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The Need for Confidentiality in Arbitration Proceedings Relating to Advisory Matters

Sun, 2016-12-25 22:24

Arnaud de La Cotardière and Claudia Cavicchioli

Linklaters For Linklaters

Advisory works generally include advisory services rendered by investment banks to their clients in two main areas: M&A (mergers and acquisitions) and equity capital markets. In this context, a financial institution will enter into a various number of agreements, either with its clients (mandate, etc.) or with its counterparty to a transaction where the deal is conducted for its own account (share purchase agreement, etc.).

From a theoretical perspective, international arbitration appears particularly suited as a dispute resolution method for M&A and advisory works, notably given the generally complex issues they raise and the frequent need for confidentiality, due to the generally sensitive nature in terms of reputation.

The interviews conducted when drafting the ICC Commission Report on Financial Institutions and International Arbitration (the “Report”) have shown that this theoretical approach is largely adopted by financial institutions, which, nevertheless, still have concerns in submitting disputes to international arbitration. While showing a strong interest in arbitration, many representatives of financial institutions indicated that they rarely have recourse to this kind of dispute resolution mechanism, because of the cost involved (at least in some jurisdictions), the general unfamiliarity with the process and, in particular, a lack of trust in the process, as they perceive arbitration to be a “small club” with only few players.

On the other hand, the interviews supported the idea that one of the key perceived benefits of international arbitration in advisory matters relates to the existence of private hearings and the possibility of confidentiality. The possibility of opting confidentiality is therefore frequently a determining factor in a financial institution’s choice to submit a dispute to arbitration, insofar as it is upheld in the lex arbitri, or imposed under the rules of the arbitration institution, or provided for in the parties’ dispute resolution clause.

A large majority of the interviewees have notably underlined the risk of reputational damage for an advisor, should a negligence or a similar claim be heard publicly. One financial institution also responded that it will be more inclined to submit a dispute to arbitration when the parties believe that the possibility of confidential proceedings may encourage a settlement of the dispute between the parties before the award is rendered. A dispute arising out of the acquisition by a hedge fund of a stake in a company subject to a squeeze-out was cited as an example.

In this respect, the interviewees were well aware that, unless otherwise provided for under the applicable law, arbitration under ICC Rules is private but not expressly confidential. Therefore, when confidentiality is sought, the parties have to agree that the arbitration proceedings must remain confidential, either in their dispute resolution clause, or during the arbitration proceedings themselves, in the terms of reference.

In light of the possibility of opting for confidential proceedings, international arbitration is increasingly a part of the strategic options considered for cross-border banking and financial disputes in advisory matters and an important alternative to domestic litigation.

It is legitimate to ask whether international arbitration will eventually be seen as a viable alternative dispute resolution mechanism for resolving advisory disputes. The elements of response to this question are to be found in the complexity of the issues at stake, which relates to two main factors. First of all, advisory disputes often arise between commercial partners (notably, between financial institutions and their major clients), who will set as one of their main goals the need for maintaining the business relationship. Secondly, the disputes in this field are of a particular nature, as they seldom arise out of a matter of bad faith or wilful misconduct. Most commonly, the dispute will relate to a problem of interpretation of a complex contractual arrangement, whose issue is genuinely uncertain.

In light of these factors of complexity, disputes in advisory matters require a dispute resolution mechanism which helps, as much as possible, to create a smooth procedure. One could claim that arbitration could serve as the perfect alternative forum. Arbitration is indeed flexible by nature. Will it be flexible enough to convince Financial institutions? That will depend on many things, but mainly on the arbitrators and lawyers attitudes!

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What Law Governs the Separability of an Arbitration Agreement?

Sat, 2016-12-24 22:07

Francis Hornyold-Strickland

Wilmer Cutler Pickering Hale and Dorr LLP


It is a key principle in many jurisdictions across the world that arbitration clauses should be separable from the underlying contract in which they are contained. This prevents arbitration clauses from being denuded of their effect, particularly where the contract is void for fraud.

However, not all jurisdictions uphold the separability principle. Therefore, in circumstances where the validity of an arbitration clause is challenged, it becomes necessary to identify the law (or laws) that should govern the question of separability.1)As discussed in this article, in some jurisdictions the question of separability can be governed by any one of a number of relevant laws. jQuery("#footnote_plugin_tooltip_3887_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This article explores the absence of an international consensus on this issue, with reference to the recent English case NIOC v Crescent Petroleum [2016] EWHC 510 (Comm) – an application under sections 67 and 68 of the Arbitration Act 1996 (“the Act”) to set aside an arbitral tribunal’s decision, including its finding that it had jurisdiction.

NIOC v Crescent Petroleum

In NIOC v Crescent Petroleum the contract was governed by Iranian law and provided for ad hoc arbitration. The parties had not stipulated the seat of arbitration, but when Crescent commenced proceedings against the National Iranian Oil Company (“NIOC”) for breach of contract, both parties agreed to seat the arbitration in London.

In the arbitration proceedings, NIOC challenged the jurisdiction of the arbitrators, arguing that: (1) the contract had been procured by corruption and was therefore void; (2) in the absence of an express choice of law governing the arbitration agreement, the arbitration agreement was governed by Iranian law; (3) the separability presumption is not recognized under Iranian law and therefore the arbitration agreement was necessarily void along with the contract; and (4) as a consequence, the arbitrators had no jurisdiction.

The tribunal rejected NIOC’s challenge to jurisdiction and found against NIOC on the merits. NIOC applied to the courts of the seat – to the commercial division of the English High Court – to set the award aside.

In the application to set aside the award, NIOC relied on Sections 2(5) and 4(5) of the English Arbitration Act to argue as follows: (1) applying Section 2(5) where an arbitration is seated outside England & Wales but the law of the arbitration agreement is English, that law governs separability, therefore, separability is implicitly a matter of the substantive law of the arbitration agreement, not of the lex fori2)Section 2(5) of the Act provides that where English law governs the arbitration agreement and where an arbitration is seated outside England & Wales, the separability presumption under Section 7 of the Act applies. Although, by contrast, the arbitration in this instance was seated in England, NIOC submitted that this provision meant that, as a matter of English law, the law of the arbitration agreement governs the question of separability. jQuery("#footnote_plugin_tooltip_3887_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; (2) applying Section 4(5) of the Act the substantive law of the arbitration agreement was the same as that under the contract, namely Iranian law; the law of the seat was not applicable because the seat was only chosen after the arbitration agreement was entered (and the law governing the arbitration agreement should not change); (3) Iranian law does not recognize the separability principle and therefore both the contract and the arbitration agreement were void.

The judge in the case, Justice Burton, rejected these arguments and instead held that Section 2(5) was not applicable since the arbitration was seated in England. Rather, applying Sections 2(1) and 7 of the Act, he held that the arbitration agreement was valid.

Section 2(1) provides that where an arbitration is seated in England, Section 7 of the Act applies. Section 7 articulates the English law position on separability and reads:

“Unless otherwise agreed by the parties, an arbitration agreement which forms or was intended to form part of another agreement (whether or not in writing) shall not be regarded as invalid, non-existent or ineffective because that other agreement is invalid, or did not come into existence or has become ineffective, and it shall for that purpose be treated as a distinct agreement.”

This judgment supports the presumption of separability and is consistent with the pro-arbitration position adopted by English courts, as well as that of numerous other jurisdictions.

The judgment does, however, leave unanswered the issue of the legal basis of the separability presumption, which NIOC sought to exploit. Its arguments raise interesting conflict of laws and/or comity questions regarding the governing law of separability: specifically, it remains unclear whether the law of the main contract, the law of the arbitration agreement, the lex fori, or (where different) the relevant procedural law applies. This is a question for which there is no international consensus.

In certain jurisdictions it may not matter: arbitrators can employ the “validation principle” to give effect to the separability of an arbitration agreement. This principle encourages arbitrators to apply a law connected to the dispute that will give effect to separability and the parties’ agreement to arbitrate.3)Born, Gary. International Commercial Arbitration: Commentary and Materials. Second Edition. Kluwer Law International. 2001, at p.112. See also: Born, Gary. International Arbitration: Law and Practice. Kluwer Law International. 2012, at p. 56; Article 178(2) of the Swiss Law on Private International Law; Santiago de Compostela Resolution of the Institut de Droit International, Article 4, in 4 ICSID Rev. 139, 141 (1989); Award in ICC Case No. 7920 of 1993, XXIII Y.B. Comm. Arb. 80 (1998). jQuery("#footnote_plugin_tooltip_3887_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A number of legal systems adopt the principle, including Switzerland, Spain and Algeria, as well as the Institut de Droit International.4)Born, Gary. International Commercial Arbitration. Second Edition. Kluwer Law International, at §4.04[A][3] and §19.04[A][d]; See also for instance, Hamlyn & Co v Talisker Distillery [1894] AC 202, 215 (House of Lords): “[i]t is more reasonable to hold that the parties contracted with the common intention of giving entire effect to every clause, rather than of mutilating or destroying one of the most important provisions [-] the arbitration clause becomes mere waste paper if it is held that the parties were contracting on the basis of the application of the law of Scotland.”; see also Judgment of 26 August 2008, XXXIV Y.B. Comm. Arb. 404, 405 (Austrian Oberster Gerichtshof) (2009); Award in ICC Case No. 11869, XXXVI Y.B. Comm. Arb. 47, 57 (2011); and Collection of ICC Arbitral Awards 1991-1995 75, 84 (1997). jQuery("#footnote_plugin_tooltip_3887_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The English Arbitration Act implicitly adopts a similar, although slightly different, approach: the Act has no provision that permits arbitrators to choose whichever law would give effect to separability. Instead, the Act provides for English law as the governing law for separability in scenarios where: (1) the arbitration is seated in England & Wales irrespective of the law of the contract and/or arbitration agreement5)If the arbitration is seated in England & Wales, the separability presumption applies, unless the parties have expressly stipulated that separability is to be governed by a different law (see Section 7 of the Act). jQuery("#footnote_plugin_tooltip_3887_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3887_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });; and (2) where the arbitration is seated outside England and Wales but the law governing the arbitration agreement is English. In this regard the Act is more prescriptive than the validation principle but similarly expansive in its reach.

From a pure conflict of laws perspective, there is a clear tension between holding that: (1) the lex fori governs separability for arbitrations seated in England & Wales, but that (2) for arbitrations seated outside England & Wales, the law of the arbitration agreement (if English), governs separability, rather than the lex fori. Nonetheless, both achieve the effect of engaging Section 7 of the Act, which upholds the separability presumption. In this regard, the Act upholds the separability presumption whenever there is a connection to England & Wales or English law.

This might be seen as an implicit adoption of something similar to the validation principle. Both the validation principle and the English Arbitration Act prioritize expanding the reach of the separability presumption, over legislating for a single law that should govern the question. This is despite the fact that the latter would be more consistent with normal conflict of laws principles. However, arguably, when weighing up these competing concerns, given the centrality of party choice to the arbitration process, the absence of clarity over conflict of laws is a sacrifice worth making to maintain the validity of arbitration agreements: without Section 2(5) of the Act, it is quite possible that NIOC’s application would have succeeded and the tribunal’s jurisdiction may have been successfully challenged. That result would have undermined the parties’ express choice to resolve their dispute by arbitration and forced them to litigate, which, in turn, would have damaged the perception of arbitration as an effective, binding mechanism.

Taken in this light, the Act maintains the progressive approach to arbitration that has been a central tenet of English law since the early 2000s. At a time when arbitration is coming under increasing scrutiny, the Act remains a welcome legislative framework to uphold party autonomy and keep the parties to their agreement to arbitrate. In doing so it helps to ensure arbitration’s continued effectiveness as a dispute resolution tool.

References   [ + ]

1. ↑ As discussed in this article, in some jurisdictions the question of separability can be governed by any one of a number of relevant laws. 2. ↑ Section 2(5) of the Act provides that where English law governs the arbitration agreement and where an arbitration is seated outside England & Wales, the separability presumption under Section 7 of the Act applies. Although, by contrast, the arbitration in this instance was seated in England, NIOC submitted that this provision meant that, as a matter of English law, the law of the arbitration agreement governs the question of separability. 3. ↑ Born, Gary. International Commercial Arbitration: Commentary and Materials. Second Edition. Kluwer Law International. 2001, at p.112. See also: Born, Gary. International Arbitration: Law and Practice. Kluwer Law International. 2012, at p. 56; Article 178(2) of the Swiss Law on Private International Law; Santiago de Compostela Resolution of the Institut de Droit International, Article 4, in 4 ICSID Rev. 139, 141 (1989); Award in ICC Case No. 7920 of 1993, XXIII Y.B. Comm. Arb. 80 (1998). 4. ↑ Born, Gary. International Commercial Arbitration. Second Edition. Kluwer Law International, at §4.04[A][3] and §19.04[A][d]; See also for instance, Hamlyn & Co v Talisker Distillery [1894] AC 202, 215 (House of Lords): “[i]t is more reasonable to hold that the parties contracted with the common intention of giving entire effect to every clause, rather than of mutilating or destroying one of the most important provisions [-] the arbitration clause becomes mere waste paper if it is held that the parties were contracting on the basis of the application of the law of Scotland.”; see also Judgment of 26 August 2008, XXXIV Y.B. Comm. Arb. 404, 405 (Austrian Oberster Gerichtshof) (2009); Award in ICC Case No. 11869, XXXVI Y.B. Comm. Arb. 47, 57 (2011); and Collection of ICC Arbitral Awards 1991-1995 75, 84 (1997). 5. ↑ If the arbitration is seated in England & Wales, the separability presumption applies, unless the parties have expressly stipulated that separability is to be governed by a different law (see Section 7 of the Act). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Austrian Supreme Court Establishes New Standards as Regards the Decisive Underlying Reasoning of Arbitral Awards

Fri, 2016-12-23 22:49

Anne-Karin Grill and Sebastian Lukic

Schoenherr For Schoenherr

The decisive underlying reasoning (motifs, Begründung) is, without doubt, an essential part of any arbitral award and as such bears the potential of frustrating parties and arbitrators alike. On the one hand, elaborate reasoning in arbitral awards more often than not comes at the price of long waiting periods for the issuance of the awards, and periods of meticulous drafting on the part of the arbitrator(s). On the other hand, a lack of elaborate reasoning may likewise be a headache, since it exposes the arbitral award to setting aside.

From a practitioner’s point of view, how do you reconcile the extremes? When can the decisive underlying reasoning of an arbitral award be considered sufficient against the background of possible setting aside proceedings? Clearly, these are questions that must be determined on a case-by-case basis. Further, any assessment will necessarily be informed by the relevant lex arbitri.

As for arbitral awards issued by tribunals seated in Austria, a key provision in this respect is Section 611(2) para 5 of the Austrian Code of Civil Procedure (“ACCP”). This provision states that arbitral awards shall be set aside if the arbitral proceedings were conducted in a manner that is in conflict with the fundamental values of the Austrian legal system (procedural ordre public). Prevailing scholarly opinion argues that procedural ordre public may only be invoked where severe breaches of procedural law have materialised.

Up until recently, scholarly opinion in Austria also supported the finding of the Austrian Supreme Court that the failure to include any decisive reasoning in the arbitral award whatsoever or to include only insufficient reasoning, did not constitute a violation of Austrian procedural ordre public. The most recent judgment on the subject matter issued by the Austrian Supreme Court stems from September 2016 and marks an important turnaround regarding the relevance of the decisive reasoning underlying arbitral awards (OGH 28.09.2016, 18 OCg 3/16 i). In the case at hand, the Austrian Supreme Court was called upon in connection with setting aside proceedings relating to an interim award (Zwischenschiedsspruch). One of the questions before it was whether the decisive reasoning underlying the interim award was “insufficient” to a degree rising to the level of a violation of Austria procedural ordre public. By reference to the amendments introduced to the Austrian Arbitration Act (Schiedsrechtsänderungsgesetz 2006), the Austrian Supreme Court overturned its longstanding jurisprudence on the setting aside of arbitral awards on the basis of violations of Austrian procedural ordre public, finding that non-adherence to certain standards applicable to the underlying decisive reasoning in arbitral awards can be a ground for setting aside under Section 611(2) para 5 ACCP. According to the Austrian Supreme Court this is necessarily so in light of the fact that the standards applicable to arbitral awards are not the same as those applicable to judgements of civil courts. In this context, the Austrian Supreme Court called upon arbitral tribunals to strictly implement formal quality (formale Qualität) in their awards, especially in the absence of an appellate mechanism in the context of arbitration by which legal flaws in the decision – be them formal or material in nature – could be addressed. In particular, the Austrian Supreme Court held that

– arbitral awards are subject to setting aside pursuant to Section 611(2) para 5 of the ACCP if the decisive underlying reasoning consists merely of “meaningless phrases” (inhaltsleere Floskeln);

– if arbitral awards, in the decisive underlying reasoning section, make reference to the submissions of one party only, such reference does not imply “insufficiency” in the given context; and that

– an arbitral award is sufficiently reasoned (ausreichend begründet) if the arbitral tribunal discusses its own position in the course of the proceeding and, in the subsequent award, makes reference to this position.

The recent judgement of the Austrian Supreme Court is certainly to be welcomed. From both arbitrators’ as well as counsels’ perspective, it provides essential guidance: in the process of drafting their awards, arbitrators will forthwith have to bear in mind the minimum standards expressly determined by the Austrian Supreme Court. Counsels, on the other hand, in assessing the chances of success of potential setting aside proceedings in Austria, will be mindful that while the recent judgment may have opened a new door for setting aside in Austria, even awards that contain only insufficient reasoning will not be set aside by the Austrian state courts. This will be so in cases where (i) the parties expressly waived their right to receive a reasoned award (Verzicht auf die Begründung des Schiedsspruchs, Section 606(2) ACCP) or, more importantly, where (ii) the parties did not request an explanation of the award (Erläuterungsantrag, Section 610(1) para 2 ACCP). The latter, in particular, is a remedy that will have to have been exhausted before an application for the setting aside of the award may be lodged.

In conclusion, a word of reassurance may be in order. While the Austrian arbitration landscape is now richer in terms of grounds for setting aside, it is unlikely that we will see a surge in complaints as regards the quality of the decisive underlying reasoning in awards issued by arbitral tribunals seated in Austria. If anything, the change of direction regarding the jurisprudence of the Austrian Supreme Court will serve to improve the quality of Austrian arbitral awards even further.

*Anne-Karin Grill was recently named “Future Leader in Arbitration 2017” by Who’s Who Legal.

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Using Arbitration to Resolve International Financing Disputes

Thu, 2016-12-22 22:12

Charles Nairac and Jean-François Adelle

White & Case For White & Case

The ICC Commission on Arbitration and ADR’s Task Force on Financial Institutions and International Arbitration recently published its ‘Report on Financial Institutions and International Arbitration’ (the “Report”). The undersigned had the honour of leading the work stream on “International Financing” and the findings of that team are summarized in Section IX (International Financing) of the Report, which we present below.

Scope of the Work Stream

International Financing encompasses within it a broad scope of transactions where the parties and/or assets are located in several countries, including bilateral and syndicated lending transactions (secured and unsecured), asset finance, project finance and trade finance. The aim of our stream of the Task Force was to identify current trends in dispute resolution in international financing and to assess the effectiveness of arbitration to resolve disputes arising out of international financing.

Historical Reticence

The Task Force’s survey of financial institutions revealed, as was already well known to all members of the stream, that there has been a historical reticence to relying on arbitration as a means for resolving international financing disputes. Within the different types of transactions, we noted a stronger resistance to using arbitration in the syndicated lending and asset finance sectors, as opposed to project finance transactions. This resistance stems largely from cultural factors and been fueled by inertia and standardized documentation. Apart from this reticence, some financial institutions also cited the unsuitability of arbitration to cater to the requirements of financial disputes (particularly the restricted range of available interim measures) and the inability to generate binding legal precedents.

This historical resistance has been exacerbated in the arena of secured transactions, due to the uncertainty of enforceability of security rights over assets through arbitration. Court intervention was viewed as somewhat preordained and recourse to arbitration was perceived to be an exercise in futility. Although often unfounded, the belief in such practical inarbitrability of security agreements continues. It is correct that, for those security rights whose enforcement requires the intervention of a court (if not enforced voluntarily), it will not make sense to choose arbitration as a means of dispute resolution. But whenever the security at issue is self-enforcing, there is no inherent reason for disputes arising out of such security to be referred to a national court as opposed to an arbitral tribunal.

Concerns have occasionally been voiced that arbitration may result in short-circuiting third party rights, especially in the context of insolvency proceedings. That concern is baseless. The decisions rendered by arbitral tribunals will always be subject to compliance with the decisions of the insolvency court on matters over which it has mandatory and exclusive jurisdiction, such as the validity of security posted during the lookback period and the approval of the statement of secured claims, and with the timetable of the insolvency proceedings.

Mapping the change in trends

The trend has however begun to shift away from the historical resistance to arbitration. Indeed the Task Force stream found that arbitration is increasingly used, as opposed to court litigation, where parties and assets are subject to courts perceived as inadequate for the protection and enforcement of the financier’s rights, and no agreement can be reached on the choice of a court deemed acceptable by the parties. This was especially true for project finance transactions, as well as for financing transactions in general, centered in Latin America, CIS or Africa, and for transactions involving State or State sector entities as counter-parties. It was also noted that self-enforcement is an increasingly available option in security laws and when the intervention of a court remains necessary, it is restricted to secured asset enforcement issues as opposed to adjudication on the secured claim.

Although no marked preference for either arbitration or litigation was found in trade finance, there is a growing recognition that court litigation is not the most suitable forum for resolving disputes in such transactions and that arbitration is capable of being tailored to specific contexts.

What does arbitration have to offer?

The ease of enforceability of an arbitral award across jurisdictions due to the popularity of the New York Convention, 1958 is a key advantage offered by arbitration.

In addition, arbitration offers the benefits of expert decision-making in complex disputes, flexibility, neutrality, and a confidentiality regime which the parties can design according to their needs and preferences (ranging from the fullest confidentiality extending even to the mere existence of the proceedings, to a regime of full publicity). Arbitration can also offer the advantage of avoiding fragmentation of remedies across multiple court fora, by providing the option for financiers to enter into multiparty dispute resolution mechanisms and/or consolidation of arbitral proceedings. Arbitration also provides the parties the flexibility to be able to isolate and segregate issues into separate proceedings, for example separating reimbursement actions from disputes relating to commercial contracts entered into by the project company.

Whither Litigation?

What does the (admittedly timid but nevertheless real) change in trend indicate for the future of dispute resolution in international financing? As pointed out above, arbitration is likely to continue to attract users where there are qualitative concerns about the national courts available as alternatives to arbitration. Whether the parties choose arbitration or litigation will depend on which mode of dispute resolution is more suitable for the specific transaction at issue, especially in light of the parties involved and an assessment of the available alternatives. In many cases, arbitration will prove to be a very attractive option.

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ICC Report Identifies Financial Institutions’ Experience and Perceptions Of International Arbitration

Thu, 2016-12-22 11:43

Claudia T. Salomon and Georges Affaki

Latham & Watkins

The new ICC Report on Financial Institutions and International Arbitration finds that the oft-cited financial institutions’ averseness to arbitration, abstractly stated, is incorrect. Financial institutions’ perception of arbitration is rapidly evolving in the wake of the global financial crisis, the sovereign debt crisis, the digitalization of banking, and the new regulatory approach to bank resolution. With the data disclosed in the Report, arbitral institutions are in a strong position to engage further with financial institutions and their regulators, and financial institutions have the tools to utilize arbitration as a viable alternative to litigation.

The methodology

The Task Force took stock of the use of arbitration in banking and financial disputes through interviews with more than 50 financial institutions. The Task Force also collected statistics from 13 arbitral institutions and conducted an in-depth examination of relevant investment and commercial arbitration awards.

Recognizing that one size does not fit all, the Task Force analyzed all the fields of corporate and investment banking including: derivatives, sovereign lending, investment arbitration and banking instruments, arbitration in bank regulatory matters, international financing (including syndicated loans and trade finance), Islamic finance, multilateral and development finance, advisory banking, asset management, and interbank arbitration.

The Report

The Report starts by setting the record straight regarding the use of arbitration in banking and finance. Financial institutions use arbitration. They do so in situations which require a neutral forum and decision makers with specialized knowledge, such as project finance involving sovereign counterparties in emerging countries, derivatives in certain regions of the world, notably in Asia, sensitive capital restructuring and mergers/acquisitions, certain multilateral loans, and asset management. However, the Report also notes that financial institutions neither use arbitration regularly nor as a default rule.

The Report offers recommendations regarding how financial institutions may adapt arbitration to their requirements and identifies the many features that make arbitration attractive for businesses. These include the international recognition and enforcement of awards amongst the 160 New York Convention member countries, the choice of arbitrators, the adaptability of the arbitral procedure potentially offering an opt-in appeal, and the possibility to obtain from the tribunal provisional measures and early dismissal of claims. In underscoring the flexibility of arbitration, the Report emphasizes its potential accommodation both of the expectation of confidentiality in certain banking businesses, such as advisory banking, and of standard-setting precedent publication that other banking businesses, such as syndicated lending and derivatives, require to control risks in their field.

The Report also offers insight into the opening of investment arbitration to banking and financial instruments. In the past decade, investment arbitration awards have determined that various financings, the operation of bank networks and the issue of sovereign bonds, bank guarantees and derivatives, to have the qualifying elements of protected investments. Barring a particular carve-out in the applicable investment treaty, a dispute between an investor (often a financial institution or its foreign shareholders) and the host State in relation to those instruments becomes potentially eligible for treaty protection and adjudication by an international arbitral tribunal, even though the relevant banking contract may not include an arbitration clause. Recent awards have allowed banks and their shareholders to seek vindication for expropriation or discriminatory actions by national bank regulators which were either prompted by political motives or denied their due process rights.

The new findings published in the report are expected to become the linchpin of a constructive dialogue between arbitral institutions and federations of financial institutions, thus heralding a new era in banking and financial dispute resolution.

Georges Affaki and Claudia T. Salomon co-chaired the Task Force on Financial Institutions and International Arbitration that prepared the Report.

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The CETA drama: Entering the dark age of protectionism and nationalism?

Tue, 2016-12-20 22:27

Nikos Lavranos


The recent developments concerning the signature of the Comprehensive Economic Trade Agreement (CETA) between Canada and the EU have illustrated the paralysis and inability of the EU and its Member States to deliver economic prosperity and create jobs – which used to be one of the very reasons for establishing the EU and giving it far-reaching competences in trade matters. Arguably, this CETA drama may very well be the signpost that the EU is entering the dark age of protectionism and nationalism.

CETA is the first trade and investment agreement that is concluded between Canada, EU and its Member States, after in December 2009 the Lisbon Treaty gave the EU exclusive competence on Foreign Direct Investment (FDI) – which does not mean that the EU has exclusive competence over all aspects of investment law and arbitration. Indeed, by the very fact that the European Commission has voluntarily agreed to treat CETA – and by the way also TTIP – as mixed agreements, the European Commission has admitted that the EU is not exclusively competent. This approach, however, collides with its previous held view regarding the EU-Singapore FTA, which has also been finalized. Regarding, the EU-Singapore FTA, which is very similar to CETA, the previous European Commission has requested an Opinion by the Court of Justice of the EU (CJEU). In her request, the European Commission is claiming that it is an EU-exclusive treaty. Whether or not these treaties are exclusive will be determined by the Court probably in 2017. Clearly, it would be more consistent if the European Commission would stop claiming that it is exclusively competent.

But the bottom line is that CETA will now have to be ratified by 28 (or 27) national parliaments plus a few regional ones.

As the CETA drama has demonstrated, this makes it quite likely that one or more of those parliaments will refuse to ratify CETA or try to extract unrelated commitments in return for their ratification. Indeed, one of the commitments extracted by Wallonia from the Belgian government is that Belgium would put CETA to the CJEU for an opinion as to its compatibility with EU law.

However, the ironic thing about this commitment is that according to Article 218 (10) TFEU Belgium or any other Member State or the European Parliament, the Council or the European Commission could have put CETA before the Court long ago, but nobody has done that so far. So, while Wallonia may have obtained a political commitment to sell to its voters, legally speaking, it is nothing new or special.

In addition, CETA is also challenged before the German Constitutional Court. Recently, the Court rejected the request for an emergency injunction that would have prevented Germany from agreeing to the provisionally application of CETA, but a decision on the merits of CETA is still awaiting.

So, the fact that CETA is put in front of courts seems to be a general trend towards asking courts to take decisions, which should actually be taken by governments and parliaments.

Another important development is the increasing use of referenda.

For example, in the Netherlands a non-binding referendum on the Association Agreement between the EU and Ukraine was recently rejected. Although, it was a non-binding referendum, the Dutch government and most political parties in parliament said that they would respect the vox populi – whatever the outcome may be. The result is that the Dutch government is trying hard to find a solution, which would respect the outcome of the referendum and enable the parliament to approve it.

Turning back to CETA: the Dutch organizers of the Ukraine referendum have now developed an appetite for organizing new referenda, and the next one will be against CETA. At least it seems very likely that a referendum will be held as they claim to have collected about 200.000 signatures, while 300.000 are required.

Thus, referenda – as the one on Brexit has shown – can create political turmoil and can have consequences, which may not be foreseen. This is again confirmed by the recent referendum in Italy, which was lost by former Prime Minister Renzi and which has needlessly put Italy at the brink of yet another economic and financial crisis.

Hence, we see a shift of the decision-making process from governments and parliaments towards voters. Of course, one could say that referenda are the most democratic tool available, but it may not always result in wise decisions. Indeed, it appears that voters use the opportunity of referenda to express their generally felt frustrations, which often have nothing to do with the questions which are at stake in the referenda.

Indeed, the refusal of Wallonie echoed the more widespread feeling in Europe that the EU’s move towards globalization must be stopped. The financial crisis has clearly caused the feeling that the EU is not delivering what it promised to do: namely, to bring jobs and prosperity.

The critique against mega-trade deals, in particular TTIP, is of course not limited to Wallonia.

Here in Austria, but also in Germany, the Netherlands and France, there is no appetite for these deals. Although, at the occasion of the last visit of President Obama to Germany, Ms Merkel emphasized again the importance of TTIP.

In contrast, French trade minister Fekl recently argued that the European Commission cannot negotiate anymore alone, but national experts of the Member States must be involved as well as national parliaments must have a greater say regarding trade deals.

The same voice of taking back control is heard in many countries across the EU and most visibly in the UK after Brexit and now also in the US after Mr Trump has been elected new President.

Thus, TTIP is not coming with Mr Trump as new US President, while CETA is far from a done deal. So, what did the EU deliver in terms of trade and investment deals after 7 years of having received the competence? No very much.

Instead, we see a stronger role of Member States in the EU’s trade policy, which may even go as far as a re-nationalization of that competence. But even if that does not happen, the increasing involvement of and control by Member States will undermine the negotiation power of the EU vis-à-vis the US or China. But ironically maximizing the bargaining power of the Member States was the very reason why the EU was given exclusive trade and investment competence. Indeed, if the UK really leaves the EU, that already will significantly weaken the EU’s negotiation position, since the UK economy is so important within the EU.

In short, we see a slow but steady return towards nationalism and protectionism in Europe and in the US with Mr Trump as President-elect.

But can globalization be stopped? Can the Googles, Apples and easyjets be stopped?

Will CETA or TTIP make any difference? Here I agree with Ms Merkel and Mr Obama who recently remarked that there is no way back from globalization. But the CETA drama as well as the Brexit and recent referendum in Italy are signals that large parts of the voters feel lost and want control back. Many people are apparently afraid of losing their national identity.

So, what can the EU do about it?

First and foremost, the European Commission must accept that Greece will never be like Germany and Italy never like Sweden. This would enable the EU to accommodate existing differences between the Member States.

Second, decision-making powers must be taken away from the EU and bring them back to the national and regional level.

Third, regionalization and localization must be strengthened. Here consumers and local producers play an important role: buy locally made products; the share economy is another way of becoming more independent from global trade.

In conclusion, it seems that trade and investment deals such as CETA and TTIP are something of the past, at least until the dark age is over. But in a decade or so the pendulum may swing back again and there will be again appetite for global trade and investment deals.

Until then, we must stay positive and remain patient.

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Criticism of Arbitration: How to Use It

Mon, 2016-12-19 22:26

André de A. Cavalcanti Abbud

BM&A Advogados

In the 1980s, a study conducted by Stanford University showed that after watching the same television reports on the Sabra and Shatila massacre in Beirut, both a pro-Israeli and a pro-Arab group concluded that the coverage was biased in favor of the other side. The researchers found that the partisans of the two groups evaluated the fairness of the facts and arguments used in the reports according to their own divergent views as to the merits of each cause and what would constitute impartial coverage.

But what does this have to do with arbitration? Could a similar mechanism influence users’ opinions as to the quality of arbitration and its results? If so, these biases must be kept in mind when criticism is used as a source of ideas for improving arbitration, in order to avoid making mistakes.

Many empirical studies conducted over the years have revealed a phenomenon known as group polarization: after discussion within a group, the group’s members tend to adopt a more extreme position than the position held by the average member prior to discussion. There are various theories as to why this happens, and some of the most commonly cited reasons are:

1) Information. The information and arguments used in any group that has a predisposition in a given direction will naturally be biased in the same direction. This means that as the discussion advances, each member acquires from the other members of the group more arguments and information to support the view that they were originally disposed to hold, which tends to entrench their position.

2) Confidence. People with more extreme views tend to be more confident, and as people gain confidence, their views tend to be more extreme. As the members of a group perceive that the others share their view, they tend to become more confident that they are right and, consequently, assume opinions that are less cautious.

3) Comparison and social acceptance. Most people want to be seen favorably by the members of their group. For this reason, it is common for their views to reflect the way they wish to present themselves to others. On discovering the opinion of the others in the group, some people will adjust their own views in the dominant direction in order to obtain more support within the group. In parallel, people can diminish the importance of contrary information and arguments, or fail to share the information and arguments with the group, because they feel that they would be perceived less positively by the other members of the group (hidden profiles). In more aggressive contexts, where caution can be seen as a weakness, more prudent opinions tend to give way to more hard line positions, leading the group to more extreme views.

There is no reason to think that groups involved in arbitrations are immune to this type of bias. If, for example, the legal culture puts excessive value on the attorney’s role as a promoter of conflict and maximizer of individual interests, there will be a strong incentive for the attorney to maximize (i.e. exaggerate) facts and arguments that favor the client. And both attorney and client will tend to end up believing what initially might have seemed an exaggeration, not only because that was their original predisposition, but also because the more extreme view suits their interests. As the joke goes, “Is your injury serious?” “I won’t know until I talk to my lawyer”. People are always ready to look for and absorb information that supports the beliefs they already hold, and less ready to see information that contradicts those beliefs (the confirmation bias).

If this is true, it is to be expected that over the course of an arbitration proceeding, the successive discussions within the team composed of a company’s outside counsel, in-house counsel, and members of its management and operating staff will tend to reinforce the arguments favorable to the company’s side of the dispute and make the team as a whole more confident in its position (if the evidence produced in the proceeding does not clearly contradict the team’s theory). The same phenomenon is likely to occur in the group on the other side of the dispute, and the greater the complexity of the factual and legal issues, the more space there is for this polarization process, since the “right decision” is far from being obvious. Thus, for example, arguments that go against the majority position in the case law, and therefore seemed difficult to sustain at the beginning of the arbitration, can come to be perceived as the most logical and reasonable position, supported by a few courageous voices in the courts. And perhaps, as time passes, the group will come to believe that the dominant position in the case law is obviously outdated and that any decision contrary to the group’s line of argument is in “manifest error”. In this example, it is easy to see how, on the other side of the table, any decision contrary to the “well-settled” case law would also be taken to be “manifest error”.

When this process of group polarization occurs, sparked by the members’ preconceived ideas, it is quite natural for the losing party – or even both parties – to criticize the arbitrators’ award. The most common argument put forward by the dissatisfied party is that the arbitrators were not sufficiently “technical” in their interpretation of the facts or the law. But exactly the opposite argument is also made, that the arbitrators were “too technical” and failed to take the “fairness” of the decision into account. This goes to show that perhaps the real reason behind the criticism is not an “error” in the award, but the simple fact that it was unfavorable to the position defended by the dissatisfied party. Which brings us back to the Stanford study: each group felt that the facts and arguments in the reports were unfairly portrayed because they contained elements contrary to the group’s cause.

There are, of course, ways to counterbalance group polarization. Companies and groups that have deliberative mechanisms that encourage dissonant voices and seek out contrary information and arguments can generate less polarized opinions. Attorneys themselves have incentives to look at the other side of the picture. Still, whether these checks and balances are frequently used or sufficient to counteract cognitive biases and the human tendency to group polarization is another question altogether.

The objective of this text is to draw attention to the importance of taking the phenomenon of group polarization into account when interpreting and applying the criticism that is sometimes made of arbitration. To adopt criticism whole, and wave it as a banner for reform, can lead to diagnostic errors and cause serious harm to arbitration and society’s perception of it: society’s acceptance is, after all, fundamental to a system of dispute resolution based on a private agreement between the parties. It can be useful to ask, for example, whether the criticism was made before or after the outcome of the case was known, which party is making the criticism, and whether the criticism is isolated or has been voiced in a statistically significant number of cases.

This is not to suggest that arbitration does not have defects or that it shouldn’t be criticized. On the contrary: taking into account parties’ natural biases and the reasons behind their criticism increases the chances that the real value of parties’ comments can be extracted and used as an essential tool to improve arbitration and to ensure that it continues to serve its users.1)VALLONE, Robert P., Lee ROSS and Mark R. LEPPER. “The hostile media phenomenon: biased perception and perceptions of media bias in coverage of the Beirut massacre.” Journal of Personality and Social Psychology. 1985, 49(3): 577-585. For some of the ideas explored here, see SUNSTEIN, Cass. Why societies need dissent. Cambridge: Harvard University, 2005, and KAHNEMAN, Daniel. Thinking, fast and slow. New York: Farrar, Straus and Giroux, 2011. jQuery("#footnote_plugin_tooltip_9240_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9240_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ VALLONE, Robert P., Lee ROSS and Mark R. LEPPER. “The hostile media phenomenon: biased perception and perceptions of media bias in coverage of the Beirut massacre.” Journal of Personality and Social Psychology. 1985, 49(3): 577-585. For some of the ideas explored here, see SUNSTEIN, Cass. Why societies need dissent. Cambridge: Harvard University, 2005, and KAHNEMAN, Daniel. Thinking, fast and slow. New York: Farrar, Straus and Giroux, 2011. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Section 1782 and International Arbitration: Is New York Still a Swing State?

Sun, 2016-12-18 21:23

Lucas Bento

Quinn Emanuel Urquhart & Sullivan, LLP

Section 1782 has become the weapon of choice for international litigants seeking discovery in aid of foreign proceedings. Section 1782 allows an “interested person” to apply for discovery over a person or entity “found” in the U.S. “for use” in a proceeding “in a foreign or international tribunal.” Significant uncertainty exists, however, in whether Section 1782 discovery can be sought for use in a private arbitration abroad. While the Second Circuit has not weighed on this issue post-Intel,1)A Supreme Court decision that many district courts have used to allow Section 1782 discovery for use in foreign arbitrations. jQuery("#footnote_plugin_tooltip_5282_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5282_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); a recent decision from the District Court for the Southern District of New York (“SDNY”) provides some much needed insight on how New York federal courts interpret the statute.

In In Re Ex Parte Application of Kleimar N.V., No. 16-MC-355, 2016 WL 6906712 (S.D.N.Y. Nov. 16, 2016), Petitioner Kleimar N.V. (“Kleimar”) filed an ex parte application in the SDNY to seek discovery in connection with a series of arbitrations in London before the London Maritime Arbitration Association (“LMAA”), in which Kleimar alleges that defendant Dalian Dongzhan Group Co. Ltd. breached its obligations under a contract of affreightment. The District Court granted that application and allowed Kleimar to seek discovery of Vale S.A. (“Vale”) and some other third parties. The Court noted that the application was presented ex parte and stated that “should any Respondent wish to challenge the subpoena, it should file a timely motion to quash.” Dkt. 4, at 2.

Importantly, the Court also noted that “while the law is not entirely settled as to whether a foreign arbitral proceeding qualifies as a matter before ‘a foreign tribunal’ within the meaning of Section 1782 […] such an issue is more properly resolved through a timely motion to quash.” Dkt. 4, at 2-3.

Kleimar subsequently served Vale (the Brazilian mining giant) with the subpoena and Vale moved to vacate the discovery order and quash the subpoena. Vale argued, inter alia, that Kleimar failed to satisfy the requirements of Section 1782 because (1) Vale does not reside nor is found in the district, and (2) the London arbitrations are not a “foreign tribunal” under Section 1782. Kleimar opposed Vale’s motions by arguing, inter alia, that (1) Vale does reside in New York, through its New York-registered indirect subsidiary Vale Americas, Inc. (“Vale Americas”); and (2) the London arbitrations are foreign tribunals under Section 1782.

With respect to the target’s location, the Court found that Vale has “significant contacts” with New York such that it resides or is found in the state for purposes of the Section 1782. These contacts include: trading American Depositary Receipts (also known as “ADRs”) on the New York Stock Exchange; listing Vale Americas as agent for service; Vale Americas defending an ongoing action in the SDNY; and Vale Americas conducting systematic business in the U.S. and New York.

Next, the Court turned to the scope of “foreign tribunal” under Section 1782. In finding that the LMAA is a “foreign tribunal” within the purview of the statute, the Court noted the tension between the Second Circuit’s decision in National Broadcasting Co., Inc. v. Bear Stearns & Co., Inc., 165 F.3d 184, 191 (2d Cir.1999) (“NBC”) (holding that an ICC commercial arbitration in Mexico was not within the scope of Section 1782), and dictum from the Supreme Court’s decision in Intel:

While the Second Circuit has previously excluded private foreign arbitrations from the scope of qualifying Section 1782 proceedings, dictum of the Supreme Court in Intel, suggests the Supreme Court may consider private foreign arbitrations, in fact, within the scope of Section 1782. Compare Nat’l Broad Co. v. Bear Sterns & Co., 165 F.3d 184, 190 (2d Cir. 1999) with Intel, 542 U.S. at 258.

The Court further noted that other courts, following Intel, have found that a private, commercial tribunal is a “foreign tribunal.” But it also recognized that the Second Circuit has not weighed on the issue since Intel. This led the Court to look elsewhere for guidance. The Court was particularly persuaded by the reasoning of “several district courts” which found that the LMAA is a “foreign tribunal” within Section 1782. For example, an opinion from the District Court for the Southern District of Florida found that the LMAA qualified as a “foreign tribunal” because it “acts as a first-instance decision maker whose decisions are subject to judicial review.” Ex rel Application of Winning (HK) Shipping Co. Ltd., No. 09-22659-MC, 2010 WL 1796579, at *7 (S.D. Fla. Apr. 30, 2010) (“Intel suggests that courts should examine the nature of the arbitral body at issue to determine whether it functions as a “foreign tribunal” for purposes of section 1782.”). Specifically, the court in Winning focused on whether the decision of the LMAA arbitrators would be judicially reviewable. Noting that the Arbitration Act 1996 (of England) provides for judicial review of arbitral awards (including on points of law), the Court concluded that the LMAA was a “foreign tribunal” for purposes of Section 1782.

Does the Kleimar decision suggest a need to show that, for purposes of Section 1782, the foreign arbitration is subject to judicial review akin to that available under the English Arbitration Act of 1996? Kleimar is unlikely to stand for such an extreme proposition, particularly since the availability of judicial review of arbitral awards on a point of law is absent in many other jurisdictions.

In the final analysis, the Kleimar decision does not resolve the question of whether international private arbitrations fall within Section 1782. It does, however, suggest that the NBC decision is no longer controlling post-Intel. In doing so, it leaves the door open for a more liberal interpretation of the statute. While most SDNY decisions granting Section 1782 applications for use in foreign arbitrations do so in the context of “London maritime arbitration proceedings,”2)See e.g. Challenger Trading S.A. v. Valeska Shipping Lines Limited, No. 16-CV-04197, Dkt. 9, 4 (S.D.N.Y., Jun. 17, 2016) (Granting Section 1782 application “in aid of a contemplated London maritime arbitration proceeding, based on a breach of a time charter agreement.”); In re ex parte Application of Grand Bulk Shipping Limited, No. 13-MC-00008, Dkt. 4 (S.D.N.Y., Mar. 12, 2014). jQuery("#footnote_plugin_tooltip_5282_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5282_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it appears that the SDNY is not confining its pro-arbitration interpretation to maritime arbitrations seated in London. See e.g. AVIC International HK Trading Limited et al v. Reunited LLC et al, 1:13-mc-00288, Dkt. 27 (Nov. 22, 2013)(Granting Section 1782 application for discovery for use in a private arbitral proceeding pending before the Shanghai International Economic and Trade Arbitration Commission (Shanghai International Arbitration Center)).3)See also In Re ex parte petition of Ramburs Inc., No. 13-MC-00074, Dkt. 5 (S.D.N.Y., Mar. 1, 2013) (denying Section 1782 application for use in GAFTA arbitration in London because Petitioner failed to “provide a basis to believe that” the information sought would be “for use” – i.e. relevant – in the foreign proceedings). jQuery("#footnote_plugin_tooltip_5282_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5282_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Until the Second Circuit weighs on the issue, it is likely that federal courts in New York will continue to tread carefully in interpreting the scope of Section 1782, mindful of the shadow of NBC and the weight of Intel.

Lucas Bento is also the President of the Brazilian American Lawyers Association. He is the author of The Globalization of Discovery under 28 U.S.C. § 1782: Law and Practice (Kluwer Law International, forthcoming). The views expressed in this post are the author’s personal views, and do not reflect the opinions of Quinn Emanuel or of the Brazilian American Lawyers Association.

References   [ + ]

1. ↑ A Supreme Court decision that many district courts have used to allow Section 1782 discovery for use in foreign arbitrations. 2. ↑ See e.g. Challenger Trading S.A. v. Valeska Shipping Lines Limited, No. 16-CV-04197, Dkt. 9, 4 (S.D.N.Y., Jun. 17, 2016) (Granting Section 1782 application “in aid of a contemplated London maritime arbitration proceeding, based on a breach of a time charter agreement.”); In re ex parte Application of Grand Bulk Shipping Limited, No. 13-MC-00008, Dkt. 4 (S.D.N.Y., Mar. 12, 2014). 3. ↑ See also In Re ex parte petition of Ramburs Inc., No. 13-MC-00074, Dkt. 5 (S.D.N.Y., Mar. 1, 2013) (denying Section 1782 application for use in GAFTA arbitration in London because Petitioner failed to “provide a basis to believe that” the information sought would be “for use” – i.e. relevant – in the foreign proceedings). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors:

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Kluwer Journal of International Arbitration – Call for Papers

Sat, 2016-12-17 17:03

Maxi Scherer

General Editor, Journal of International Arbitration, WilmerHale & Queen Mary University of London

The Kluwer Journal of International Arbitration (JOIA) is pleased to announce a forthcoming Special Issue on “Dispute Resolution in Asia.”

This Special Issue will focus on the use of international arbitration as means of resolving cross-border disputes in Asia.  Slowly but steadily, Asia has established its presence on the international arbitration world map.  The main drivers of this process have been attributed to the growing economic strength and geopolitical importance of the region, as well as the ever-increasing legal sophistication and infrastructure of Asian jurisdictions.  Asia’s economic development leads to growing numbers of international arbitrations involving Asian parties, while at the same time providing these parties with inherently stronger bargaining powers in shaping the arbitral process.  As new arbitration institutions have been set up in an attempt to capture this market, the leading arbitration institutions in Asia continue to be trendsetters in initiating rule revisions.  At the same time, Asian states have introduced varying degrees of reforms to their arbitration laws.  As Asia continues on its steady transition to maturity, there will no doubt be challenges.  For instance, how will Asia ensure a consistent pattern of excellence across the region?  Will Asian jurisdictions be able to address the increasing concerns of time and costs in arbitration?  How can one support the growth of a pool of international arbitrators with credible knowledge of Asia?

Submissions to this Special Issue may include (but are not limited to) a review or critique of recent innovations, challenges, reforms, or decisions concerning international arbitration in one or more Asian jurisdictions.  We invite all those with an interest in the theme of “Dispute Resolution in Asia” to contribute to this special issue.  The general author guidelines of the journal apply and can be found here.  Manuscripts should be submitted to [email protected], for consideration on or before 15 February 2017.

Professor Dr Maxi Scherer (General Editor JOIA)

Darius Chan (Special Issue Editor)

Victoria Narancio (Assistant Editor)

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Brexit and Foreign Investors’ Legitimate Expectations

Sat, 2016-12-17 08:51

Roger Alford (Editor)

Notre Dame Law School

Last month I was privileged to organize a conference at the University of Notre Dame’s London Global Gateway on the topic of UK trade and Brexit. The conference had three sessions: (1) UK trade negotiations with the EU; (2) UK trade negotiations outside the EU; and (3) UK’s post-Brexit status within the WTO. You can watch all three sessions here. The participants were all trade experts, including Lorand Bartels at Cambridge, Meredith Crowley at Cambridge, Piet Eeckhout at UCL, Jennifer Hillman at Georgetown, Rob Howse at NYU, Simon Lester of the CATO Institute, Sophie Robin-Olivier at Paris II Sorbonne, and yours truly.

In this post, I want to focus on the question of whether Brexit might trigger foreign investor claims against the United Kingdom. In my discussion, (beginning at 1:06:30) I discuss Brexit in the context of the UK’s obligation to foreign investors to maintain regulatory stability. I draw the analogy of the Argentina arbitration cases suggesting that a fair and equitable treatment standard gives rise to legitimate expectations. As discussed in detail by Michele Potesta here, legitimate expectations can be created through the general regulatory framework, and those expectations are greater in developed countries like the United Kingdom.

If British and other foreign investors are able to succeed in Argentina for that country’s relatively modest change to its laws, will foreign investors be able to succeed in claims against the UK for fundamental changes to its regulatory environment? What is good for the goose is good for the gander. Does a change in the regulatory framework by withdrawing from the EU and EU FTA network constitute a change so severe and radical that an arbitral tribunal would find a violation of fair and equitable treatment by reference to an investor’s frustration of its legitimate expectations. Every investor makes reasonable assumptions when it decides to invest in the UK, and those assumptions will arguably be undermined if and when the UK withdraws from the EU and its free trade network.

For example, will automakers that decided to invest in the UK on the legitimate expectation that its automobiles will be exported duty-free to the EU and the EU’s free trade network, be able to argue that the UK’s withdrawal resulting in 10 percent duties on cars from the UK to the EU constitute a BIT violation? Or will the banking industry that established themselves in the UK on certain assumptions about access to the EU be able to argue that they invested in the UK with the reasonable and legitimate expectation that they could access the EU market? These claims seem at least plausible. In short, it is safe to say that when the UK is negotiating its withdrawal from the EU, they must consider the possibility that if the regulatory framework changes too much, they open themselves up to the potential liability for fundamentally altering the regulatory environment so as to violate the fair and equitable treatment standard.

With the UK not yet triggering Article 50, these issues are only now beginning to be explored. But I know from personal conversations with investment arbitration practitioners, the possibility is real and the risk to the UK is genuine.

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International Tax Dispute Resolution and the BEPS Multilateral Convention: A Camel Safari

Thu, 2016-12-15 22:29

Jonathan Schwarz

Temple Tax Chambers; King’s College London

“A camel is an animal designed by a committee” – Anonymous

In launching the BEPS programme in 2013, the OECD warned that replacement of the current consensus-based framework by unilateral measures, could lead to global tax chaos marked by the massive re-emergence of double taxation (OECD: Action Plan on Base Erosion and Profit Shifting (2013)). The BEPS actions themselves have raised the prospect of increased risks of double taxation caused by uncertainty introduced by rule changes and uneven implementation of those changes by states around the world.

In light of this BEPS Action 14 aimed at improving the international tax dispute resolution process. Traditionally disputes in the tax treaty area have been resolved by mutual agreement (MAP) between the competent authorities of contracting states in line with article 25 of the OECD Model Tax Convention. The most important limitation on this process is that competent authorities cannot be compelled to resolve the dispute.

Mandatory binding arbitration has been advanced as the best way to effectively resolve tax treaty disputes. Provision for such arbitration was included in the OECD Model Convention in 2008 and has been include in bilateral treaties by a few countries. Similar arbitration is available in the EU for transfer pricing under the EU Arbitration Convention.

There is no consensus among OECD and G20 countries on the adoption of arbitration as a dispute resolution mechanism. Only a small sub-set of the 100 countries that have shown interest in the BEPS Convention have expressed interest in mandatory binding arbitration. They are: Australia, Austria, Belgium, Canada, France, Germany, Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Poland, Slovenia, Spain, Sweden, Switzerland, the United Kingdom and the United States. The group is around half of OECD member countries and only 13 of the present 28 EU Arbitration Convention participants. These countries do however represent the overwhelming majority of outstanding MAP cases. One effect of the BEPS project will be to expand the number of countries involved tax treaty disputes where no such mechanism is in place.

The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS Convention) by the OECD on 24 November 2016, Part IV, contains detailed provisions for an optional arbitration mechanism that states may sign up to as part of their participation in the BEPS Convention.

Mandatory Binding Arbitration

The basic mechanism of the existing OECD Model is followed. Thus any issue that remains unresolved two years after the taxpayer presented the case to the competent authorities must be submitted to arbitration if the taxpayer so requests. The arbitrators’ decision is binding on the states unless the taxpayer does not accept the decision or the arbitration is held to be invalid or if the taxpayer pursues the issues through the judicial process of the contracting states.

Contracting states may reserve the right not to accept arbitration or for an arbitration that is on foot to be terminated if a decision on the issue is rendered by a court or administrative tribunal of either contracting state. Arbitration proceedings will also terminate if the competent authorities reach agreement on the issue before the arbitrators deliver their decision.

How binding is binding?

Unlike article 25(5) of the OECD Model and the EU Arbitration Convention, The BEPS Convention offers states an opt-out to the binding nature of the arbitration. States may thus chose that the arbitrators’ decision “shall not be implemented” if the competent authorities agree on a different within three months of the arbitrators’ decision. This opt-out may be in relation to all arbitrations or only in relation to so-called principled arbitrations.

Type of Arbitration Process

The BEPS Convention adopts last best offer (“baseball arbitration”) as the default procedure. An optional principled procedure may be adopted instead. This is an all-or-nothing choice. Although the principled procedure requires a decision based on the law as applied to the facts, the competent authorities must agree on any legal sources other than the relevant treaty and the domestic law of the two states. Where the choices made by two states are not identical, then there is no arbitration provision in place between them unless the competent authorities agree on the type of arbitration process.

Measuring success

It is often said that the success of mandatory binding MAP arbitration is not so much in generating arbitrations but in the pressure it puts competent authorities to resolve their differences quickly and before entitlement to invoke arbitration arises.

The drafters of the BEPS Convention arbitration provisions have done much to relieve that pressure on the competent authorities. Firstly the two year time limit for resolution by agreement may be extended to three years. Secondly, detailed rules about the sufficiency of information provided by taxpayers allow for the extension of the time limit until information requested by a competent authority is provided. Thirdly, competent authorities may ignore the arbitrators’ decision if the can agree a different resolution.

All the other substantive provisions of the BEPS Convention, have been the subject of several discussion drafts published for comment by the OECD. The arbitration provisions first saw the light of day when the draft Convention was published. There has been no public consultation on the text contained in the draft. Some of the provisions may address concerns of tax administrations about the process and governments reluctant to agree to arbitration. Independent input on the viability of the provisions to address the basic drivers behind submitting international tax disputes to an independent panel are notably absent.

Apart from the primary decision by states whether to apply the arbitration provisions of Part IV of the BEPS Convention, there are at least 10 choices that states may make within it. If all 20 states that have shown interest in mandatory binding arbitration adopt Part IV, it will take some time to see whether workable arbitration mechanisms emerge between any two contracting states. This poor camel may find itself put out to pasture even before it has had a chance to see if it can bear the load its was designed to carry.

Jonathan Schwarz is a regular contributor to the Kluwer International Tax Blog.

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2016 Queen Mary International Dispute Resolution Survey: Unveiling Technology, Media and Telecoms (TMT) Disputes

Wed, 2016-12-14 21:35

Gustavo Moser

School of International Arbitration, Queen Mary University of London (QMUL)

The 2016 International TMT Dispute Resolution Survey, sponsored by Pinsent Masons LLP, is the seventh survey carried out by the School of International Arbitration since 2006. It is part of a major investigation into international dispute resolution practices and trends worldwide.

This year’s survey, the largest industry-sector empirical study ever conducted in international arbitration, sought to map out and investigate the prevalent interests and preferences of TMT players and their approach to dispute resolution. The results collected reveal a wealth of information from practice areas which were, until now, underexplored.

The 2016 report sheds light on the dispute resolution toolkit available to TMT players, including the use of international arbitration and other dispute resolution mechanisms. It highlights respondents’ preferences, prior experiences, (dis)satisfactions, predictions and challenges for the future. The study further reveals the protagonists of the dispute resolution decision-making processes, what influences these players in real-life negotiation contexts, and divulges the industries which players believe are more likely to face such disputes.

As an amuse-bouche for the readers, the report revealed, for example, at least 17 different types of TMT related disputes, many of them involving in excess of USD 100m, multi-faceted scenarios and different challenges faced by all players in this process. The report also underlined the need to design dispute resolution strategies as a way to stay ahead of the game. As to predictions, IP, collaboration and data/security were cited as the most contentious areas.

In relation to dispute resolution policies and preferences, the survey data showed that arbitration continues to be encouraged, although mediation was the dispute resolution mechanism of choice for in-house respondents. At an all-respondents level, arbitration is the preferred mechanism but litigation was the most used.

Furthermore, the study contributes to a more profound debate on improving dispute resolution mechanisms. Respondents were invited to express their views on factors they considered as promoting dispute resolution efficiency most going forward. In this connection, the survey included questions on transparency mechanisms, specialisation of institutions, rules and decision-makers, and online tools. The top 3 changes to make international arbitration more appealing are: lower costs, more industry experts appointed, and transparency mechanisms.

In this regard, it is also worth noting that international arbitration is and, echoing the respondents’ choices, will remain a popular choice: 92% believe that it is well suited for TMT disputes and 82% demonstrated optimism about the future of international arbitration: it will continue to grow.

The 2016 Survey is certainly an invitation to explore the exciting and yet (at least to some of us) unknown world of “TMT”; idiosyncratic and seemingly driven by multiple stimuli. In the report, readers are invited to unveil the mechanics behind TMT disputes and understand the considerations that surround the decision-making processes and strategies in these practice areas.

The full report and key findings are available here.

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Kluwer Mediation Blog: November News

Wed, 2016-12-14 03:36

Anna Howard

Centre for Commercial Law Studies, Queen Mary University of London

From mediation legislation developments in the Ukraine to the contribution of mediation and mediators in these times of uncertainty and opportunity, over the past month the posts on the Kluwer Mediation Blog have addressed a wonderful assortment of topics.

In Putting Away Childish Things, John Sturrock considers the loss of civility which appears commonplace nowadays, particularly in the political arena, and identifies the infinite potential of mediation in problem-solving in a complicated and uncertain world.

In Upheaval And Resilience: A Note From The Shaky Isles, Ian Macduff directs our attention to what might constructively emerge from the many recent social and political upheavals, drawing on the qualities and opportunities of mediation to do so.

In Who Should Be Promoting Mediation and Why? Mediation in Germany: The Poor Cousin to the Courts, Greg Bond calls for a promotion of mediation for what it is, namely a way to work though conflict that, due to the intrinsic quality of the mediation process and the quality of the results, makes sense – even if the courts work well.

In Mediation in Water Disputes – One More Drop, Rafal Morek outlines the World Bank’s recommendation that India and Pakistan use mediation to determine how the Indus Water Treaty should be used to resolve issues over two dams under construction along the Indus river system.

In Will Ukraine Have A Draft Law On Mediation in 2017,Tatiana Kyselova and Maryna Omelynska consider the draft law on mediation which was recently approved, on its first reading, by the Parliament of the Ukraine.

In Reasons to Mediate, Constantin-Adi Gavrila explores how the very reasons to mediate can, for some, be reasons not to mediate.

In Mediation and Change, Sabine Walsh explores our capacity for change and considers the role of mediation and mediators in helping to facilitate change.

In Dutch Mediation Bill: Pushing the River? Martin Brink outlines some key features of the Dutch mediation market and examines the new bill to promote mediation in The Netherlands.

Many more topics have been considered on the Kluwer Mediation Blog. Why not take a look …

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The ICC Expedited Procedure Rules – Strengthening the Court’s Powers

Tue, 2016-12-13 03:44

Lucja Nowak and Nata Ghibradze

Hogan Lovells

Over the past few decades, responding to the need to control the growing costs and time of arbitration proceedings, the International Court of Arbitration of the International Chamber of Commerce (“ICC Court”) has continuously sought to achieve greater efficiency of the ICC arbitration proceedings (examples of such efforts can be found on the links available here, here, and here). On 4 November 2016, in its most recent step of “further increasing the efficiency and transparency of ICC arbitrations,” the ICC Court announced amendments to the ICC Rules of Arbitration (“ICC Rules“). These amendments, coming into force as of 1 March 2017, introduce – among others – the rules on expedited procedure (“Expedited Procedure Rules“). On that day the ICC Court will join other leading international arbitral institutions that have introduced similar expedited rules (to name but a few: ICDR, SIAC, HKIAC, SCC, ACICA, DIS, Swiss Rules).

The ICC Court has long been active in exploring practical ways to reduce time and costs of international commercial arbitrations, especially with regard to small claims. Already in 2001, the ICC Court formed a Task Force (comprised of nearly 60 representatives from different countries), which produced the ICC Court’s Guidelines for Arbitrating Small Claims under the ICC Rules of Arbitration, published in March 2003. The Guidelines are not binding but are often used in practice. Moreover, an accelerated arbitral procedure is not entirely unknown to the users of the ICC Rules, since the parties can always – at least theoretically – use the procedure in an expedited way for mutually agreed fast-track arbitrations. For example, Article 38 (ex Article 32) of the ICC Rules expressly encourages the parties to shorten various time limits under the Rules and accordingly expedite the procedure. However, this requires willingness and close cooperation of all parties, either at the time they agree on arbitration or after the dispute has arisen. Alas, at the former stage the parties are unlikely to know the complexity of their future disputes and at the latter, they are usually unwilling to cooperate, even if such cooperation could save time and costs.

The newly introduced Expedited Procedure Rules aim at addressing this efficiency problem. As stated by the ICC Court President Mr. Alexis Mourre, their introduction “is an entirely new offer” because the rules will apply automatically to all disputes where the amount in dispute does not exceed USD 2 million (Article 30(2)(a)) (“Small Claims”). At the same time, the Expedited Procedure Rules may apply to other cases, provided the parties agree to their application (Article 30(2)(b)).

This post focuses on a single provision of the Expedited Procedure Rules, which the authors find particularly noteworthy. It addresses Article 2(1) of the Expedited Procedure Rules, which provides that “[t]he Court may, notwithstanding any contrary provision of the arbitration agreement, appoint a sole arbitrator.” (emphasis added) This provision clearly limits party autonomy and, thus, poses a question whether the ICC Court is being given too much power. Do the Expedited Procedure Rules quash one of the basic principles of international arbitration?

These questions can be approached from two perspectives:

• On the one hand, arbitration as a whole is a creature of consent and, thus, the parties’ freedom to design the proceedings as they deem appropriate should not be limited. The decision of the parties as to the number of arbitrators is of crucial importance, especially in light of the known “truth” that arbitration is only as good as arbitrators.
• On the other hand, by submitting their dispute to the ICC Rules, the parties have already (impliedly) consented to the ICC Court’s powers, reflecting their awareness of the mechanisms applied in the Rules and their reliance on the Court’s experience and wisdom in applying them.

To start with, a brief look at other expedited arbitration rules shows unanimity among the key arbitral institutions that a sole arbitrator is the most efficient solution for expedited arbitration proceedings. This is not surprising as the sole arbitrator can reach a decision quicker than a panel of three arbitrators and his or her fees and expenses will also be lower that a three-arbitrators’ tribunal. However, the institutional rules vary greatly as to how this overarching consent is balanced with party autonomy in cases when the arbitral agreement foresees an arbitral tribunal comprised of more than one arbitrator:

First, in the Commercial Arbitration Rules of the Japan Commercial Arbitration Association (“JCAA Rules“) party autonomy trumps the advantages of using expedited rules to ‘small claims’. Although the JCAA expedited procedures apply automatically to disputes worth below ¥20 million (Rule 79.1), they become unavailable if the parties agreed on more than one arbitrator (Rule 75.2(2)).

Second, the Arbitration Rules of the Hong Kong International Arbitration Centre (“HKIAC Rules,” Article 41.2(b)) and the Swiss Rules on International Arbitration (“Swiss Rules,” Article 42.2(c)) advocate the use of persuasion. They mandate the respective institutions to invite the parties to modify their agreement on three arbitrators and refer their case to a sole arbitrator. If the parties do not change their mind, the dispute is resolved by three arbitrators under the expedited rules.

Third, the Arbitration Rules of the Singapore International Arbitration Centre (“SIAC Rules“) provide that “the case shall be referred to a sole arbitrator, unless the President determines otherwise” (Rule 5.2). The SIAC Rules therefore automatically override the party agreement on more than one arbitrator and give the President the power to decide otherwise.

Conversely to the SIAC Rules, the ICC Expedited Procedure Rules introduce a ‘manual switch’ to the sole arbitrator, to be operated by the ICC Court. Unlike the JCAA or SIAC Rules, the ICC Rules do not mandate a sole arbitrator for expedited proceedings but give the ICC Court discretion to “appoint a sole arbitrator” – “notwithstanding any contrary provision of the arbitration agreement.” We already know that this ‘sole arbitrator switch’ will be frequently used because in its recent press release the ICC Court said that it “will normally appoint a sole arbitrator.” The ICC Court will therefore likely play a more active role than the SIAC President in the expedited proceedings.

Interestingly, the question whether an arbitral institution can override the party agreement to have the case decided by three arbitrators has specifically been dealt with in a landmark decision by the Singapore High Court in the AQZ v. ARA case of February 2015. In that case, Mrs. Justice Prakash had to decide on a setting aside of an award rendered by a sole arbitrator (confirmed by the SIAC President) in disregard of the parties’ explicit agreement to have their dispute decided by three arbitrators. As explained in a previous post, the party requesting setting aside of the award based its argument on Article 34(2)(a)(iv) of the UNCITRAL Model Law, allowing for setting aside when the composition of the arbitral tribunal and/or the arbitral procedure was not in accordance with the clear agreement of the parties. In her judgment, Justice Prakash rejected the application and held that since the parties had

“expressly chosen a version of the SIAC Rules that contained the Expedited Procedure provision. Therefore, it was consistent with party autonomy for the Expedited Procedure provision to override their agreement for arbitration before three arbitrators.”

This decision can be highly relevant for the interpretation of Article 2(1) of the Expedited Procedure Rules, due to their similarities with the SIAC Rules. Specifically, both the SIAC Rules (Rule 5.3) and the ICC Rules (Article 30(1)) contain provisions stating that, by submitting to the respective rules, the parties agree that these rules take precedence over any contrary terms contained in the arbitration agreement.


It is clear that with the introduction of the Expedited Procedure Rules, the ICC Court powers are further increased. However, examination of other expedited rules does not lead to a conclusion that the Court’s new powers are going ‘too far’. It is the parties’ choice to agree to those powers by incorporating the ICC Rules in their arbitration agreement. The party autonomy is further respected by the fact that the Expedited Procedure Rules will not apply to arbitration agreements concluded before 1 March 2017, i.e. before the new Rules’ entry into force (Article 30(3)(a)). Moreover, if the parties wish to have three arbitrators in a tribunal, they can opt out of the Expedited Procedure Rules in their arbitration agreement (Article 30(3)(b)). In this regard, while the increased powers of the ICC Court may seem to be an assault on party autonomy, they are based on a clear and justified assumption that the expedited rules are helping precisely those parties who cannot agree between themselves to expedite the arbitration in circumstances where such mutual consent would have made the proceedings time- and cost-effective, i.e. with regard the Small Claims. These provisions also do not close the door to fast-track arbitrations based on agreements between cooperative parties.

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Russian Laws on the Offensive: Cross-Border Effect of the New Arbitration Regime for Corporate Disputes

Sun, 2016-12-11 21:58

Dmitry Andreev

Wilmer Cutler Pickering Hale and Dorr LLP For WilmerHale

Russia has recently revised its arbitration laws. The key development of the reform is to address the arbitrability of so-called “corporate disputes.” The new laws lift the longstanding ban on arbitrating most types of controversies relating to a Russian company. There is a catch, though: the lawmakers set out mandatory procedural conditions with which any arbitration of corporate disputes must comply (“Conditions”).

The Conditions vary depending on the type of corporate dispute. If the subject matter of the dispute is about shares in a Russian company – e.g., a pure M&A transaction – the only condition is that parties use institutional arbitration. (To distinguish from ad hoc arbitration, Russian laws use a term of art “permanent arbitral institution” which means the same as “arbitral institution” in other jurisdictions.) If, however, a dispute is about an internal corporate matter – e.g., a shareholders’ agreement – the list of requirements expands:

the seat of arbitration must be Russia;
all shareholders and the Russian company itself must sign the arbitration agreement;
an arbitral institution must administer the proceedings (and it must have a license to administer arbitrations seated in Russia); and
the institution must have special arbitration rules for corporate disputes (and deposit them with Russia’s Ministry of Justice).

While the Conditions may look straightforward, it is not yet clear how they will operate in the context of international arbitration and cross-border proceedings. One can expect a lot of debate on whether the Conditions have extraterritorial application and how they fit with Russia’s international treaties. In this entry, I summarize the queries that international arbitration users may have and give a high-level analysis of these issues.

1. What is the procedural nature of the Conditions?

Normally, a mandatory rule governing a certain aspect of arbitral procedure – such as seat, form of arbitration agreement, use of institutional or ad hoc arbitration – is deemed to be part of the lex arbitri, the procedural law of the seat of arbitration. If the arbitration does not comply with such a rule, the resulting award may be attacked on the grounds that the arbitration agreement was invalid or that the arbitral procedure breached the lex arbitri.

However, Russian lawmakers did not just introduce the Conditions into the Arbitration Act as mandatory procedural rules. They went further and, firstly, added the Conditions to the Arbitrazh Procedure Code (“APC”) that governs arbitrability in Russia and, secondly, phrased them as prerequisites to arbitrability of corporate disputes (rather than as mandatory rules applicable to adjudication of corporate disputes in arbitration). The Conditions therefore form part of “conditional arbitrability” – a concept new to Russian law, under which a subject matter cannot be submitted to arbitration at all unless certain conditions are met.

2. Are the Conditions supposed to apply to arbitral proceedings seated outside Russia?

If the Conditions were just mandatory rules of Russia’s lex arbitri, they would apply only to arbitrations seated in Russia and be irrelevant to proceedings seated in other jurisdictions. Russian lawmakers, however, chose to “upgrade” the Conditions’ status to the level of arbitrability.

By doing so, they gave the Conditions an extraterritorial boost. When a country considers a particular subject matter non-arbitrable, it can refuse to enforce an arbitration agreement or award under the New York Convention irrespective of where the arbitration is based. Apparently, the legislative purpose was to make the Conditions applicable to any arbitral proceedings in the world relating to a Russian company – even if none of the parties is Russian and the case’s sole nexus with Russia is that the subject matter of the dispute is incorporated there.

Consequently, at least from the perspective of Russian law, the Conditions appear to have a cross-border effect. In other words, parties are expected to use institutional arbitration to resolve a dispute regarding Russian shares even if the proceedings take place outside Russia.

3. Does the cross-border effect of the Conditions contradict Russia’s obligations under international treaties?

Arguably, the Conditions are not compatible with Russia’s obligations under the New York Convention (“NYC”), the European Arbitration Convention and the CIS Agreement on Settlement of Disputes related to the Commercial Activity (“Kiev Agreement”). It is, however, questionable if Russian courts will refuse to apply the Conditions to international arbitration proceedings due to these treaties.

New York Convention.
In theory, the novel concept of “conditional arbitrability” circumvents the choice-of-law principles embodied in the NYC. Under the NYC, a court seized with enforcement of a foreign award shall not assess validity of an arbitration agreement (Article V(1)(a)) or breaches of arbitral procedure (Article V(1)(d)) under its local standards – it should apply the law governing the arbitration agreement or the lex arbitri instead. When a jurisdiction chooses to tie arbitrability of disputes (Article V(2)(a)) to compliance with its own laws, it creates a “backdoor” for applying the same local standards to foreign proceedings, albeit under a new label of “arbitrability.”

In practice, several countries besides Russia have already adopted the concept of “conditional arbitrability” in the context of domestic arbitration: for example, the US – in disputes out of motor vehicle franchise contracts; Belgium – in disputes over termination of distributorship or agency; Germany – for claims to annul corporate resolutions. While it is early to state if there is an international trend towards allowing “conditional arbitrability,” Russian courts might follow these examples and conclude that the Conditions are compatible with the NYC.

European Arbitration Convention.
This Convention applies to arbitration agreements between parties domiciled in its signatory states (Article I(1)). It should apply, for instance, to corporate disputes between Russian and German shareholders. Among other provisions, the Convention guarantees parties the freedom to choose between institutional and ad hoc proceedings and to select the seat of arbitration (Article IV(1)).

Technically, the Conditions contradict Russia’s obligations under this treaty, because they restrict the freedom of the parties to choose ad hoc over institutional arbitration or to move the seat outside Russia. It is, however, uncertain if Russian courts will agree that the European Arbitration Convention preempts the Conditions – they often ignored it in the past.

Kiev Agreement. Under this treaty, parties domiciled in CIS countries are free to agree to submit commercial disputes to competent courts of any CIS country (Article 4(2)). The definition of “competent courts” includes arbitral tribunals (Article 3). The signatory states retain exclusive jurisdiction over only real estate disputes and claims against public authorities (Article 4(3)-(4)). Further, the Kiev Agreement does not enlist non-arbitrability or public policy as valid challenges against enforcing a competent court’s decision (Article 9).

In theory, therefore, the Conditions should not apply to arbitrations between CIS parties and seated in a CIS country. However, Russia’s Supreme Court has ruled (controversially) in Case No. 310-ES-4266 that the Kiev Agreement does not apply to international commercial arbitration, despite Article 3’s definition of “competent courts.” Consequently, a challenge to the Conditions based on the Kiev Agreement is currently unlikely.

4. What if parties disregard the Conditions and have a seat of arbitration outside Russia?

Notwithstanding the extraterritorial effect of the Conditions, parties can ignore them and arbitrate corporate disputes in a foreign jurisdiction pursuant to a foreign law.

Most authorities refuse to apply foreign arbitrability rules. Arbitral tribunals generally rule on arbitrability according to the lex arbitri, and courts apply their own local law. Thus, from the perspective of non-Russian law, the Conditions, being just rules of a foreign jurisdiction, do not affect enforceability of arbitration agreements or awards outside Russia.

5. How will Russian courts treat non-compliant arbitration agreements and awards?

It appears obvious that Russian courts will refuse to enforce arbitration agreements that do not comply with the Conditions if they provide, for example, that internal corporate disputes be seated outside Russia. The Russian law does not draw any important distinction between non-enforcement grounds, but finding a non-compliant agreement “incapable of being performed” seems the most appropriate ground (see Articles 48(7)-(8) & 52(16) of the Arbitration Act). More importantly, such an agreement will not have a negative effect in Russian judicial proceedings; a party may then face a risk of having to litigate the same dispute in Russian courts.

A foreign award rendered in an arbitration that did not comply with the Conditions will also be unenforceable in Russia. Most probably, the courts will use the “non-arbitrability” exception (NYC Article V(2)(a)). However, the courts may also refer to the “public policy” exception (Article V(2)(b)), for example, if the court finds that the Conditions aim to protect the interests of shareholders in Russian companies and the protection of shareholders’ interests constitutes a fundamental principle of Russian law.

6. In light of the Conditions, can parties submit disputes involving shares in Russian companies to foreign arbitral institutions that are not licensed in Russia?

The intended cross-border effect of the Conditions may confuse Russian courts when they deal with corporate disputes that only involve shares in a Russian company. As mentioned above, the APC requires that parties resolve such disputes in a “permanent arbitral institution” (a Russian term of art for an “arbitral institution”).

This Article does not specify which law determines what a “permanent arbitral institution” is. Russian courts might therefore be tempted to decide this issue under Russia’s Arbitration Act. Article 44(3) of this Act states that “foreign arbitral institutions are recognized as permanent arbitral institutions provided they obtain a license . . . in accordance with this Article.” A Russian court may then conclude that a foreign institution cannot consider a dispute about shares in a Russian company unless it obtains a license in Russia.

This approach is incorrect, because it gives extraterritorial effect to the Arbitration Act which it does not have. Article 1 of the Arbitration Act expressly limits its scope to arbitrations seated in Russia and does not expand it to international arbitrations seated outside Russia. Accordingly, Russia’s government is supposed to license only those institutions that want to administer Russia-seated arbitrations. The text of Article 44(3) confirms this as well: this provision contains a sanction for non-compliance, and it is limited only to “awards rendered . . . in the territory of Russia.”

It is more appropriate to determine whether a foreign arbitration was institutional as a factual issue. The text of the arbitration agreement, the applicable arbitration rules, or sometimes the lex arbitri can answer whether the parties agreed to arbitrate in a “permanent arbitral institution.” Consequently, if read properly, Russian law does not require foreign arbitral institutions to have a Russian license to administer foreign-seated arbitrations about shares in Russian companies.

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Tribunal secretaries: a tale of dependence and independence

Sun, 2016-12-11 07:22

Kabir Singh, Shobna Chandran, Andrew Foo and Siddhartha Premkumar

Clifford Chance

“Help! I need somebody
Help! Not just anybody
Help! You know I need someone, help …
And now my life has changed in oh so many ways,
My independence seems to vanish in the haze …”

Help raises a question of need, but does it lead to a loss of the fundamental decision-making power vested in the arbitral tribunal? John Lennon’s lyrics to the song Help unwittingly but neatly summarised the current debate over tribunal secretaries more than half a century ago.
Indeed, in recognition of the increasing role of tribunal secretaries in arbitration, Clifford Chance recently hosted the HKIAC Tribunal Secretary Accreditation Programme in Singapore. This programme and a similar one being organised by the CIArb and LCIA are, to the authors’ knowledge, the only programmes specifically designed to provide accredited training for tribunal secretaries. The HKIAC’s stamp of approval can reassure parties, their counsel and their tribunals that the risk of ‘fourth arbitrator’ accusations would be minimised.
Such training and accreditation are timely, considering Russia’s recent attack in the Dutch courts on the largest publicly-known arbitral award in history, that in the Yukos arbitration. One of Russia’s arguments was that the tribunal had improperly delegated its duties to Martin Valasek, who was the tribunal’s secretary – or, from Russia’s perspective, the ‘fourth arbitrator’.
In the event, the Dutch judges did not rule on this issue as they set aside the award on different grounds. That said, the colourful press that Russia’s arguments received has revived interest in arguments in support of set-aside applications that target arbitrators’ use of their secretaries and in the guarding of arbitrators, secretaries and awards from such attacks.
While there has been extensive discussion in this regard, blurred lines remain, particularly as to the appointment, scope of work and liability of tribunal secretaries. This post discusses these three areas of dissonance and measures that may address them.

There are two competing philosophies with regard to the appointment of tribunal secretaries – consent and efficiency – with the tribunal being the master of procedure.
These competing philosophies have led to a number of arbitral institutions adopting one of two types of approach. The first, the consent-focused approach (adopted by the SIAC, ICC, LCIA, SCC and JAMS) is that a secretary proposed by the tribunal can only be appointed if approved by all parties. After all, a distinguishing feature of arbitration is the parties’ choice of their arbitrators, accompanied by an arbitrator’s freedom to reject a nomination.
This approach resonated with participants in surveys conducted in 2012 and 2013 by ICCA and in 2015 by Berwin Leighton Paisner (BLP), in which 76-77% of them felt that consent, both to the appointment of tribunal secretaries in general, and to the appointment of a particular secretary, should be obtained prior to his/her appointment. Partasides elevates such consent to a “fundamental pre-requisite”.
The second approach, adopted by the HKIAC and commended by ICCA, is for the tribunal to propose the secretary to the parties and then allow them to raise objections, but with the tribunal determining any objection and not being required to give reasons when doing so. This approach was endorsed by the Swiss Supreme Court in Decision 4A_709/2014 and (to some extent) by the English High Court in Sonatrach v Statoil [2014] 1 CLC 473 (Sonatrach).

Scope of the tribunal secretary’s tasks
There is broad consensus among the international arbitration community that the appointment of a tribunal secretary should never result in the derogation of a tribunal’s decision-making powers. This was the “principal reason for avoiding the appointment of a secretary” among the ICCA 2012 survey respondents.
Three tasks that are (on the basis of responses to the ICCA and BLP surveys) especially controversial are (i) reviewing or summarising evidence and submissions, (ii) participating in the tribunal’s deliberations, and (iii) drafting substantive parts of the award. Further, Russia’s arguments on setting aside the award on the basis of Martin Valasek’s involvement in Yukos centred on his undertaking of these three tasks.
Two approaches towards the delineation of the tribunal secretary’s scope of work can be distilled from the practice rules and guidance of the arbitral institutions.
The first approach broadly permits a tribunal secretary to undertake some or all of the substantive tasks set out above. For example, the HKIAC expressly permits the tribunal secretary to take on tasks that are not “organizational and administrative”, including “preparing summaries from case law and publications”, “producing memoranda summarizing the parties’ submission and evidence”, “attending the arbitral tribunal’s deliberations”, and “preparing drafts of … non-substantive parts of the tribunal’s orders, decisions and awards”. Such power is subject to veto by the parties, which must be agreed upon.
The second approach, which is narrower, restricts a tribunal secretary’s remit. For example, the LCIA FAQs stipulate that secretaries should “confine their activities to such matters as organising papers for the tribunal, highlighting relevant legal authorities, maintaining factual chronologies, keeping the tribunal’s time sheets and so forth”.

Liability of tribunal secretaries

In many jurisdictions, arbitrators are typically bound by express and/or implied obligations of confidentiality to the parties. Tribunal secretaries, if properly appointed, should also owe obligations of confidentiality to the parties. For example, SIAC requires a tribunal secretary to execute a declaration of confidentiality prior to his/her appointment, while the HKIAC Guidelines place the tribunal secretary under an express obligation of confidentiality.
Conversely, if a tribunal secretary is not formally appointed, the existence and scope of his/her obligations of confidentiality are less clear. Arguably, however, such a tribunal secretary may still be sued for breach of confidence in tort in the same jurisdiction.
Thus, with regard to both the existence and the enforcement of a tribunal secretary’s obligations of confidentiality, greater certainty is achieved if s/he is formally appointed by the tribunal.

Liability generally
Virtually all legal systems accord arbitrators a substantial degree of quasi-judicial immunity from civil claims arising out of their conduct of the arbitration. For example, section 25 of the Singapore International Arbitration Act (Cap 143A) states that an arbitrator “shall not be liable for … negligence … and … any mistake in law, fact or procedure …”
Such immunity does not apply with the same universality to tribunal secretaries. If properly appointed, tribunal secretaries may, however, derive some immunity from institutional guidelines. For example, the HKIAC Guidelines shield tribunal secretaries from liability save in the case of dishonesty, and oblige parties not to make a secretary a party or witness in proceedings arising out of the arbitration.

Conclusion: Keep the doors open
The door for tribunal secretaries has been opened and will almost certainly remain open. In arbitration hubs like Singapore, it is undeniable that top-notch arbitrators typically need assistance in order to manage their concurrent appointments. That assistance usually comes in the form of a tribunal secretary (who is also employed by the arbitrator’s chambers). It is timely for institutions to lay down formal rules or guidelines applicable to some of the key issues surrounding the use of tribunal secretaries. This will allow for certainty for all stakeholders. Failure to address the issues surrounding appointment of tribunal secretaries proactively can affect the integrity of arbitration’s most prized products – arbitral awards.
To this end, the following suggestions merit consideration.
(1) Even if not required to do so by applicable rules or guidelines, arbitrators should obtain the parties’ express written consent before appointing a tribunal secretary. Alternatively, they should obtain deemed consent – for example, by stipulating a time period during which objections may be made. The following, in particular, should be proposed (or at least disclosed) to the parties: (i) the fact that a tribunal secretary will be appointed; (ii) the fact that a particular individual will be appointed; (iii) his/her CV; (iv) his/her declaration of impartiality/independence and any details that may reasonably give rise to doubts about his/her impartiality/independence; and (v) the scope of his/her tasks (including, importantly, the limits thereto).
(2) There should be clear definition of the scope of work that tribunal secretaries are allowed to undertake. Arbitral institutions should continue to take the lead on promulgating clear rules or guidelines to set out the scope of what is permissible and what is part of the integral decision-making process that should not be delegated by an arbitrator. Each institution may well draw the lines and set the balance differently, but this will result in clarity for all concerned, particularly the parties.
(3) Limits on the scope of work for which a tribunal secretary may recover fees should be established and agreed to before s/he commences work. This should involve the disclosure of timesheets, as is the case for arbitrators and counsel. This would increase transparency and ameliorate any adverse ‘perception impact’ of the self- or tribunal-policing of tribunal secretaries and the non-disclosure of their memoranda and drafts (such disclosure was requested, but refused, in the arbitration in question in the Sonatrach case). This would also disincentivise tribunal secretaries from delving into work that is beyond their proper remit.
(4) Arbitral institutions, and not tribunals, should determine objections to the appointment of tribunal secretaries. While this may appear at odds with the ‘light touch’ approach to case administration preferred by some institutions, this would enhance the impartiality (and/or the appearance thereof) of such determinations.
(5) Formal training and accreditation should be provided to budding tribunal secretaries, in addition to the HKIAC and CIArb/LCIA programmes mentioned above. This would boost parties’ confidence in the competence and integrity of secretaries and thereby reduce the incidence of objections. Formal training may also be extended to users and practitioners of arbitration, including counsel and arbitrators, so as to promote greater awareness and understanding of the proper role of the tribunal secretary.

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Set Aside Application Shredded: Hong Kong Court Refuses Set Aside Application in Joint Venture Dispute

Fri, 2016-12-09 22:22

Thomas Walsh and Lei Shi

Clifford Chance For HK45

This post looks at a recent Hong Kong High Court judgment by Mimmie Chan J (Arjowiggins HKK2 Ltd v X Co [2016] HKEC 2472) firmly rejecting a set aside application, brought by a paper producer in relation to an HKIAC award for USD 24 million against it, and which led to indemnity costs being ordered against the applicant.

The clear lesson from the judgment is that any party considering challenging an arbitral award in Hong Kong should think carefully before doing so as the Hong Kong courts, and Mimmie Chan J in particular, show little patience for unmeritious or technical attempts to resist enforcement. Moreover, parties must raise any objections during the underlying arbitration proceedings rather than seeking to hold them in reserve or uncover them after the fact.

The Arjowiggins Case

The Claimant in the underlying arbitration proceedings was French-based Arjowiggins. The Respondent was Shandong Chenming Paper Holdings. Chenming is one of the largest paper producers in China and is referred to as “X Co” in the judgment.

Arjowiggins and Chenming entered into a JV Contract in 2005, establishing a JV Company in the Mainland to manufacture high-margin paper products. Both the contract and the arbitration agreement were expressly governed by PRC law.

The arbitration agreement provided that disputes arising out of or in connection with the JV Contract:

“shall be referred to and finally resolved by arbitration in Hong Kong in accordance with the Arbitration Rules of the Hong Kong International Arbitration Centre (the “HKIAC Rules”)…”.

Alongside the main JV Contract, Chenming and the JV Company (i.e. not Arjowiggins) entered into a Steam Supply Contract under which the Chenming agreed to supply the JV Company with steam for use in the production process.

In 2012 Arjowiggins initiated HKIAC proceedings against Chenming, seated in Hong Kong. In November 2015 the arbitral tribunal of Dr Michael Moser, Professor Lu Song and Christopher Lau SC (Chair) rendered an award in favour of Arjowiggins as Claimant in the amount of USD 24 million.

Chenming then initiated set aside proceedings in Hong Kong on three separate grounds, namely (i) the alleged invalidity of the arbitration; (ii) lack of jurisdiction; and (iii) improper constitution of the arbitral tribunal. These are addressed further below.

The invalidity ground

The first ground alleged by Chenming was that the arbitration agreement was invalid under Article 16 of the PRC Arbitration Law.

Article 16 provides that any arbitration agreement must include (i) the parties’ intention to arbitrate disputes; (ii) the matters to be arbitrated; and (iii) the Arbitration Commission selected by the parties. Here, as accepted by both parties, it was clear that HKIAC was not expressly identified as the ‘Arbitration Commission’ in the arbitration agreement.

Mimmie Chan J rejected this first ground. She accepted the Claimant’s argument that the HKIAC was identifiable as the ‘Arbitration Commission’ from the HKIAC Rules themselves. Further, she found that that the parties had reached a “supplemental agreement” which named the HKIAC when they adopted the HKIAC’s amended Terms of Appointment in the arbitration proceedings. Finally, Mimmie Chan J reiterated the point she has made in a number of other recent judgments, that a party must raise any objection without undue delay and that failure to do so shall be deemed a waiver of its right to object. In particular, she noted that Chenming had not raised any objection during the proceedings and had even raised counterclaims against Arjowiggins.

Further, the Court took particular issue with Chenming’s expert, finding that he had effectively behaved as a “hired gun” and that he had “failed to give his opinion as an independent expert of the Court, and has simply reargued the case of the Respondent as advanced by the Respondent’s team, of which [the expert] formed a part, in the PRC proceedings and in the arbitration.

The jurisdiction ground

The second ground on which Chenming sought to set aside the arbitral award was that the tribunal did not have jurisdiction, as the JV Company had submitted to the jurisdiction of the PRC courts in relation to a separate dispute between the JV Company and Chenming (i.e. not involving Arjowiggins).

The Court rejected this as it was evident that the parties, the contractual relationships and the issues in the two sets of proceedings were separate and distinct.

The composition ground

The third ground was that the default appointment of Chenming’s party appointed arbitrator and the Chairman was allegedly not in accordance with the parties’ agreement, as they were appointed by the HKIAC Council and not the Chairman of the HKIAC.

In her wholesale rejection of this argument, Mimmie Chan J referred to Grand Pacific Holdings Ltd v Pacific China Holdings Ltd (in liq) (No 1) [2012] 4 HKLRD 1 and noted that it has long been established in Hong Kong that unmeritious technical points or minor procedural complaints are not sufficient to set aside awards. Further, and as a final ‘shredding’ of Chenming’s argument, she noted that the Chairman of the HKIAC is a member of the HKIAC Council.


This case reiterates the arbitration-friendly message that the Hong Kong courts, and Mimmie Chan J in particular, have advanced for many years now. It demonstrates that the Hong Kong courts will continue to resist undeserved challenges to awards, punishing them with indemnity costs as was the case in Arjowiggins.

Interestingly, the judgment comes just weeks after Mimmie Chan J did set aside an HKIAC award on the basis that the Respondent, who had been arrested and detained incommunicado in the PRC for the duration of the arbitration, had not been given proper notice and was unable to present his case. That judgment, whilst rare, is a neat counterparty to the Arjowiggins case as it demonstrates that the Hong Kong courts are not just arbitration friendly but highly sophisticated and will exercise their power where required. However, no such exercise was warranted in the Arjowiggins case.

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Mega-Regional Investment Arbitration

Thu, 2016-12-08 21:37

Mark Feldman

Peking University School of Transnational Law For ITA

Investment obligations and investor-State arbitration provisions normally have been negotiated under bilateral investment treaties (BITs), or, more recently, in the larger context of free trade agreements (FTAs). For investment provisions, the movement from BITs to FTAs recently has taken an additional, significant step: the negotiation of such provisions in the even larger context of mega-regional FTAs.

This shift in context — from BITs to FTAs, and now from FTAs to mega-regional FTAs — will significantly affect the content and operation of international investment law provisions. Although ratification of the Trans-Pacific Partnership (TPP) will face significant challenges due to anticipated shifts in U.S. trade policy, the Regional Comprehensive Economic Partnership (RCEP)—which currently includes 16 negotiating States and would cover approximately 30% of global FDI inflows—is expected to be concluded soon, and China recently has renewed calls to actively pursue an even larger Free Trade Area of the Asia-Pacific (FTAAP) agreement. Some combination of these three mega-regional FTAs likely will have a significant impact on 21st century trade and investment activity, including investor-State dispute settlement. Indeed, investment arbitration under these mega-regional FTAs likely will be distinctive in several important respects.

First, a significant number of claims likely will require tribunals to address distinctions between interrelated trade and investment activities. Such claims would arise in the context of international production networks, which mega-regional FTAs are intended to encourage and support. By clarifying the outer limits of “investor” activities, tribunals constituted under mega-regional FTAs could build upon the groundbreaking guidance provided by the TPP, which limits damages under the investment chapter to those incurred by a claimant in its “capacity” as an investor. Investment tribunals constituted under mega-regional FTAs thus could make significant—and much needed—contributions to the development of investment law by analyzing distinctions between intertwined trade and investment activities occurring in the context of international production networks.

Second, mega-regional FTAs could provide particularly good opportunities for the development of effective appellate mechanisms. If appellate tribunals were to be tied to one—and only one—individual mega-regional FTA, each such appellate tribunal could have a systemic impact on the international investment law regime, given the active investment arbitration practice likely to develop under each treaty. At the same time, because each appellate tribunal would oversee the interpretation of only one treaty, such appellate tribunals could avoid the temptation to understate the significance of textual distinctions across treaties, which can arise from a perceived need to achieve greater consistency in the case law.

Third, mega-regional FTAs likely will increase the availability of investment liberalization commitments. By offering compelling trade benefits—in particular, enhanced access to regional and global value chains—mega-regional FTAs could encourage developing States to agree to investment liberalization commitments that otherwise would be difficult to secure, as illustrated by commitments made by Brunei, Malaysia, and Vietnam under the TPP.

Fourth, mega-regional FTAs can encourage investment liberalization in another respect: by relying on existing momentum for trade liberalization to create momentum for investment liberalization, particularly when reserved sectors are set out in a single set of annexes that apply both to the investment and trade in services chapters of an agreement. The TPP illustrates such an approach.

Fifth, by including a large number of signatories, mega-regional FTAs could give rise to coordination challenges. Such coordination challenges could weaken the effectiveness of joint interpretation mechanisms—a form of control mechanism on which States can rely to limit the independence of tribunals constituted under a particular treaty. In response to the risk of coordination challenges, policymakers should consider a wide range of alternative control mechanism options, including soft law options, which recently have been used effectively by the NAFTA Parties (when developing non-binding “Statements” on arbitral procedure) and UNCITRAL (when developing transparency rules that apply largely on a voluntary, opt-in basis).

With the conclusion of the TPP (subject to a challenging ratification process), the likely conclusion of an RCEP agreement, and the active development of an FTAAP agreement, these distinctive characteristics of mega-regional investment arbitration ultimately could be seen, more generally, as characteristics of 21st century investment arbitration.

For further discussion of these issues, see Mark Feldman, Investment Arbitration under Mega-Regional Free Trade Agreements: a 21st Century Model (working draft available here).

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The Requirement Of “Effective Seat” in CEAC Holdings Limited v. Montenegro: Are We Moving Towards a Double-Barreled Test for Protected “Investor”?

Thu, 2016-12-08 03:15

Inna Uchkunova

International Moot Court Competition Association (IMCCA)

Co-authored with: Oleg Temnikov, Wolf Theiss


In a recent award issued in the case of CEAC Holdings Limited v. Montenegro (ARB/14/8, Award, 26 July 2016) the arbitral tribunal had to decide whether CEAC Holdings Limited (hereinafter: “CEAC”) was a protected investor within the meaning of the applicable Cyprus–Serbia and Montenegro BIT.

Under Article 1 of the said BIT an investor is:

“a legal entity incorporated, constituted or otherwise duly organized in accordance with the laws and regulations of one Contracting Party, having its seat in the territory of that Contracting Party [… ]” [Emphasis ours]

The main point of contention therefore was whether CEAC really had “its seat” in the Republic of Cyprus. The Claimant insisted on a low threshold of a mere “registered office”, while the Respondent asserted that the threshold that must be met is a high one involving “management and control”. The tribunal however found that the evidence presented by CEAC – who bore the burden of proof – did not satisfy even the lower threshold proposed by itself since it failed to show that it had, e.g., any premises of its own at the claimed address which had been open to the public.

The criterion applied by the tribunal in respect of “seat”

In making its decision the tribunal avoided express renvoi to municipal law but took it into account as a background to its interpretation as other tribunals have previously done. (Tenaris S.A. and Talta-Trading e Marketing Sociedade Unipessoal LDA v. Venezuela (ARB/11/26, Award 29 January 2016, para. 169.) The tribunal stated that:

“[…] if it is to be considered to be a company’s registered office […]:
(a) It must consist of a physical premises – a vacant plot will not do;
(b) The company must have some right (by way of ownership, lease or license) to use the property or part thereof […];
(c) The premises must be accessible to the public (for at least two hours on each business day) for inspection of the various books and registers […] and for service of documents and notices upon the company;
(d) The books and registers that a company must by law maintain in its registered office should actually be held there; and
(e) The relevant company’s name should be painted or affixed on the outside of the office […]” (Award, para. 171)

The standard of proof required by the tribunal was “sufficient and persuasive evidence”. (Award, para. 183)

Given, however, that the alleged premises of CEAC appeared empty and were inter alia inaccessible for courier delivery the Claimant failed to meet its burden of proof. For these reasons, the tribunal ultimately held that it lacks jurisdiction to deal with the case. (Award, para. 212)

Comparison with other decisions

A number of previous tribunals have been called upon to deal with the same issue. For example, in Tenaris S.A. and Talta-Trading e Marketing Sociedade Unipessoal LDA v. Venezuela (ARB/11/26, Award, 29 January 2016) it was decided that the terms “siège social” and “sede”, as used in the applicable Luxembourg and Portuguese Treaties, similarly mean the “place of actual or effective management.” (Ibid., para. 154)

The Tenaris tribunal however took into account the fact that for “a holding company, or a company with little or no day-to-day operational activities, its day-to-day ‘management’ will necessarily be very limited […]” (Ibid., para. 199)

In the case of Alps Finance and Trade AG v. Slovak Republic, (UNCITRAL, Decision on Jurisdiction, 5 March 2011) the tribunal required proof that:

“[…] the place where the company board of directors regularly meets or the shareholders’ meetings are held is in Swiss territory; there is a management at the top of the company sitting in Switzerland; the company has a certain number of employees working at the seat; an address with phone and fax numbers are offered to third parties entering in contact with the company; certain general expenses or overhead costs are incurred for the maintenance of the physical location of the seat…” (Decision on Jurisdiction, para. 217)

It must be noted, however, that in this case the definition of “investor” contained in the applicable Czech-Slovak BIT required that “real economic activities” be carried out in the territory of the respective State. Such requirements have been inserted in many investment treaties so as to exclude mailbox and paper companies from investment protection. (See Yaung Chi Oo Trading Pte Ltd. v. Myanmar, ASEAN I.D. Case No. ARB/01/1, Award, 31 March 2013, para. 52, where the applicable ASEAN agreement required “effective management”.)

This approach needs to be compared with BITs providing merely that a qualified investor is one who has his place of incorporation in the territory of the home State. For instance, in Tokios Tokelės v. Ukraine (ARB/02/18, Decision on Jurisdiction, 29 April 2004) the tribunal recognized that “the Claimant is an ‘investor’ of Lithuania under Article 1(2)(b) of the Ukraine-Lithuania BIT based on its state-of-incorporation.” (Ibid., para. 43).

In such cases, a mere certificate from the respective trade register will suffice as proof of corporate nationality (Tokelės v. Ukraine, para. 43) contrary to the situation in CEAC v. Montenegro where the panel opined that such certificates “constitute only prima facie evidence.” (supra, para. 155)

At least on one occasion an arbitral tribunal has refused to take the term “place of incorporation” at face value and proceeded to satisfy itself that the Claimant-company was actually managed from the purported place of business, that the majority of its contracts were concluded there, that it submitted its financial statements in that State, etc. (Société Civile Immobilière de Gaëta v. Guinea, Award, 21 December 2015, paras. 144, 155, 165, 179)

In that case however, taking into account the agreement of the parties as to the applicable law, the tribunal applied French law in determining the nationality of the investor. (Ibid., para. 139)
Contrary to this approach, the majority of tribunals seem to agree that international law should be applied and a renvoi to national law is excluded. (Alps Finance and Trade AG v. Slovak Republic, para. 196; Tenaris S.A. v. Venezuela, para. 169)

Comment on the divergent practice of previous tribunals

The above overview of arbitral practice shows that great attention must be paid to the text actually used in the applicable treaty. Thus, the tribunal in Saluka Investments v. The Czech Republic has stated that:

“…the Tribunal must always bear in mind the terms of the Treaty under which it operates. Those terms expressly give a legal person constituted under the laws of The Netherlands – such as, in this case, Saluka – the right to invoke the protection of the Treaty. To depart from that conclusion requires clear language in the Treaty, but there is none […]” (Partial Award, 17 March 2006, para. 229)

Consequently, when the parties to the BIT have referred merely to the place of incorporation of the investor it is not the for the tribunal to retrospectively replace their expressed will by importing interpretations requiring effective management or control.

Similarly, when determining the relevant threshold regard must be had to the particulars of the respective corporate claimant (e.g., whether its chosen corporate form presupposes lesser on-site activity) and in any event, caution must be exerted so that arguments deriving from awards dealing with additional requirements such as “real economic activities” are not transposed to cases in which the applicable provisions require mere “place of incorporation”.

Critical date and prevention of abusive treaty-shopping

Given the multitude of approaches used by previous tribunals the question arises whether we are moving towards a double-barreled test requiring that to qualify as a protected “investor” the claimant must satisfy not only the elements enumerated in the applicable BIT but also other elements deriving from arbitral practice as is the case with qualified “investments” which need to satisfy not only the requirements of the BIT but also those of the ICSID Convention since the latter was intended to protect only qualified investments and not ordinary commercial transactions.

The answer to the above question is clearly “no”. As stated in the preceding section, it is not for arbitral tribunals to correct the wording actually used – if the contracting States have accepted the place of incorporation as the leading criterion, that is the end of the matter. (See Tenaris S.A. v. Venezuela, supra para. 196)

“Seat”, on the other hand, has been consistently accepted to mean something more than a mere “registered office” and requires “a more significant economic relationship”. (Christopher Dugan et. al., Investor-State Arbitration (OUP: 2008) p. 307)

In this respect, one last observation needs to be made. In CEAC v. Montenegro the tribunal determined that the critical date for determining the existence of a seat is the date of filing of the application.

Similarly, the tribunal in Vacuum Salt v. Ghana has firmly denied a rule of continuous nationality in respect of juridical persons:

“…plausible justification exists for requiring continuous nationality (at least to the date of registration of a request for arbitration) of an individual but not of a juridical person…” (Award, 16 February 1994, fn 9 as cited in Christoph Schreuer, The ICSID Convention: A Commentary (CUP: 2009) fn. 905 p. 276.)

Nevertheless, in cases in which the applicable BIT refers to a “seat”, if the situation preceding the date of the dispute is disregarded the purported investor may turn out to be a mere shell company designed to gain access to investment arbitration and having a fictitious seat. Notably, Douglas has stated that: “[t]he claimant must have had the relevant nationality at the time of the alleged breach of the obligation forming the basis of its claim and continuously thereafter until the time the arbitral proceedings are commenced”. (Zachary Douglas, The International Law of Investment Claims (CUP: 2009) p. 284)

Admittedly, the text of the Convention requires a form of continuous nationality only in respect of natural persons, but the omission regarding juridical persons could be explained by the fact that the drafters desired to emphasize that no subsequent date is to be taken into account since in those cases in which “foreign control” is involved (See Article 25(2)(b) in fine) such control may have been excluded by the expropriatory act, i.e. by taking the shares in a given company the host State may strip it of foreign control and thus paralyze the claim.

This does not imply however that the situation preceding the breach is irrelevant, otherwise a carte blanche would be given to rogue investors to go forum-shopping. Importantly, in Tenaris S.A. v. Venezuela the claim of the investor was registered in 2011, but the tribunal examined evidence of board meetings in the period 2009-2011. (supra, paras. 8, 12, 210, 213, 224)

It would therefore be interesting to see whether future tribunals would apply the same approach to the critical date as the one used in CEAC v. Montenegro.

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Uncertainty of enforcement of emergency awards in India

Wed, 2016-12-07 05:01

Kartikey Mahajan and Sagar Gupta

India took a big leap in reforming its arbitration law by amending the Arbitration & Conciliation Act, 1996 (“Act“) in December 2015 (“2015 Amendments“). The 2015 Amendments coupled with setting up of the Mumbai Centre for International Arbitration (“MCIA“) within a year of the amendments and the increased emphasis by the Government on arbitration bode well for promoting institutional arbitration in India.

One of the obvious advantages of institutional arbitration is the emergency arbitrator provisions – a procedure which has been resorted to quite frequently by the Indian parties under the SIAC rules. Enforceability issues, however, loom large over such emergency awards in a foreign seated arbitration in light of the recent decision of the Delhi High Court (“Court“) in Raffles Design International India Pvt. Ltd.& Anr. v. Educomp Professional Education Ltd.& Ors. (MANU/DE/2754/2016) (“Raffles Design”). The Court ruled that an emergency award in a foreign seated arbitration cannot be enforced in India under the Act. However, it appears that parties can seek indirect enforcement of emergency awards by applying for interim measures under section 9 of the Act before Indian courts. We analyse the judgment and its implications below.


Indian position pre-2015 Amendments

Due to the Bhatia-BALCO dichotomy in Indian arbitral jurisprudence, arbitration agreements executed prior to 6 September 2012 with a foreign seat may still be bound by the provisions of Part I of the Act (applicable to India seated arbitrations) unless expressly or impliedly excluded. (one of the authors has discussed this previously here).

There are two important provisions for the grant of interim relief under the Act. Section 17 provides for interim measures by the arbitral tribunal and section 9 provides for interim measures by courts. Since both these provisions are contained in Part I of the Act, the authors presume that these provisions are not applicable to foreign seated arbitrations per se without going into the exceptions that may arise due to the Bhatia-BALCO dichotomy.


2015 Amendments – Job half done

To ensure that parties involved in a foreign seated arbitration have recourse to interim relief from Indian courts, the 2015 Amendments made section 9 of the Act applicable to foreign seated arbitrations (subject to an agreement to the contrary).  Another significant amendment was insertion of section 17(2) under which any order issued by the arbitral tribunal is now deemed to be an order of the court and enforceable in the same manner. The addition of section 17(2) should aid the enforcement of emergency awards for domestic seated arbitration in India. However, there was no similar amendment made in Part II of the Act dealing with foreign seated arbitrations, leaving any interim orders passed by a foreign seated arbitral tribunal as non-enforceable in India.

In August 2014, the Law Commission of India in its 246th Report, sought to offer statutory recognition to emergency awards by broadening the definition of “arbitral tribunal” under section 2(1)(d) of the Act (similar to the position in Singapore as described below) to incluase an emergency arbitrator. Nonetheless, such statutory recognition is not reflected in 2015 Amendments and this, along with the absence of a provision similar to section 17(2) in Part II of the Act, has caused uncertainty in India for both domestic and foreign seated emergency awards.


Raffles Design: The Judgment and Improper reliance

In Raffles Design, the dispute resolution clause provided for arbitration under SIAC Rules. In September 2015, the petitioners invoked emergency arbitration provisions and an emergency award was rendered on 6 October 2016. The petitioners were successful in enforcing emergency award against one of the respondents before the High Court of Singapore under section 12 of the Singapore International Arbitration Act in February 2016. The Court was concerned with the question, among others, of maintainability of an application for interim measures under section 9 of the Act after a foreign seated emergency award was already obtained by the petitioner, which it answered in the affirmative. The reasoning raises some interesting propositions worth analysing.

  1. a) Enforcement of Emergency Awards in India

The Court reasoned that section 17(2) of the Act is not applicable to foreign seated arbitrations, as it is contained in Part I of the Act. The Court then went on to rely on Article 17H of the UNCITRAL Model Law (“Model Law”) which provides for recognition and enforcement of interim measures granted by the arbitral tribunal to be binding, except the grounds mentioned in Article 17I. In the absence of a similar provision for foreign seated arbitrations, the Court held that the emergency award cannot be enforced under the Act and the only method available for enforcing the same would be to file a suit. (¶ 98-99)

The Act is silent on the enforcement of foreign seated emergency awards/orders of the arbitral tribunal and the Court’s observations in this regard that emergency awards cannot be enforced under the Act appear to be consistent.

  1. b) Non-reliance on HSBC

The Court reasoned that section 9 of the Act cannot be used to enforce emergency awards but the parties are free to approach the court for interim relief under section 9 (¶100). Raffles Design is not the first Indian case which provided an avenue to the parties to approach Indian courts under section 9 for interim measures after obtaining an emergency award in a foreign seated arbitration.

The judgment of HSBC PI Holdings (Mauritius) Ltd. v. Avitel Post Studioz Ltd. & Ors. (MANU/MH/0050/2014) (“HSBC”) holds particular importance for the acknowledgement of the concept of emergency arbitration in India. It is unfortunate that HSBC has not received much attention in the Indian arbitration scene and was not even mentioned by the Court in Raffles Design.

  1. c) Improper reliance on Article 17I(2) of the Model Law

In HSBC, the Bombay High Court granted interim measures in a similar vein as that of the emergency arbitrator. On the other hand, in Raffles Design it was held that it is open to a court to independently determine the grant of interim relief.

In arriving at this conclusion, the Court incorrectly sought to rely on Article 17I(2) of the Model Law to state that the “court enforcing an interim order passed by the Arbitral Tribunal in prescribed form undertakes a review of the substance of interim measure.” (¶101)  In fact, a bare reading of Article 17I(2) of the Model Law demonstrates that such a review on merits of the interim measure is not available – “…. The court where recognition or enforcement is sought shall not.. undertake a review of the substance of the interim measure.” (emphasis added)


Analysing international trends

The legislative and judicial trend worldwide is to bring municipal arbitration laws to recognize and enforce emergency awards. Some jurisdictions who have brought such legislative changes include Singapore (amendment to the definition of ‘arbitral tribunal’ to include emergency arbitrator in section 2(1)), and Hong Kong (amendment to include Part 3A, section 22B to make emergency relief granted, whether in or outside Hong Kong, by an emergency arbitrator under the relevant arbitration rules enforceable).

Recognition of the importance of emergency arbitration can be observed from the recent decision of Gerald Metal S.A. v. Timis & Ors. (2016 EWHC 2327 (Ch)) where it was held that the Court may not grant interim measures in the case of “urgency” if, emergency arbitration provisions are available under the procedural rules (in that case, LCIA). One of the factors considered by the court was that the test for ‘urgency’ was same under both the English Arbitration Act, 1996 and the LCIA Rules. Therefore, limitation on the powers of the court was placed to grant interim measures and it could only be exercised if there was a lack of “practical ability” of the emergency arbitrator to provide interim relief or when its powers are inadequate. As the emergency arbitrator awards are themselves surrounded by a cloud of uncertainty in terms of enforcement in India, it is difficult to foresee any Indian court exercising restraint in favour of an emergency arbitrator’s powers to grant interim relief.


The way forward

Raffles Design highlights the lacunae under Indian law in relation to enforcement of foreign seated emergency arbitrator awards. It is noted that the amendment to section 2(1)(d) of Act recommended by the Law Commission of India would have brought Indian law in line with the global trend to enforce emergency awards by way of legislative provision. However, such an attempt would only be applicable for domestic seated emergency awards which can still possibly be enforced resorting to section 17(2) of the Act. In order to expressly recognise the emergency awards in foreign seated arbitrations, a provision similar to section 17(2) of the Act needs to be inserted in Part II of the Act.

The timing of amendments of the Singapore and Hong Kong legislations to include favourable provisions relating to emergency awards coincided with the inclusion of emergency arbitration provisions in the SIAC Rules and HKIAC Rules. It is hoped that with the launch of the MCIA providing for emergency arbitration and the Government’s push towards institutional arbitration, such provisions will be incorporated in the Indian legislation in near future.

For the time being, in the absence of a conclusive judgment of the Supreme Court, the only remedy available for indirect enforcement of emergency awards appears to be for the parties to apply for interim measures under section 9 of the Act. As held in Raffles Design, the Court will review the merits independently of the interim relief already granted by the Tribunal. But the authors are hopeful that a court dealing with such a section 9 application may be more inclined to grant interim relief where it has already been ordered by the emergency arbitrator as was done in the case of HSBC.

Raffles Design decides only the maintainability of the section 9 application and the Court is yet to decide on the merits. It is only after analysing the judgment on merits and as well future decisions from other High Courts of the country, we can firmly establish that the Indian courts might be looking to award the same relief in an application under section 9 of the Act as that awarded by the emergency arbitrator.

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