second only to local Swedish companies appearing before the Arbitration Institute of the Stockholm Chamber of Commerce (SCC). In addition, the majority of investor-state disputes at the SCC concerned CIS countries.


 
Figure 1. Cases Involving CIS Related Parties on Major Arbitration Institutions

Approximately a third of the London Court of International Arbitration (LCIA) cases involve either a Russian/CIS party or a party ultimately controlled by Russian/CIS entity. Most these cases are governed not by Russian law, but by English law with the choice of London as the seat of arbitration and appointment of English arbitrators. Moreover, CIS businesses often operate via foreign registered companies, which make the real number of Russia-related disputes even higher.

Although the countries of the former Soviet Union are not perceived as arbitration-friendly because of the weak rule of law, many countries in the region have recently modernised their legislation to become more supportive of international arbitration. Arbitration institutions based in the CIS region consider significantly more cases compared to institutions based abroad.

 

Unusual aspects of international arbitration in the CIS region

Legal systems of the countries of the CIS region share the same roots in the Soviet legal system and several peculiarities, compared to arbitration practices in the West. Unusual aspects of international arbitration in the region include the cautious approach of courts to optional arbitration clauses (which give more procedural options to one party compared to the other).

Another unusual aspect is the possibility under Russian civil law, for a shareholder or a public prosecutor in some cases to apply to a court to invalidate the entire contract containing an arbitration clause, even though they are not parties to the contract. Law of several other CIS countries contain similar provisions.

A distinct characteristic of the CIS arbitration market is that international law firms, rather than domestic firms, often represent parties in international arbitration, usually in close cooperation with local firms.  However, this is not usually the case for disputes considered in institutions located in the CIS region. Several domestic CIS firms also successfully represent parties in large cases in the region and elsewhere.

Other common procedural features of the CIS arbitration include such measures as reducing the number of the parties’ submissions, full payment of arbitration costs by the claimant, squeezing proceedings into one hearing limited by time, and resolving disputes mainly based on documentary evidence.

CIS-related disputes are also known for the use of the so-called guerrilla tactics, meaning that the parities ‘will try to exploit the procedural rules for their own advantage, seeing to delay the hearing and (if they get any opportunity) ultimately to derail the arbitration so that it becomes abortive or ineffective’.

The legislation of the CIS countries does not give a clear definition of public policy, in most cases referring just to foundations of law and order of the state, or the basis of the rule of law. This uncertainty gives the courts discretional powers to interpret this concept, and sometimes public policy is interpreted in a very broad manner in order not to enforce awards rendered against state-controlled entities.

Although foreign arbitration users might expect that public policy can be broadly interpreted in the region, in practice most CIS countries rarely set aside or refuse to enforce awards on the basis of expansive interpretation of public policy.

 

Investor-State disputes involving CIS States

After the Soviet Union disintegrated in 1991, its successor republics urgently sought to attract foreign investors to support the recovery of their economies. Former Soviet states started to conclude bilateral treaties to facilitate cooperation on legal matters within the post-Soviet space. The peak of concluding international treaties concluded by CIS states was in early 1990s.

The largest number was concluded by Russia, followed by Ukraine and Belarus. Kazakhstan, Uzbekistan and Moldova each concluded over forty BITs. Tajikistan and Turkmenistan tended to conclude less treaties. In addition, most CIS States are contracting parties to the Energy Charter Treaty (ECT).

 

Figure 2. Total Number of BITs signed by CIS States

Overall, the countries in the region have concluded more than 550 investment treaties, including BITs, free trade agreements, and other treaties containing investment-related provisions. Typically these treaties provide more than one option for arbitration, including resort not only to ICSID itself, but also to ICSID Additional Facility Rules when the dispute falls outside the scope of the ICSID Convention, the SCC Rules, as well as ad hoc proceedings under the UNCITRAL Rules.

In 2014, Russia, Belarus and Kazakhstan signed and ratified the Treaty on the he Eurasian Economic Union (EAEU). Armenia has acceded to the Treaty, and the relevant accession agreement was ratified by the Parliaments of Armenia and Russia. In 2015, Kyrgyzstan also joined the treaty. The Treaty confirms the creation of an economic union that provides for free movement of goods, services, capital and labour. The Treaty, which entered in force in 2015 also provides a full suite of investment protections, along with a binding investor-state arbitration mechanism.

 

Figure 3. Total number of investor-States disputes against CIS States

An important novelty of the EAEU Treaty is that it extends common dispute resolution provisions (including ICSID and UNCITRAL options) to investors coming from the Member States of the EAEU.

 

Understanding international arbitration in the CIS region

The legal framework of many CIS states has significantly improved in recent years because of reform of several CIS states’ legislation on arbitration. Apart from certain controversial proposals regarding the increased regulation of arbitration, the new legislation is a significant step forward in the development of a more arbitration-friendly climate in the region.

With each State has its own peculiarities, investors and lawyers advising them need to understand the law and practice of arbitration in the CIS countries to minimise their risks.

The recently published Law and Practice of International Arbitration in the CIS Region (Kaj Hober & Yarik Kryvoi eds) offers the first comprehensive overview of commercial and investor-state arbitration of the CIS States, including bigger States such as Russia, Ukraine and Kazakhstan and less known jurisdictions such as Moldova, Turkmenistan and Tajikistan.

 

 

 

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