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Arbitration in the UAE: End of Year Round-up – From the Penal Sanctioning of Arbitrators to the 2016 DIFC-LCIA Rules of Arbitration (Part 1)

Mon, 2017-01-16 17:02

Gordon Blanke

DWF (Middle East) LLP

With the beginning of a new year, it is time for a look at arbitration developments in the UAE that have gone unnoticed (or at least unreported) over the course of 2016. As the readership of this Blog will be aware, the United Arab Emirates (UAE) have developed into one of the most fecund arbitration jurisdictions in the world. Offering a common and a civil choice between the Dubai International Arbitration Centre (DIFC) and the Abu Dhabi Global Market (ADGM), both offshore, on the one hand and mainland or onshore UAE, in particular Dubai and Abu Dhabi, on the other, this is hardly surprising. Needless to say that given the increase in importance of the UAE as a regional arbitration hub, developments there deserve closest scrutiny in order to ensure that arbitral practice and procedure in this still comparatively young jurisdiction evolve on the basis of best international standards (without, of course, losing sight of cultural sensitivities).

One of the most recent developments that has attracted immediate criticism from within specialist circles is the amendment of Art. 257 of the UAE Penal Code to include arbitrators:

“An expert, arbitrator, translator or investigator who is appointed by a judicial or an administrative authority or elected by the parties and who issues a decision or expresses an opinion or submits a report or present a cause or proves an incident in favour of a person or against him contrary to the obligation of fairness and impartiality shall be punished by temporary imprisonment. The aforementioned shall be precluded from performing the duties they were charged with in the future.”

In reaction to this amendment, some international law firms have been rumoured to have placed an immediate ban on their arbitration partners to serve arbitrator mandates in the UAE and to have invited any presently serving arbitrator to withdraw from their UAE-seated mandates. This, no doubt, is a precautionary measure to forestall any negative publicity that potential criminal prosecution (whether ultimately meritorious or not) may entail (apart from an obvious desire to avoid litigation in court and the expenses and commitment of executive time this may require). I personally believe that this is an over-reaction. One must not forget that a withdrawal by an arbitrator from a pending mandate without good reason may attract civil liabilities both under various regional institutional rules as well as Art. 207(2) of the UAE Arbitration Chapter and is unlikely to be covered by professional indemnity insurance. This said, it is unlikely that the new amendment will dissuade arbitrators from serving mandates in the UAE. The main reason for this is that on the basis of UAE criminal law, it will be very difficult to prove the underlying bias that gives rise to criminal liability. It is also important to note that the provision has already been in force with respect to court-appointed experts and translators for many years and its implementation to date does not appear to have caused any major concerns. Nonetheless, there is a real danger that Art. 257 as amended might be invoked abusively by unmeritorious parties that are known to make use of guerrilla practices in a local arbitration context. Judging by the UAE courts’ mature handling of vexatious civil liability claims brought by such parties before the e.g. Dubai courts to date, arbitrators can rest assured that the UAE judiciary will only entertain the most serious infringements (for the avoidance of doubt, none of the recent civil liability claims for professional negligence before the UAE courts have succeeded, see my previous reporting here: G. Blanke, “The liability of arbitrators in the UAE: Quod novi sub sole?”, Kluwer Arbitration Blog, 28 March 2016, available online). I personally believe that the initial excitement caused by the amendment to the UAE Penal Code will be short-lived and parties with bad intentions – faced with an unreceptive local judiciary – will ultimately desist from pursuing vexatious criminal liability claims against irreproachable arbitrators.  It is important to bear in mind that criminal liability under UAE law requires – for want of a better term – mens rea and will therefore only trigger the criminal liability of an arbitrator who knowingly “issue[s] a decision or expresses an opinion […] contrary to the duty of fairness and impartiality” (this requirement remains unaffected by the removal of the word “knowingly” from the original version of Art. 257). This means that an arbitrator’s criminal liability will only come into play if it can be established that he or she has favoured one of the parties to the arbitration with the intention of providing an unfair advantage, so the bias must be proven to have been intentional (gross professional negligence will likely only attract civil liability). A qualifying advantage can be procedural, such as not having accorded a party a fair hearing, or substantive, such as a finding in favour of a party in violation of the prevailing law on the merits. Any such violations, whether procedural or substantive, must be proven to have been committed by the arbitrator intentionally, i.e. a genuine error in applying the law or the unintentional conferral of a procedural advantage will not be sufficient.

On the more positive side, the Dubai Courts have issued a number of rulings that confirm some fundamental principles of arbitration under the UAE Arbitration Chapter and the positive approach taken by the Dubai Courts to the enforcement of foreign arbitral awards. As regards the former, in Case No. 199/2014 (see ruling of the Dubai Court of Cassation of 21st August 2016), the Dubai Court of Cassation confirmed the res judicata effect of an award. According to the Court, an award becomes finally binding upon the parties to the arbitration upon its issuance. This even holds true where new evidence or material facts come to light ex post. As a consequence of the res judicata effect of an award, the underlying arbitration agreement will also usually be considered exhausted. The potential subsequent nullification of the award will not change this position. This essentially confirms the existing acquis on the effect of res judicata under the UAE Arbitration Chapter (see in particular G. Blanke, Commentary on the UAE Arbitration, Sweet & Maxwell, 2016, at para. II-148). As regards the latter, the Dubai Courts (see Case No. 693/2015, ruling of the Dubai Court of Cassation) have affirmed that on the question of which law applies to the determination of capacity issues in relation to the underlying arbitration agreement within the international enforcement context the law at the seat will prevail. In the Dubai Court of Cassation’s reasoning, this is in keeping with the requirements of Art. V(1)(a) of the 1958 New York Convention (on the recognition and enforcement of foreign arbitral awards). This is a welcome development in that it will remove any uncertainties on the properly applicable law (which would otherwise be the law of incorporation of the individual signatory party).

Turning to the DIFC, the DIFC-LCIA Arbitration Centre, the DIFC-based sister organization of the London Court of International Arbitration (LCIA), has adopted a revised set of arbitration rules, the 2016 DIFC-LCIA Rules. These entered into effect on 1st October 2016 and apply to all new arbitration proceedings commenced in a DIFC-LCIA forum from that date. The 2016 version of the Rules is very closely modeled on the 2014 LCIA Arbitration Rules, which have been in effect since 1st October 2014 and have so far proven uncontroversial in practice since their entry into force. The principal changes introduced by the 2016 version of the Rules are largely cosmetic and leave the overall operating system of the DIFC-LCIA Rules intact. These changes, one senses, have been adopted in order to enhance the overall efficiency and integrity of arbitrations conducted under the auspices of the DIFC-LCIA. Other changes, however, are more conceptual in nature and have most probably been adopted in an attempt to modernize the rules in order to bring them into line with other leading sets of international arbitration rules, such as those of the ICC International Court of Arbitration, the Singapore International Arbitration Centre (SIAC) and the Hong Kong International Arbitration Centre (HIAK), all (potentially) strong competitors in the region. Yet a third category of changes appears to aim at underlining the distinctive character of the DIFC-LCIA Rules and at giving them a competitive edge over other competing sets of international rules. To give a flavor of their quality and incisiveness, it is worth emphasizing the following changes:

  • The tribunal’s availability – Taking guidance from the 2012 revision of the ICC Rules, the revised DIFC-LCIA Rules introduce into the appointment process the notion of the tribunal’s availability. Pursuant to Art. 5.4 of the revised Rules, a nominated candidate must sign a declaration stating whether he/she is “ready, willing and able to devote sufficient time, diligence and industry to ensure the expeditious and efficient conduct of the arbitration”. Further, pursuant to Art. 10.2 of the revised Rules, an arbitrator may be revoked if he/she “does not conduct or participate in the arbitration with reasonable efficiency, diligence and industry”. No doubt, these provisions read together will promote the efficient conduct of the arbitration process.
  • Appointment of an emergency arbitrator – Taking guidance from the ICC Rules, the SIAC and the HIAC Rules, a new Art. 9B provides for the appointment of an emergency arbitrator “in a case of emergency” at any time before the constitution of the tribunal.
  • Consolidation – The revised Rules provide for more elaborate mechanisms of consolidation, both at the hands of the tribunal and the LCIA Court.
  • Appointment and conduct of legal representatives – The most innovative and possibly controversial provisions of the revised Rules are those relating to the appointment and conduct of legal representatives in DIFC-LCIA arbitration. It is questionable to what extent it is sensible to confer upon a tribunal such policing powers; there is a reasoned concern that being entrusted with the policing and sanctioning of the conduct of the parties’ legal representatives, the tribunal’s focus on determining the merits may be diluted and ultimately jeopardise the procedural efficiency of the arbitration.

… to be continued…

 

 

 

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ICC Commission Report on Financial Institutions and International Arbitration: Workstream on Arbitration of Islamic Finance Disputes

Sun, 2017-01-15 21:36

Samaa Haridi and Mohamed Abdel Wahab

Hogan Lovells For Hogan Lovells

The Workstream on Arbitration of Islamic Finance Disputes was tasked with looking at whether the development of specific rules and the development of a comprehensive so-called lex Islamica and procedures for Islamic Finance would encourage the use of arbitration in resolving Islamic Finance Disputes. The Workstream’s Report proposes a list of recommendations that the ICC may consider while developing its rules and procedures. The Report emphasizes that the applicability of its recommendations should be assessed in light of the Sharia’s doctrinal diversity. Islamic Shari’a doctrinal diversity is composed of Primary and Secondary Sources; while the Primary Sources are undisputed, the Secondary Sources may pose a challenge in the development of unified rules and procedures because there is limited consensus on the scope of interpretation of the Secondary Sources.

The Primary Sources of Islamic Shari’a are the Quran and the Sunna. The Quran, the paramount authority, includes the principles that govern the relationships of individuals in society. The second most authoritative source for Shari’a is the Sunna, which is a collection of the actions and sayings of the Prophet compiled by the Prophet’s contemporaries and should be used as a reference for actions and decisions. The Secondary Sources comprise the Islamic Schools of Jurisprudence that was developed to address topics not covered within the Primary Sources. However, these Schools differ in the methodology they use to derive their rulings from Quran and Sunna.

There are six main Schools of Islamic Law: four within the Sunni branch of Islam and two within the Shi’a branch. The Schools agree on certain rules and principles and disagree on others. The Report highlights a certain number of principles of Shari’a law, such as the prohibition of the payment or acceptance of interest (Riba), which all Schools agree upon, and the prohibition of the use of conditions precedent in a contract, as an issue deemed permissible according to some Schools and prohibited for others. The Report also provides insights on the possibility of varying interpretations of various principles within Shari’a law. For example, all Schools prohibit speculative transactions, but they disagree as to the point at which a transaction becomes too speculative or uncertain to pass muster. This potential difference in interpretation might pose a challenge in the application of the Report’s recommendations to the development of a framework for Islamic Finance Arbitration.

The Report proposes that the ICC lead the development of a framework for the resolution of Islamic finance disputes through establishing fast track and cost effective rules on arbitrating Islamic finance disputes and conducting trainings in Islamic finance transactions and disputes, in cooperation with well-established institutions specializing in Islamic finance to help arbitrators and practitioners gain the needed expertise in the field of Islamic finance. It recommends the development of an arbitration guide for the Islamic finance market, the establishment of a task force dedicated to the development of a lex Islamica and the development of a set of uniform, harmonized legal norms for deciding Islamic finance disputes.

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ISDS, Moral Damages, Reputational Harm… To The State – A Comment In The Wake Of Lundin

Fri, 2017-01-13 07:30

Aleksei Drobyshev

YIAG

Lundin Tunisia B. V. v. Republic of Tunisia is a case that very little information was (and, in many ways, still is) available about until very recently. In November 2016, excerpts from the award (in French), itself dated December 22, 2015, became available on the ICSID website.

The published excerpts give very limited information on the factual background of the dispute. The following is known for certain: the Claimant, Lundin, had a contract with Tunisia, under which it received certain concessions with respect to an off-shore oil field. The contract included a clause that allowed Tunisia to buy back a portion of these concession rights, which Tunisia did. The state purchased these concession rights through a public entity, whose debt Tunisia guaranteed. Part of the claim by Lundin was with respect to this public entity not performing some of its obligations, while other parts addressed a related tax dispute between the parties.

In addition to the substantive issues and those procedural issues that are ordinary for investment disputes (such as whether the Claimant had an investment), the Lundin tribunal was faced with an issue that few investment tribunals face – the issue of moral damages. The moral damages claim, however, was raised not by the investor, but by Tunisia, the Respondent state.

Although the tribunal rejected the moral damages claim, it did so on the facts – the Claimant committed no international wrongdoing. With respect to the procedure, the tribunal found first, that the Respondent state can bring a moral damages claim in an investment dispute, and, second, that the tribunal does have the power to award such moral damages, should it find such a decision appropriate.

Although it is a somewhat rare occurrence, this is not the first time that an investment tribunal has had the task of deciding a moral damages claim. Even though BITs and other investment treaties, to the author’s knowledge, do not contain provisions on awarding moral damages to either party, investment tribunals have affirmed that they have the mandate to award moral damages to the investor (see e.g. Desert Line v. Yemen, Europe Cement v. Turkey). The underlying rationale goes all the way back to the fundamental principle that the reparation for an international wrongdoing shall, to the fullest extent possible, wipe out the consequences of said wrongdoing. This principle is reflected in the ILC Articles on State Responsibility (Articles 31, 34), and is applied in public international law including in the Opinion in the Lusitania Cases and the Chorzów case.

The Lundin tribunal began its reasoning with this statement: “Il ne fait pas de doute que des dommages-intérêts pour dommage moral peuvent être attribués par des tribunaux arbitraux internationaux[…]” (para. 374).

There is no doubt that, in principle, an investment tribunal can award moral damages. That is, to an aggrieved investor.

However, when a Respondent state makes a moral damages counterclaim in an investment dispute, that raises its own issues.

Since the ILC Articles on State Responsibility are often cited as the rationale for an investment tribunal to hear a moral damages claim, it seems only natural to examine them first. While they have a very specific subject, i.e. the responsibility of states, they touch upon, albeit indirectly, the question of what kind of damage states can suffer, too.

Article 31 of the ILC Articles uses the broad term “injury” with respect to damage that warrants reparation and provides that this includes both material and immaterial damage. The latter is referred to as “moral” damage, and involves, as put by the ILC Draft Articles Commentary, “such items as individual pain and suffering, loss of loved ones or personal affront associated with an intrusion on one’s home or private life”. One can notice that the given examples share one common characteristic: they cause stress to an individual. But how can one cause stress to a State? In the author’s view, it is not possible.

That is not to say that the state can only suffer material, financially assessable harm. Indeed, the ILC Articles in Article 37 take into account the possibility of a state (as claimant against another state) suffering damage that is not quantifiable. Such damage, however, generally warrants satisfaction, such as a declaration of wrongfulness or an apology, and even that is only the case when restitution and compensation are insufficient to undo the damage done by the international wrongdoing. This falls outside the scope of moral damages, i.e. the kind of loss that is quantifiable, and involves either physical or psychological stress to individuals, or reputational harm. More importantly, however, this damage must have been caused to a state by another state, since the ILC Articles do not apply to actions of individuals.

Despite that, and the Articles’ subject matter, the Lundin tribunal used a reference to Article 31(2) of the ILC Articles as a general basis for a finding that the tribunal had the power to hear Tunisia’s moral damages counterclaim against the investor.

In general, it is difficult to think of the moral damage that the state can suffer from an investor, when the very purpose of ISDS is to protect investors, and host states only accept obligations to protect investors under their investment treaties. The only kind of damage that the state can suffer is reputational harm: if the state is falsely accused of wrongful expropriation of an investment, it risks creating a reputation that that state is investor-unfriendly, and thus the state experiences harm. This is also a line of reasoning that one can see in the public excerpts of the Lundin award (para 379). An earlier tribunal, Meerapfel v Central African Republic, also admitted the possibility of reputational harm to the respondent state, but rejected the counterclaim on facts (para. 431).

There is a fault in this line of reasoning: if the basis for hearing and awarding any kind of moral damages claims by investment tribunals is the idea that damage for international wrongdoings should be undone as fully as possible, then the question is: what was the wrongdoing by the investor?

The first option is that the investor induces reputational harm to the state by the very act of bringing the claim before the investment tribunal, if the tribunal finds that the state did not violate its obligations under the relevant investment treaty. The second one is that the reputational harm is caused by the media exposure from the dispute. Either way, the conclusion that there is wrongdoing by the investor would be rather absurd, since the investor does not violate any rules of public international law by bringing an investment claim or if the state experiences negative media coverage.

It appears that the current reasoning that investment tribunals use to admit respondent states’ counterclaims with respect to moral damages is somewhat flawed. If the sole basis for awarding any kind of moral damages in investment disputes is the ILC Articles (particularly, the principle that all damage resulting from a violation of international law must be compensated), then the respondent states’ moral damages counterclaims should not be admitted. This is because investment tribunals decide cases based on investment treaties, which an investor cannot violate the way the host state can. Whatever immaterial (i.e. reputational) damage the investor can cause to the state, it does not happen because of a violation of public international law.

In the author’s view, the best way out of this dilemma is to not allow respondent states’ moral damages counterclaims in investment arbitration. Alternatively, if the tribunals are to find a rationale for admitting such counterclaims, it appears that it should be based on something other than the ILC Articles, which were the basis in Lundin. The ILC Articles are a proper basis to allow investors’ moral damages claims, since they concern international responsibility of states. This mechanism, however, does not work the other way around.

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Turkish Court of Appeals: The Arbitral Tribunal’s Failure to Obtain an Expert Report Does Not Constitute a Violation of Public Policy

Fri, 2017-01-13 04:46

Okan Demirkan and Begüm Yiğit

Kolcuoglu Demirkan Kocaklı Attorney Partnership

An arbitration-friendly decision was rendered by the 11th Civil Chamber of the Turkish Court of Appeals (“Court of Appeals”) on 22 June 2016 [File no. 2016/4931, Decision no. 2016/6886]. The decision deals with the question as to whether the arbitral tribunal’s failure to refer the calculation of damages to experts constitutes a violation of public policy. Success in an arbitration proceeding depends highly on the evidence that impacts the substance of an arbitral award. Historically, public policy has been and still is a delicate notion in Turkey. The Court of Appeals’ recent decision is particularly important, as the Court of Appeals examined the discretionary power of the arbitral tribunal to take evidence in respect of the public policy ground for setting aside the award.

Article 439 of the Turkish Code of Civil Procedure (“CCP”) stipulates the grounds for setting aside a national arbitral award, which are in line with the UNCITRAL Model Law. According to this article, the award may be set aside upon one of the parties’ request if,

(i) a party to the arbitration agreement was under some incapacity or the said agreement is not valid under the law to which the parties have subjected it or failing any indication regarding the law applicable, the arbitration agreement is invalid under Turkish law;
(ii) the composition of the arbitral tribunal is not in line with the parties’ agreement or with the procedure provided in the CCP;
(iii) the arbitral award was not rendered within the term of arbitration;
(iv) the arbitrator or arbitral tribunal unlawfully found itself competent or incompetent;
(v) the arbitrator or arbitral tribunal decided on a matter beyond the scope of the arbitration agreement or did not decide on all of the matters claimed or exceeded its competence;
(vi) the arbitral proceedings were not conducted in accordance with the parties’ agreement or failing such agreement, with the CCP, and such non-compliance affected the substance of the award; and
(viii) the parties were not treated with equality or were otherwise unable to present their case. The award may be set aside ex officio by the court examining the file if, (i) the subject matter of the dispute is not capable of resolution by arbitration under Turkish law, or (ii) the award is in conflict with public policy.

As the grounds listed in Article 439 of the CCP are exhaustive and awards are not subject to judicial review on their merits, violation of public policy is the most preferred ground in Turkey for making an application to set aside an arbitral award.

In the present case, although the arbitrators were not experts in the field of accounting and finance, they rendered an award without obtaining an expert report regarding the calculation of damages arising out of unjust termination of an agreement. The plaintiff, invoking Article 431 of the CCP, which provides an arbitral tribunal with the authority to decide to refer issues to experts when necessary, filed a claim to set aside the award before the competent first instance court, claiming that the award violated public policy and the CCP’s provisions. The first instance court decided to set aside the award based on violations of public policy and the CCP provisions. According to the first instance court, as per Article 431 of the CCP, the arbitral tribunal should have referred the calculation of damages to experts, and obtaining an expert report regarding the calculation of damages is a matter relating to public policy. However, the Court of Appeals reversed the first instance court’s decision by adopting an arbitration-friendly approach and emphasizing the fundamental principles of commercial arbitration.

Firstly, the Court of Appeals held that the application of applicable law is not listed as one of the grounds for setting aside an award under Article 431 of the CCP, and therefore this matter cannot be examined during an action for setting aside. This conclusion complies with the standards of arbitration-friendly jurisdictions, where it is well established that an arbitral tribunal does not exceed its authority merely because it reaches an incorrect substantive result as regards the application of law. Doing so is not an excess of mandate or authority, and is not contrary to public policy, but a substantive mistake on an issue within the tribunal’s jurisdiction. The English High Court held in a recent decision that the tribunal’s failure to reach the correct decision cannot constitute a ground for challenge under the English Arbitration Act [B v. A [2010] 2 Lloyd’s Rep 681, [2010] EWHC 1626 (QB) (Comm)]. A recent U.S. decision is to the same effect, holding that courts are limited to determining whether the arbitrator acted within the scope of his powers and not whether he did it well, correctly or reasonably [AmerixCorp v. Jones, 457 F. Appx. 287, 291 (US Ct of Apps (4th Cir), 2011)].

Secondly, the Court of Appeals held that the arbitral tribunal had discretionary power to obtain an expert report and the arbitral tribunal’s failure to refer the calculation of damages to experts does not constitute a violation of public policy. It seems plausible to suggest that this conclusion is consistent with the wording of Article 431 of the CCP, as it stipulates that the arbitral tribunal “may” decide to appoint experts to report on issues determined by the tribunal. In other words, pursuant to Article 431 of the CCP, arbitrators are competent but they have discretion to request or exclude expert evidence. This conclusion is also in line with the provisions of the IBA Rules on Taking of Evidence in International Arbitration. Under Article 9 of the IBA Rules on Taking of Evidence in International Arbitration, the arbitral tribunal may exclude any evidence due to lack of sufficient relevance to the case or materiality to its outcome.

Furthermore, the conclusion reached by the Court of Appeals, according to which arbitral tribunals possess broad authority over evidentiary matters, is reflected in national arbitration legislation and judicial decisions of arbitration-friendly jurisdictions. For instance, according to section 34(1) of the English Arbitration Act, an arbitral tribunal shall decide all procedural and evidentiary matters, subject to the right of the parties to agree any matter. Similarly, courts generally refuse to set aside particular awards based on allegedly incorrect refusals to admit or exclude evidence. In this respect, the French Court of Appeals upheld an award which refused to consider evidence provided by one party, reasoning that arbitral tribunals’ evidentiary decisions cannot ordinarily be reviewed [Judgment of Paris Court of Appeals, 2001 Rev. Arb. 731, 16 November 2000].

In conclusion, the Court of Appeals’ decision is pleasing, as it emphasizes essential principles that have already been accepted in arbitration-friendly jurisdictions. One issue worth noting is that this Court of Appeals decision concerns an award rendered in domestic arbitration, so arbitration lawyers have good reason to hope that the same approach will be adopted in relation to awards rendered in international arbitration proceedings. It is expected that the Court of Appeals’ arbitration-friendly interpretation will positively influence the public policy understanding of Turkish courts in national and international arbitration practice.

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Standard Chartered Bank (Hong Kong) v. TANESCO: The Tribunal’s Power to Reconsider Its Previous Decisions

Thu, 2017-01-12 04:00

Inna Uchkunova

International Moot Court Competition Association (IMCCA)

Co-authored with Ivaylo Dimitrov, George Washington University Law School

Foreword

A recent award rendered in the case of Standard Chartered Bank (Hong Kong) Limited v. Tanzania Electric Supply Company Limited (TANESCO) (ARB/10/20, Award, 12 September 2016) (hereinafter: “SCB HK v. TANESCO”) seems to put an end to a dispute which had sparked lately relating to an arbitral tribunal’s power to revise or reconsider its previous interim decisions in ICSID arbitration.

The tribunal in SCB HK v. TANESCO decided unanimously that it can exercise a power to reconsider its earlier Decision on jurisdiction and liability, thus becoming the first ever ICSID tribunal to do so. It reasoned, inter alia, that:

“In exercising a power to reopen a decision, a tribunal should be guided by, although not bound by, the limitations on reopening that apply to awards. Whatever the power the tribunal has to reconsider a decision that power must at least extend to the grounds for reopening an award in Article 51…” (Award, para. 322)

Facts

The factual background of the case is very complex involving numerous court proceedings in various jurisdictions. For present purposes, it may be briefly stated that the case relates to the 2001-2003 loan restructuring of the Independent Power Tanzania Limited (“IPTL”), the latter being in charge of constructing and operating an electricity generating facility in Tanzania.

Initial Dispute and the 1st ICSID Proceedings

In 1995, IPTL and TANESCO, an entity wholly owned by the Republic of Tanzania and designated as an agency pursuant to Article 25(1) of the ICSID Convention, concluded a power purchase agreement (“PPA”).

In 1998 however, a dispute arose between the parties to the PPA which resulted in TANESCO initiating ICSID proceedings claiming that IPTL has failed to comply with the financial model (debt/equity ratio) for the project leading to a higher tariff and overcharges.

The 1st ICSID tribunal acknowledged that IPTL had imprudently incurred costs and the tariff was recalculated.

Debt Restructuring and SCB HK’s Involvement

In 2004, following a renewed invoice dispute, TANESCO refused to make capacity payments and instead began to deposit the sums due under the PPA into an escrow account. IPTL, for its part, took to restructure its debt. The refinancing was effectuated without the knowledge of TANESCO. The Respondent’s position is that the new loan exceeded the amounts authorized by the 1st ICSID tribunal.

In 2005, SCB HK acquired IPTL’s loan and in 2010, further to IPTL’s default, SCB HK exercised its step-in rights and initiated ICSID proceedings claiming that all contractual rights of IPTL under the PPA are vested in it as the lender-assignee. TANESCO countered that the claimant’s debt acquisition was invalid under local law since the security assignment was not registered with the Tanzanian trade register.

The 2nd ICSID Tribunal’s Decision

In its Decision on jurisdiction and liability dated 12 February 2014, the tribunal found that the assignment was valid. The tribunal however provided only declaratory relief refusing to order TANESCO to pay the claimed sums to SCB HK rather than to IPTL, essentially, for the following reasons: (1) in light of the winding up proceedings with regard to IPTL, which had in the meantime been initiated by VIP Engineering and Marketing Ltd, IPTL’s minority shareholder, the possibility for the appointment of a liquidator was still open, therefore, the tribunal did not wish to interfere with the jurisdiction of Tanzanian courts which were in a better position to determine the priority among IPTL’s creditors; (2) the existence of the escrow account and the funds held therein provided at least some protection to SCB HK’s rights.

Developments on the Ground

Following the Decision, it transpired that with the support of TANESCO and the Government of Tanzania (“GoT”) all shares in IPTL had been transferred to Pan Africa Power Solutions (T) Ltd (“PAP”), a Tanzanian company. It remains unknown when and how Mechmar, the majority shareholder in IPTL, had transferred its shares to PAP. What is known is that after all affairs of IPTL had passed to PAP, TANESCO has agreed to settle the dispute regarding the outstanding payments and GoT released the funds from the escrow account and paid them to PAP which used part of the money to pay for the purchase of IPTL’s shares.

Reconsideration

Given that at the time of the tribunal’s Decision it was not known to either the claimant or the tribunal that TANESCO and IPTL had reached a settlement and that the escrow account funds have been released, SCB HK sought reconsideration of the Decision on jurisdiction and liability in light of those developments which affected the claimant’s situation.

After discussing the question whether a tribunal has a power to revisit its previous decisions and agreeing that it does since in this case important information had been withheld or misrepresented by the Respondent, the tribunal decided that it should reconsider its previous Decision.

Indeed, the tribunal noted that in the Decision it had provided a mere declaratory relief so as not to interfere with the local courts’ authority and in order to leave open the possibility of a liquidator being appointed for IPTL since it is for the liquidator and the courts to determine the question of priority among IPTL’s creditors. But now that the dispute between TANESCO and IPTL has been settled there was no likelihood for the appointment of a liquidator and what is more the situation of SCB HK has been rendered worse since the funds from the escrow account have been released in favour of PAP.

The tribunal, therefore, decided that it must grant the relief originally sought by the claimant and that in addition to making a declaration of the amount owed by TANESCO to SCB HK, it will also order the payment of that amount. The tribunal also recalculated the tariff applicable to the PPA.

A Note on the Tribunal’s Power to Reconsider Its Pre-Award Decisions

Following Prof. Georges Abi-Saab’s landmark dissent in ConocoPhillips v. Venezuela (ARB/07/30, Decision on respondent’s request for reconsideration, 10 March 2014), the question of the tribunal’s power to reopen its previous decisions was brought to the forefront.

The main argument of those denying that such a possibility exists has been that interim decisions are intended to be res judicata and thus not subject to review separately from the final award.

This argument is unsubstantiated for two main reasons:

1) arbitral awards rendered under the ICSID Convention are also intended to be final and binding but nevertheless they are subject to post-award remedies such as interpretation, revision, or annulment;
2) it has been claimed that under the ICSID Convention only awards are subject to remedies such as interpretation, revision, or annulment to the exclusion of interim decisions, but as seen in Waste Management II, this contention does not hold true since the tribunal there recognized that:

“…it had the power, while still exercising its functions and prior to the closure of the proceedings, to give any necessary interpretation of any of its decisions, to make any necessary supplementary decision, and to correct any error in the translation of a decision.” (emphasis added) (Waste Management, Inc. v. United Mexican States, ARB(AF)/00/3, Award, 30 April 2004, para. 17)

Prof. Schreuer has similarly commented that:

“Art. 51 is designed specifically for situations in which the tribunal has terminated its activity. A tribunal that is still in session can always revise its preliminary decisions informally.” (Christoph Schreuer, The ICSID Convention: A Commentary (CUP: 2009) at p. 880)

Importantly, even in Perenco Ecuador Limited v. Ecuador the tribunal acknowledged that “only in exceptional circumstances would it be open for the Tribunal to reconsider its prior reasoned decisions.” (emphasis added) (ARB/08/6, Decision on Ecuador’s reconsideration motion, 10 April 2015, paras. 3, 6)

It is also worth mentioning that in reconsidering their decisions arbitral tribunals must be guided by the standard contained in Article 51 of the ICSID Convention and not that contained in Article 52 thereof concerning annulment since, as noted by Prof. Andreas Bucher, it was never intended for the same tribunal to determine, e.g., whether it has made an excess of powers in its own decisions. (ConocoPhillips v. Venezuela ARB/07/30, Dissenting Opinion in relation to the Application for Reconsideration of part of the Decision on the Merits, 9 February 2016)

In sum, tribunals may and in cases such as SCB HK v. TANESCO should use the power to reconsider their decisions guided by Article 51 of the ICSID Convention, namely where a fact has been discovered of such a nature as to decisively affect the decision of the tribunal and the concerned party’s ignorance of that fact is not due to negligence, probably excepting cases in which the fact relates to a belated jurisdictional objection. (See Award, para. 323) Such a fact must have existed at the time of the decision. (Cf. Schreuer, supra p. 884, marginal para. 19) It remains, however, still unclear whether a tribunal may reconsider its decisions on its own motion in case of error of law. (See Waste Management, Inc. v. United Mexican States, supra, para. 17; Prof. Georges Abi-Saab’s D.O., supra, para. 62)

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Winter is Coming: Investment Arbitrations Striking Bosnia and Herzegovina

Wed, 2017-01-11 04:01

Nevena Jevremović

Association ARBITRI

Bosnia and Herzegovina (“BiH”) is generally perceived as a good emerging market for investment. The country is rich with natural resources and has a long tradition of industry with favorable and attractive locations and resources. Potential areas of investment include banking and finance, energy and mining, construction and IT (ICT) sector. The relevant national framework is beneficial for foreign investors, with incentives important to foreign investors, such as low taxes and flat tax rates. On an international scale, BiH is a party to around 40 bilateral investment treaties, and is a signatory to the ICSID Convention.

This, however, does not mean that BiH does not have its fair share of obstacles to overcome to increase foreign investments. In 2015, the flow of direct foreign investment was BAM 244 million (approx. EUR 122 million), with the main investors coming from Austria, Serbia, and Croatia. There is an 81,64 % drop from 2007 when the amount of direct foreign investment was BAM 1,329 million (approx. EUR 664 million).

Businesses and proponents of a responsible governance have criticized this dramatic drop, and advocated for a systematic change (see, e.g., White Book published by the Foreign Investor’s council sets for measures that, if implemented, would attract more investment). A recent increase in the number of investment disputes brought against BiH attests that this framework needs to change.

To put things into perspective: the overall value of the three investment arbitrations brought against BiH is over EUR 700 million. For a country facing financial difficulties, participating in these proceedings, and potentially losing the disputes, will be a difficult hit to take. The nature, scope and the result of these proceedings are important; however, there is almost no substantive information on this. Although publicly available information Is scarce and superficial, some general information can be drawn.

First, these disputes revolve around large-scale infrastructure and energy projects. For example, in Elektrogospodarstvo Slovenije – razvoj in inzeniring d.o.o. v. Bosnia and Herzegovina (ICSID Case No. ARB/14/13), the Slovenian energy company filed an arbitration claim against BiH claiming damages in the amount of approximately EUR 700 million. The relationship between the two companies dates back to the 1970s. The parties then entered into a contract for the construction and operation of Thermal Power Plants Block I and II. Although the contract performance was interrupted due to the war in Bosnia from 1991 to 1995, Slovenian company sought to regulate mutual relationship during 2006. As no agreement was reached, Elektrogospodarstvo attempted to seek remedies before the local courts in 2009, but was ultimately unsuccessful. The court found that the parties had agreed to arbitrate any dispute arising under the agreement, and therefore the court did not have jurisdiction to hear the case. Elektrogospodarstvo subsequently in 2014 initiated arbitration proceedings before an ICSID tribunal. The details of the case are not made public, but the essence of the claim is a breach under the Energy Charter Treaty, and the Agreement on Reciprocal Protection of Investments signed between the two states.

Second, the claims are brought alleging the government’s failure to take steps necessary for the investment to start. In Strabag (AG) v Ministry of Telecommunications and Transport, Strabag claims damages in amount of EUR 640,000 for breach of their construction agreement. In 2012, Strabag was the most successful bidder for the construction of a bridge over the river, Sava, in the north of Bosnia. Necessary licenses, however, were not procured and Strabag was unable to start the construction work within the 180 days’ timeframe provided in the agreement. Consequently, Strabag initiated arbitration proceedings before the Permanent Court of Arbitration in the Hague claiming damages for breach of the agreement. The media speculated that BiH will most likely lose this case. There is some indication in the press that the BiH Prosecutors Office is waiting for the outcome of the case to begin its own investigation as to why the necessary licenses were not procured.

A similar situation led to the most recent ICSID arbitration – Viaduct d.o.o. Portorož, Vladimir Zevnik and Boris Goljevšček v. Bosnia and Herzegovina (ICSID Case No. ARB/16/36). Almost a decade ago, the Republic of Srpska granted concession to Slovenian nationals for the construction of a hydropower plant on the river Vrbas in the northern part of the country. The power plant was never built, and the concessionaires unilaterally terminated the contract in 2015. According to the information in the local press, and as reported in the IAR Reporter, the investors claim that the local authorities awarded the same rights to a local concessionaire, and therefore acted in a discriminatory and repudiatory way.

Third, the information on the final outcome of the case is ambiguous. The cases before ICSID are not fully transparent. It is only possible to follow the procedural steps, without having any insight into the claims or defenses raised. Similarly, there is no conclusive information on how some of these proceedings are being handled on the government’s side. For example, the Council of Ministers sent a note to the Ministry of Telecommunications and Transport, the defendant in the Strabag case, recommending a potential settlement. There is no information whether such a settlement was initiated and, if yes, what was offered in its course. Given the public interest in projects of this type, and especially the consequences it may have on the environment, employment, etc., this attitude is somewhat reckless, to say the least.

Despite the obstacles, investment projects will keep knocking on BiH’s doors, and with them (unless the current settings change) a possibility of new investment claims. One of the questions which could be a good start for a reform is: Who bears the risk of overly optimistic investment contracts which provide for unrealistic deadlines for the completion of a project?

Foreign investors are attracted by BiH’s rich natural resources. The country, on the other hand, strives to enable a favorable climate for those investors. This is especially done through the concession granting framework. Nonetheless, the granting of a concession for exploration and later exploitation of natural resources does not suffice. There is a long line of bureaucracy requirements that need to be met for the operations to start. The processes are typically long and often unnecessarily burdensome. Just recently, Strabag AG and Koncar signed an agreement for the construction of the Vranduk power plant. The dynamics of awarding similar concessions to foreign investors will continue, parallel to signing overly optimistic contracts since BiH wants to attract and keep its investors.

However, such governance and the unawareness of the obligations which BiH has under its BITs and international treaties will jeopardize the future of investments. This mandates raising awareness, and a serious analysis and strategic planning on how to approach future contracts and disputes with foreign investors. For example, a situation where a ministry does not act upon the instruction of the Council of Ministers to engage in negotiations and amicable settlement might not be the most responsive way to handle these situations. To ensure a more responsible approach towards this type of disputes in the future, the attitude towards the dispute resolution processes with foreign investors needs to be reshaped.

The government should also be equipped to face the pressure and often unbalanced position with a foreign investor. A failed investment is not always the host state’s fault; an investor bears part of the risk as well. Therefore, building the capacities of the states to negotiate and carry out these deals in ways that will be beneficial to both the public and foreign investors is a must.

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“Legitimate Expectations” in the Vattenfall Case: At the Heart of the Debate over ISDS

Tue, 2017-01-10 04:00

Laura Yvonne Zielinski

Criticism of the Investor State Dispute Settlement (“ISDS”) system is common these days. Protesters demonstrate against “secretive tribunals of highly paid corporate lawyers” as which the mainstream media increasingly portray arbitral tribunals. (“Investor-state dispute settlement – the arbitration game”, The Economist, 11 October 2014)

A Controversial Doctrine

Central to the general public’s opposition to ISDS is the concept of legitimate expectations. The German magazine Der Spiegel, for instance, criticizes arbitral tribunals’ broad interpretation of the concept to mean quasi-comprehensive insurance for investors. (“Schiedsgerichte – Die Kläger-Clique”, Spiegel Online, 16 April 2016)

Rooted in domestic administrative law, the standard of legitimate expectations has been introduced into international investment law through the prism of good faith, (Tecnicas Medioambientales Tecmed S.A. v. United Mexican States, ICSID Case No. ARB(AF)/00/2, Award, 29 May 2003, para. 154) It “is now considered part of the [fair and equitable treatment (the “FET”)] standard” and is “firmly rooted in arbitral practice”. (Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 546)

“[T]he concept of “legitimate expectations” relates […] to a situation where a Contracting Party’s conduct creates reasonable and justifiable expectations on the part of an investor (or investment) to act in reliance on said conduct, such that a failure by the [Contracting] Party to honour those expectations could cause the investor (or investment) to suffer damages.” (International Thunderbird Gaming Corporation v. The United Mexican States, Arbitral Award, 26 Janaury 2006, para. 147) Over time, the contours of the concept have been refined to take account, for example, of the socio-economic situation of the host State and of the investor’s conduct. (Parkerings-Compagniet AS v. Lithuania, ICSID Case No. ARB/05/8, Award, 11 September 2007)

Invoked in a Controversial Case

Opposition to ISDS is particularly vocal in Germany where it was sparked by popular outrage over Vattenfall AB and others v. Federal Republic of Germany (ICSID Case No. ARB/12/12), an investment arbitration proceeding brought under the Energy Charter Treaty. The Swedish company Vattenfall, together with others, is reportedly claiming €4.7 billion as compensation for losses allegedly suffered due to Germany’s decision to shut down all nuclear energy production.

The companies claim that it is not so much the decision itself to stop the production of nuclear energy in Germany that caused their losses, but rather the unexpected political changes in this regard. In 2002, the governing Social Democrats and Green parties decided to phase-out all nuclear power plants but allocated limited nuclear energy production volumes to companies that these would still be allowed to produce. Subsequently, in 2010, Angela Merkel’s government amended the Atomic Energy Act (“AEA”) to postpone the shutdown and allocated additional energy volumes (“11th Amendment”). However, only a few months later, following the Fukushima disaster in March 2011, the same administration performed a political U-turn and enacted another amendment to the AEA (“13th Amendment”) aiming to accelerate the phasing-out by imposing fixed shutdown dates for all nuclear reactors, irrespective of the remaining energy production volumes that had been allocated previously. To justify its decision, the government invoked the protection of public health and the environment.

Also in 2012, Vattenfall, RWE and E.ON. (“Energy Companies”) challenged the same legislation before the German Federal Constitutional Court (“Court”).

In a decision of 6 December 2016, further analyzed in a post by Nikos Lavranos previously published and available here, the Court dismissed the Energy Companies’ expropriation claim, but held that Germany had violated their legitimate expectations.

Interpreted by the German Federal Constitutional Court

The Court held that the 13th Amendment to the AEA constituted a breach of Vertrauensschutz (Article 14(1) of the German Constitutional Law) – the domestic German equivalent of the protection of legitimate expectations – insofar as it did not provide for any transition periods or compensation for investments in nuclear power plants which declined in value following the 2011 reduction of the production volumes that had been allocated in 2010. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 369)

Article 14(1), under specific circumstances, protects legitimate expectations of stability of the legal framework as the basis of investments. It does not guarantee the fulfillment of all investment expectations, and does not generally provide protection against changes in the economic legal framework and resulting changes in the market position of an investor. It does, however, provide for compensation in cases in which the State directly prevents or substantially limits the use of investments undertaken in justified reliance on a specific legal framework. Nevertheless, the State has broad powers in determining how to compensate and is not obliged to spare investors from suffering any burden at all related to the changes. (BVerfG, Urteil des Ersten Senats, 6 December 2016, paras. 371 and 372)

Following the postponement of the phasing-out of nuclear power plants in 2010, the Energy Companies had legitimately expected their investments in the production of additional energy production volumes to be protected. Investments seemed to have been encouraged and it had not been foreseeable that the government would change its position again within the same legislative period. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 376)

However, the Court also stated that legitimate expectations could only have arisen during the period between the enactment of the 11th Amendment on 8 December 2010 and the letter of 16 March 2011 from the Federal Environmental Ministry announcing a nuclear moratorium. Legitimate expectations could have neither been created by the government’s declaration of intent of 26 October 2009 to postpone the nuclear shutdown, nor by the presentation of the corresponding draft law of 28 September 2010. While the introduction of a draft law can destroy legitimate confidence in the continuing existence of a specific legal framework, it cannot create legitimate expectations of future changes. Compensable expectations can only arise once the parliament has passed a law. Consequently, the Court held that no legitimate expectations could continue to exist after the publication of the letter from the Federal Environmental Ministry of 16 March 2011, as this letter had clearly cast doubts on the government’s continued willingness to support the nuclear energy industry. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 377)

Additionally, the Court held that the creation of legitimate expectations was not put into question by the fact that the constitutionality of the 11th Amendment to the AEA in 2010 had been disputed for years. The Court recalled that general discussions around the constitutionality of a law, outside of the Constitutional Court that is competent to decide on such matters, are common and therefore do not erode a law’s function as the basis for legitimate expectations. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 378)

While the Court stated that the public interest justifications that motivated the enactment of the 13th Amendment to the AEA are of particular importance, they could not free the State from the consequences of the violation of the legitimate expectations it had itself created by enacting the 11th Amendment to the AEA. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 379)

Finally, the Court held that, while any detriment to the aim of the acceleration of the nuclear shutdown should have been avoided in compensating the Energy Companies’ losses, the government’s broad powers in determining the scope of compensatory measures would have been sufficient to provide a form of compensation that would not have endangered the aim behind the 13th Amendment to the AEA. (BVerfG, Urteil des Ersten Senats, 6 December 2016, para. 382)

Concluding Remarks

The Court’s analysis of Vertrauensschutz contains interesting indications of what should and what should not be considered to create legitimate expectations in the investment context. Balancing the State’s aim to protect the public interest and the investor’s justified reliance on legal stability, it draws the line between mere political statements and legal realities. Thus declarations of intent or draft laws cannot create legitimate expectations but laws passed by parliament can. Investors should not rely on simple controversies surrounding a law, but can legitimately base their investment decisions on a competent court’s decision on a law’s constitutionality. Vertrauensschutz cannot function as an insurance against all business risk, but the State should take investors’ interests into account in changing the legal framework and should use its broad powers to provide for compensatory measures that do not sacrifice a law’s public interest purpose.

As mentioned above and as recently held by the Crystallex tribunal, in international investment law, “protection of legitimate expectations under the FET standard [already] occurs under well-defined limits.” (Crystallex International Corporation v. Bolivarian Republic of Venezuela, ICSID Case No. ARB(AF)/11/2, Award, 4 April 2016, para. 547) Nonetheless, the Court’s use of and definition of the concept could further inform its content by way of reference to principles of law embodied in domestic legal systems. Such further delimitation of the concept of legitimate expectations through a comparative approach might contribute to renewed legitimacy of the FET standard, and thus of ISDS itself.

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Corralling Defaulting Parties and their Unpaid Costs Deposits under the SIAC Rules 2016

Sun, 2017-01-08 17:33

Arthur Dong and Darren Mayberry

AnJie Law Firm

SIAC released new rules of procedure (“SIAC Rules”) for the management of its arbitration practice, effective 1 August, 2016. Some of the new provisions are ground-breaking. New provisions include a consolidation procedure, a joinder procedure, and even rules providing for early dismissal of baseless claims. The SIAC Rules have drawn great attention to its numerous novel provisions. Nonetheless, it also adopted some subtle but no less weighty amendments. One amendment aims at costs deposits recovery. It allows the Tribunal to issue an interim order, or an award, for reimbursement of unpaid deposits for costs.

Rule 24 of the 2013 SIAC Rules had empowered the Tribunal to “issue an award for the unpaid costs of the arbitration.” (Rule 24(i), 2013 Rules). The corresponding but much improved version from the 2016 SIAC Rules permits the Tribunal to “issue an order or Award for the reimbursement of unpaid deposits towards the costs of the arbitration.” (Rule 27(g), 2016 Rules). The most critical new clarification replaces ‘costs’ with the term ‘deposits.’

First, some background on costs. Each party, claimant and respondent, normally pays 50% each. (Rule 34.2, 2016 Rules). They often make payment in three tranches of deposits. The Registrar may demand further deposits. (Rule 34.4, 2016 Rules). Costs of the arbitration include the Tribunal’s fees and expenses, SIAC’s fees and expenses, and the expense or fees of Tribunal-appointed experts. (Rule 35.2 2016 Rules). Parties are responsible for their own legal and expert fees, but may recover these in a successful award. Unfortunately, respondents may fail to pay one or more tranches of deposits for costs. When confronted with such a default on deposits, SIAC’s Registrar will not infrequently charge claimant the balance of respondent’s default.

The revision’s central purpose may simply be to provide clarity. Previously, Tribunals may have proven hesitant to enforce SIAC’s cost demands, if the matter of unpaid costs (or deposits) had even crossed the Tribunal’s mind at all. Under the new Rules, the Tribunal manifestly may enter an order for costs without a full hearing on the matter and before the conclusion of the case. Tribunals may have been hesitant or reluctant to employ the 2013 provision before the final award on the merits because of the lack of clarity on this point. They may not have even regarded the provision seriously or in any detail. Tribunals can now issue an order or an award to collect deposits against an uncooperative party after resolving jurisdiction, or even before doing so.

Whatever SIAC’s purpose for the revision, practitioners may recognize its full tactical potential. Rule 27(g) allows claimants a potentially powerful recourse against recalcitrant respondents. An able practitioner should consider making a Rule 27(g) motion whenever an opposing party refuses to pay its deposits. Additionally, one of the following aggravating conditions might also be present: (1) the arbitration fees assessed for the case are significant in amount; or (2) the proceedings have become, or are in the process of becoming, protracted in complexity or duration of time. In any case, practitioners should only seek recourse with the Tribunal when the opposing party has obtained some real advantage, however minor, through the refusal to pay a costs deposit. When no aggravating conditions arise or persist, practitioners may consider briefly invoking Rule 27(g) during the merits hearing. This would serve as a gentle reminder to the Tribunal to address the opposing party’s failure to pay deposits in its award and assessment of costs.

Certainly, Rule 27(g) motions promise an escape from the prior practice under which claimants simply bore the respondent’s costs until the award on merits is issued, or sometimes even until the award enforcement phase. This distinct possibility should prompt the following dispositions from applicants and tribunals. Practitioners must not hesitate to resort to Rule 27(g). Meanwhile, tribunals should resolve such applications with both deference and expeditiousness towards its applicants. After all, if the respondent will not pay its deposits, claimant must do so instead. Otherwise SIAC’s administration of the case may be suspended, or the relevant claims or counterclaims may be considered withdrawn (Rule 34.6, 2016 Rules). And leaving respondent to remain delinquent will not rehabilitate a respondent exhibiting a distinct lack of cooperation or good faith.

A party prevailing under Rule 27(g) would ordinarily obtain an order from the tribunal demanding the opposing party pay its deposits. At such an early stage of the proceedings, a prevailing party has a few apparent ways to enforce such an order, at least beyond a simple demand to the losing party to issue payment within a reasonable time period. Two remedies are obvious. On one hand, a successful application would in many cases become self-enforcing, as the party facing such an order would want to avoid open defiance of the tribunal’s clear procedural directive. On the other hand, a particularly eager prevailing party could also enforce such an order in a court with jurisdiction over the assets of the other party. Notably, if the tribunal’s decision takes the form of an award, the New York Convention would mandate enforcement in most other jurisdictions.

Tribunals may decide to bolster their Rule 27(g) orders with specific enforcement measures, particularly if aggravating circumstances accompany a respondent’s non-payment. Tribunals will find the most appropriate manner of remedies reserved at the very end, following the award on the merits.

Indeed, the Tribunal’s remedies or enforcement derives from its expansive discretion to determine in the award the apportionment of the costs of the arbitration among the parties. (Rule 35.1, 2016 Rules). The award of costs, of course, includes that of the tribunal, the SIAC administration fees, and even the prevailing party’s expert and attorney fees. (Rules 35 and 37, 2016 Rules). Absent specific prohibition by the parties, SIAC’s 2016 Rules mandate (employing “shall”) that the tribunal is to specify the costs and determine their apportionment. SIAC’s Rules does not instruct tribunals with further presumptions or principles that might inform their mandate, unlike other institutional rules. In contrast, the 2014 LCIA Rules explicitly favors the general principle of apportionment by relative success (or failure) with regard to the merits,

“except . . . in the circumstances the application of such a general principle would be inappropriate under the Arbitration Agreement or otherwise. The Arbitral Tribunal may also take into account the parties’ conduct in the arbitration, including any co-operation in facilitating the proceedings as to time and cost and any non-co-operation resulting in undue delay and unnecessary expense.” (Rule 28.4, LCIA 2014 Rules).

As for SIAC, its silence as to the specific bases informing costs allocation should be understood as a purposeful and strategic position. Since the SIAC Rules mandate a decision on costs without signaling any obligatory first principles, SIAC appears to have reserved comparatively more latitude for tribunals in which to apportion costs with consideration to a party’s default on deposits. Arguably, an arbitration clause designating the SIAC 2016 Rules must specifically restrict costs allocation to “parties bear their costs” or alternately, “costs follow the event,” to foreclose Rule 27(g) cost shifting. Otherwise, any ambiguity may open the door for a tribunal to allocate costs at least partially against a party defaulting on deposits, as if punishment for non-co-operation were a secondary but available principle. After all, the parties will have agreed in their arbitration clause to submit to a tribunal’s expansive power to allocate costs pursuant to application of SIAC Rule 35.1.

Best practice counsels that tribunals clearly forecast the possibility of cost shifting. Any effective Rule 27(g) order will spell out the tribunal’s right at the end to withhold otherwise rightful costs from, or award substantial costs against, a defiant and delinquent party.

Ultimately, compliance or non-compliance regarding 27(g) orders will drive an assessment of costs, either explicitly or implicitly, overtly or subliminally. And normally, even if the threat remains inchoate, it will serve the proceedings adequately enough. After all, over the course of the arbitration, the pressure of an impending award and the heightened potential of an unfavorable costs allocation should motivate even the most spirited of non-cooperative parties to at least take minimal steps to expedite the proceedings. And perhaps in most cases, respondents will simply comply with the 27(g) order in a timely manner.

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The CAS List of Arbitrators: Lessons from the Pechstein case for Tokyo 2020

Thu, 2017-01-05 23:20

Bruno Guandalini and Caio de Faro Nunes

2016 was a great year for Brazil, especially because it hosted the Rio 2016 Olympic Games, which has brought many good things: thousands of sports enthusiasts came to Rio de Janeiro to see high profile athletes; others just came for a good caipirinha on the Copacabana Beach; and, of course, many athletes from different countries came chasing their life dream – an Olympic gold medal. Some of these athletes are famous and have a successful career, such as Michael Phelps, Usain Bolt, or Neymar Jr. Others, however, were not even professionals and came from very poor countries, seeking an opportunity to leave dictatorial regimes. For them, preparing for the Olympic Games and even traveling to Brazil was already a huge battle, a gold medal winning. They have really set a “life record”.

In order to help this last group, some Brazilian Arbitration specialists formed a steering committee, acting as pro bono attorneys in the CAS Ad Hoc Arbitrations related to Rio 2016 disputes. In fact, those athletes would be helpless without this initiative, simply because they could not afford good counsel representation in such a specialized form. This weakness brings to mind the frequent political, economic and technical imbalance between sports associations and athletes. Very often athletes cannot afford a great legal battle. At the same time, they frequently depend on a specific organization for living, and are subject to the entity’s political decisions. In those cases, CAS arbitral tribunals serve as the “last resort” authority. The problem is, however, that its legitimacy has been questioned in the never ending Pechstein saga.

Long story short, Claudia Pechstein is a well-known German speed skater who has been suspended for two years by the International Skating Union (ISU) – the only international professional skating association – due to an alleged indication of doping. Since Ms. Pechstein has signed a CAS arbitration agreement in the organization’s registration form, she commenced arbitration proceedings to challenge ISU’s suspension. Following an unsuccessful arbitration, she challenged the award before the seat of the arbitration, but the Swiss courts finally upheld the arbitral award. Still upset with the outcome of the dispute – which was actually denied by some specialists on the merits – Ms. Pechstein then resorted to the German courts, requiring damages from ISU and from the German federation Deutsche Eislauf-Union e.V., for lost income during the time of her suspension. The first instance preliminarily rejected the case. In the second instance, the Higher Regional Court of Munich found that the fact that ISU required Ms. Pechstein to sign the CAS arbitration agreement as a condition to participate in an international competition does not make such agreement void per se. The court also held, however, that by the time Ms. Pechstein signed the agreement, the CAS rules “did not provide for a fair balance with regard to the influence of the sport bodies on the one hand and the athletes on the other in choosing the arbitrators”(since most of the arbitrators on the CAS list were appointed by the sports association, with almost no influence from athletes) (see here). A huge threat was established to the whole CAS Arbitration system. The case was then brought before the German Federal Tribunal (BGH), which dismissed it on 9 June 2016. Regarding the dominant position argument, the BGH “confirm(ed) the dominant market position of the sport organizations, i.e. the ISU in this specific case, but (saw) no misuse of this position taking into account the interests of both sides – sport organizations and athletes”. As a rationale for the list of arbitrators imbalance issue, “the BGH (did) not see a structural imbalance as the CAS is not integrated in another organization like disciplinary bodies within sport organizations are”. In the eyes of the BGH, CAS rules allow athletes to achieve this balance once the “list of arbitrators has been composed in a sufficiently independent way even if established by a body with a majority of representatives of sport organizations”. On the top of that, it found that “athletes have a fair choice by nominating an arbitrator out of a list of more than 200 people and they can reject an arbitrator for bias”. 2016 in gone and flame in Rio is over but not the Pechstein saga. The case is still pending before the European Court of Human Rights in Strasbourg. Also, Ms. Pechstein affirmed that she will appeal to the German Constitutional Court. Even if Ms. Pechstein overturn’s chances are low, her case invites to a critical analysis of the BGH decision firstly and then to a normative analysis of the list of arbitrators issue.

To begin with, the BGH did not consider the arbitration market incentives. CAS existence depends on sports organizations to impose arbitration agreements as a condition to athletes who, having no choice, would accept CAS arbitration as a forum of last resort. It is mainly an arbitration market imposition. There is no free consent to arbitration, because if Ms. Pechstein had not signed the form she would have not competed in the ISU’s events – the only professional and international skating organization – and would have probably had no money for making a living. In addition, the arbitrators listed would presumably defend the sports organizations that will keep using CAS arbitration agreements, since, in this way, CAS business (and the organizations political power) would be maintained. It consists in a systemic bias, generated by the arbitration market and political incentives.

Secondly, the fact that athletes can nominate an arbitrator out of a list of 200 people is irrelevant. Even if arbitral tribunals are usually composed by three arbitrators and athletes have the right to appoint one of them, there is no information disclosed regarding the arbitrator’s nomination (whether he or she has been listed by a sports organization, by an athlete, or even by CAS itself). How then, in the appointment of the arbitrator, could athletes identify the names that were listed by sports organizations? On the top of that, there is always CAS acting as an appointing authority when parties do not appoint an arbitrator’s name or when arbitrators do not agree upon the president’s name.

Finally, the BGH’s argument that there is a possibility of rejecting an arbitrator for bias is not valid. According to CAS rules (R34), an arbitrator may be challenged for bias if the circumstances give rise to legitimate doubts over her/his independence or over her/his impartiality. However, the problem is that the challenge would be decided by the International Counsel for Arbitration for Sport (ICAS) and the CAS itself. Therefore, how would ICAS and CAS decide a challenge of an arbitrator for alleged breach of due process in the composition of the tribunal if ICAS itself is biased by economic and political incentives?

It is clear that the German Court upheld the CAS award position in order to guarantee the harmony of many CAS awards and the legitimacy of the system. If the Higher Regional Court of Munich decision would have been held valid, CAS arbitration system would have certainly collapsed.

As seen, the main problem in the Pechstein case is the alleged violation of due process as a consequence of the imbalance in the arbitral tribunal formation, specifically regarding the CAS list of arbitrators. Therefore, the case invites us to ask the following question, applicable to every institutional arbitration: how to exclude a systemic bias when the list of arbitrators may be controlled by interests of one of the parties and the appointing authority could presumably have interests in favoring such party? If it is almost impossible to stop sport organizations from adopting and imposing to athletes CAS arbitration agreements, the first answer would be to immediately exclude the mandatory list of arbitrators. This could, in first hand, avoid any challenge like the one argued in the Pechstein case. In fact, at the end of the day the existence of the list of arbitrators is not supported. The main argument in favor could be legal certainty and better control of quality of arbitrators. However, the Pechstein case came to show the contrary – and CAS seemed to agree – since it has recently “consider(ed) taking additional steps to preserve its independence – for example, by giving athletes further opportunity to influence the list of arbitrators and becoming more transparent about how the chair of a panel is nominated” (see here).

Even though CAS wants to keep its list for market or political purposes, it shall not be mandatory and the nomination process and criteria shall be fully disclosed. All names should have the date in which the arbitrator became listed, the person or entity that indicated the arbitrator to the list, the number of CAS arbitrations in which the respective arbitrator has already sat and who the parties were. This process would ensure transparency and would help CAS to maintain its legitimacy as the leading sports arbitration institution.

Last but not least, given the alleged systemic bias presumably caused by market and political incentives, CAS should also guarantee impartiality in acting as an appointing authority. The President of the Division should always be a person independent from any sport organization whatsoever.

In conclusion, even though the Pechstein saga has not caused a collapse in the CAS system, its legitimacy was at least questioned. It is time – and up to CAS – to improve steps in abandoning the mandatory list of arbitrators or at least adopting a full disclosure approach in its list composition; it would certainly confirm CAS legitimacy as the main sports arbitration institution worldwide. Even if Ms. Pechstein has not yet seen any gold medal from this battle, her case certainly could call the world’s attention for a more legitimate arbitration system. This is what the arbitration community, athletes, sports organizations, and mainly the International Olympic Committee should seek for Tokyo 2020.

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An Assessment of Australia’s Parliamentary Report on ISDS in the TPP

Thu, 2017-01-05 10:07

Jarrod Hepburn and Mark Huber

On 30 November, Australia’s Joint Standing Committee on Treaties (JSCOT) released its Report 165 on its inquiry into the Trans-Pacific Partnership Agreement (TPP).

JSCOT is a 16-member parliamentary committee tasked with advising the Australian parliament on ratification of treaties.

This article presents an overview and discussion of the Report’s findings on ISDS, the most common issue cited by respondents to JSCOT’s public inquiry.

Although recent comments by US President-elect Trump indicate that the TPP is unlikely to come into force, the Report warrants attention as it provides an insight into the Australian parliament’s understanding of the ISDS regime,  particularly while the country continues negotiations on another plurilateral trade and investment agreement, the Regional Comprehensive Economic Partnership (RCEP).

This insight is important, as the attitudes of Australia’s major political parties towards ISDS are historically inconsistent. Appended to the Report are certain ‘Additional Comments’ opposing ISDS by Committee members from the opposition Labor Party; and a short ‘Dissenting Report’ by the minority Australian Greens Committee member.

The Report’s final view is that ‘[u]nder the TPP ISDS provisions, Australian investors have more to gain than the Australian Government and the Australian people have to lose’.

Australia’s investment landscape:

The Report notes that Australia’s outward investment is the most significant sector covered by the TPP, accounting for 45% (A$868bn) of investment made by Australians abroad. The TPP would create new ISDS commitments between Australia and some TPP parties; would replace existing commitments with some other parties; and would sit alongside existing commitments with other parties.

In their opposition to ISDS, the Labor Party Committee Members cite reporting by Australia’s Productivity Commission that ‘[a]vailable evidence does not suggest that ISDS provisions have a significant impact on investment flows.’ Economic evidence on this question has long been debated; Luke Nottage, amongst others, has recently supported the proposition that ISDS agreements can promote foreign investment. The presence of ISDS can also affect the availability, and potentially pricing, of political risk insurance. Separate to investment flows, ISDS might still be supported for its role in protecting existing investments.

The ISDS regime:

The Report commences with a basic summary of ISDS and how it operates. At times, the Report’s wording is quite terse, leading to an overly simplistic impression of ISDS. For example, the Committee notes that, for a foreign investor to bring a case, they “must believe that an arbitrary or capricious action of the host Government has caused them to lose their investment”. Of course, a claimant’s subjective beliefs will have minimal impact on a tribunal’s ruling. More importantly, the statement ignores the possible application of a ‘sole effects’ approach (although, admittedly, the TPP’s state-friendly language might make this less likely).

Australia’s ISDS experience:

The Report next considers the use of ISDS in Australia. The Committee appears to balance the one known case brought against Australia (by Philip Morris) against ten known cases of Australian investors using (both treaty-based and contract-based) ISDS provisions against other countries.

Australian company Planet Mining (then engaged in ISDS against Indonesia), gave written and oral input contending that the availability of ISDS can be pivotal when making foreign investment decisions. The Committee relies heavily on Planet Mining’s evidence, and on further submissions and oral testimony from Planet Mining’s counsel, Dr Sam Luttrell. Other experts also made submissions but many, including Nottage, are surprisingly not cited.

The Report ultimately finds that ‘the benefits for Australian investors from agreements that include ISDS have been largely ignored in the debate about ISDS. The debate about ISDS provisions is consequently unbalanced.’

However, these benefits often prove difficult to quantify. Since the Report’s release, Planet Mining’s ISDS dispute was dismissed as an abuse of process, and the investor was ordered to pay nearly US$10m in costs. One wonders if Planet Mining’s views on ISDS have now changed. In any case, Planet Mining’s views alone do not necessarily tell us much about whether Australian investors generally take ISDS into account when making investment decisions.

ISDS in the TPP:

The Report provides a basic description of ISDS agreements, reviewing the content of early-generation agreements, the regime’s bilateral nature, and the TPP’s development from the new-generation US model. The Report highlights the TPP’s plurilateral nature as a key advantage, noting that the states parties currently maintain 6 free trade agreements and 21 bilateral investment treaties amongst themselves (though Wolfgang Alschner and Dmitriy Skougarevskiy count an even higher number).

Replacing these treaties with the TPP would be a positive step towards reducing uncertainty and potential abuse. But, as noted earlier, the TPP would not automatically terminate most of these agreements.

Concerns with ISDS:

The Report’s final part discusses key concerns raised by participants. These appear to have centred on two issues: the question of ‘regulatory chill’, and the costs of ISDS disputes.

Sovereignty and public interest regulation:

The Report notes that the TPP expressly carves out regulatory actions designed to protect legitimate public welfare objectives, and thus considers that claims brought against Australia would most likely fail.

In the Committee’s view, Australia would only lose an ISDS case either because the challenged regulation was poor policy in the first place (and the investor therefore deserved its compensation), or because the ISDS provisions were not functioning as intended. In the latter case, the Report notes that ISDS rulings cannot overturn domestic laws and regulations, nor directly prevent new regulations. The Labor Party Committee members’ Additional Comments suggest that this point is ‘false or meaningless’. Citing Dr Luttrell, the Report considers that the existence of ‘regulatory chill’ simply remains ‘an open question’.

The Report also suggests that a state’s loss resulting from malfunctioning ISDS provisions might inspire TPP parties to amend the agreement. However, amending the TPP or issuing a joint interpretation would be a difficult diplomatic process (the latter also raising contested legal issues). Feldman notes that coordination challenges might arise. These would be compounded by the TPP states parties’ cultural, legal and economic dissimilarities.

The Report touches on a concern that an ISDS agreement with the US might increase inbound claims, because US investors are the most frequent ISDS users. The Report downplays this concern, noting that Australia’s developed-country status makes an increase in claims unlikely. A recent study by Nottage also contended that this statistic needs to be viewed in perspective.

Philip Morris’ ISDS claim against Australia was regularly cited by participants. That dispute was dismissed last year as an abuse of rights. On one hand, the case’s result demonstrates that the regime is already well-equipped to prevent abuses. On the other hand, however, it says little about whether Australia’s tobacco laws comply with investment treaty commitments.

Australia’s success in defending against its one known claim to date should not be a determinative factor in whether to support ISDS in a treaty such as the TPP. The United States similarly promotes its 100% ISDS success rate, but it has perhaps been lucky in previous cases (such as Loewen), and might lose a case in the future.

Costs:

Citing Dr Luttrell as counsel for Philip Morris, the Report claims that Australia’s legal bill in defending that dispute was US$37m (A$50m). The figure’s origin is not made clear, but it echoes an (unsourced) figure circulated in Australian media since 2015. (The tribunal’s final costs determination remains pending.)

Matthew Hodgson notes that average defence costs in investment disputes are around US$4.5m. As an extreme example, Russia’s defence bill in the decade-long Yukos dispute was US$27m. Bearing in mind that the four-year Philip Morris dispute did not pass the jurisdictional phase, the US$37m cited seems implausibly large.

Nevertheless, the Report appears unfazed by these actual and potential costs, advising the Australian Government to assume that ISDS claims will arise, and to set aside sufficient funds to defend them.

Conclusion

The JSCOT Report’s coverage of ISDS is helpful, but is at times simplistic and lacking in analytical depth.

For Australian investors, ISDS might be beneficial (at least, where the investors’ claims are not dismissed under abuse doctrines). For Australia, the TPP would replace some dated bilateral ISDS agreements, which might assist the state in managing illegitimate treaty-shopping (at least, where investors’ claims are not already dismissed under those same abuse doctrines). ISDS might also increase investment into Australia. The Report has determined that these potential benefits outweigh the risks associated with defending and losing ISDS claims in the future.

If – as seems likely – the TPP fails to come to fruition, momentum in Asia looks set to shift to the RCEP. China is not part of the TPP, and the United States is not part of the RCEP, creating a degree of foreign policy significance in the TPP failing and the RCEP succeeding. RCEP might also include ISDS provisions. Accordingly, this Report serves as a good indicator, for better or worse, of Australia’s likely views on ISDS in RCEP and other future agreements.

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Two Roads Diverged in a Clause – the Law of a Free-Standing Arbitration Agreement vs. The Law of an Arbitration Agreement That Sits Within a Main Contract

Wed, 2017-01-04 05:30

Kabir Singh, Kartikey Mahajan and Andrew Foo

Clifford Chance

Traditionally, arbitration agreements do not designate the law governing the arbitration agreement. In BCY v BCZ [2016] SGHC 249 (“BCY v. BCZ“), the Singapore High Court clarified the position in relation to the law applicable to the arbitration agreement where such choice is absent. In doing so, the High Court differentiated between the situations where the arbitration agreement sits within a main contract and where it is a freestanding agreement. The decision raises interesting implications which we analyse below.

Background to the dispute

The dispute concerned a sale and purchase agreement for shares in a company (“SPA”). The parties exchanged seven drafts of the SPA but ultimately a final version of the SPA was not signed. The SPA contained an arbitration clause providing for ICC arbitration seated in Singapore, governing law of the contract as New York law and no law was specified to govern the arbitration agreement.

When the plaintiff decided not to proceed with the proposed sale of shares, the defendant commenced ICC arbitration. The plaintiff challenged the arbitrator’s jurisdiction on the ground that no arbitration agreement had been concluded between the parties. The arbitral tribunal found that New York law applied to the arbitration agreement, under which a valid arbitration agreement had come into existence.

The plaintiff appealed the decision of the arbitrator to the High Court under section 10 of the International Arbitration Act (Cap 143A). The issue before the Court was whether an arbitration agreement had come into existence, in accordance with the law governing the arbitration agreement.

Decision of the High Court

 Relying on the English Court of Appeal judgment of Sulamérica Cia Nacional de Seguros SA and others v Enesa Engelharia SA and others [2013] 1 WLR 102 (“Sulamérica”), the High Court reiterated that the governing law of an arbitration agreement is to be determined via a three-step test: (a) the parties’ express choice; (b) the implied choice of the parties, as gleaned from their intentions at the time of contracting; or (c) the system of law with which the arbitration agreement has the closest and most real connection.

Since there was no express choice of law to govern the arbitration agreement, the High Court was concerned with part (b) of the above test, i.e., the implied choice of law.

The defendant asserted that New York law, being the law governing the SPA, should govern the arbitration agreement. The plaintiff contended, however, that Singapore law, being the law of the seat, should govern the arbitration agreement. In support, the plaintiff relied on FirstLink Investments Corp Ltd v GT Payment Pte Ltd and others [2014] SGHCR 12 (“FirstLink”) where an Assistant Registrar (an “AR“) held that absent indications to the contrary, the law of the seat will govern the arbitration agreement when the parties have not expressly specified so.

While the Court noted that the parties agreed there was no material difference between New York and Singapore law in respect of whether an arbitration agreement was in existence, the Court nevertheless proceeded to determine the governing law of the arbitration agreement given the divergence of authorities on this issue.

The Court ultimately concluded that there had been no reason for the AR in FirstLink to depart from Sulamérica in favour of a starting presumption for the law of the seat (¶54). The Court also held that the choice of law analysis for an arbitration agreement would differ depending on whether it sits within a main contract or is instead a freestanding arbitration agreement.

 

1) Arbitration agreement as part of the main contract

The Court held that for arbitration agreements forming part of the main contract the “governing law of the main contract is a strong indicator of the governing law of the arbitration agreement unless there are indications to the contrary” (¶65). The choice of a seat different from the law of the governing contract could justify moving away from the starting point of applying the governing law of the main contract. (¶55). However, it could not in itself suffice to displace the starting position (¶65).

The Court also explained that the default position should only be displaced if the consequences of it “would be to negate the validity of the arbitration agreement, even though the parties themselves had evinced a clear intention to be bound to arbitrate their disputes”. In such circumstances, the law of the seat would govern the arbitration agreement

Further, the Court held that “anything which suggests the parties may not have intended to have their arbitration agreement governed by the same law as the main contract would still be a factor to consider.”

 

2) Freestanding arbitration agreement

With respect to ‘freestanding’ arbitration agreements, the Court concluded that if there is no express choice of law of the arbitration agreement, the law of the seat would most likely govern the arbitration agreement. The Court acknowledged that freestanding arbitration agreements are rare, and gave two examples (1) in highly complex transactions, where parties enter into a single arbitration agreement covering disputes arising out of several contracts or an overall project; and (2) an arbitration agreement concluded after a dispute has arisen.

 

Implications – Default laws under the institutional rules

 

When parties have not expressly agreed the law of an arbitration agreement:

  • The Model SIAC clause and the SIAC Rules are silent on what the default law of the arbitration agreement should be;
  • Whereas the HKIAC Model clause specifies Hong Kong law as the default law applicable to arbitration agreements;
  • Similarly, the LCIA Rules provide that the default seat of the arbitration shall be London and that the default law applicable to the arbitration agreement shall be the law of the seat (English law if the default seat is London), subject to parties’ agreement otherwise.

Thus, taking into account BCY v. BCZ, the law applicable to the arbitration agreement can depend on which institution’s Model Clause and/or institutional rules are adopted:

 

Conclusion

It is common for international arbitration users to be embroiled in disputes concerning the law applicable to the arbitration agreement where no express choice had been made. This is especially true where parties treat arbitration clauses as “Midnight Clauses” and do not give appropriate attention to carefully drafting an arbitration clause.

In such situations, the BCY v. BCZ decision is certainly a welcome step. BCY v. BCZ attempts to align the Singapore position with the English position (the Sulamerica decision), such that the implied choice of law for the arbitration agreement is likely to be the same as the law of the substantive contract.

BCY v BCZ also represents development of the common law jurisprudence on the distinction it draws between freestanding arbitration agreements and arbitration agreements contained in a substantive contract. Barring any express choice by the parties, the law governing the arbitration agreement which is freestanding is the law of the seat and the law governing the arbitration agreement contained in a substantive contract is the law of the substantive contract.

It will be interesting to observe how courts and tribunals address this distinction in future cases.  This is because the distinction can be a difficult one to draw.  For example:

  • In BCY v BCZ, the alleged arbitration agreement was held to be one that was part of a substantive contract, i.e., an SPA, notwithstanding the fact that the draft SPAs were never signed. The High Court accepted that the arbitration agreement, if it existed, had existed “prior to the conclusion of the [substantive] contract” and was “independent of the SPA“.
  • In Viscous Global Investments Ltd v Palladium Navigation Corporation “Quest” [2014] EWHC 2654, cited by the Singapore High Court, there were four bills of lading which each contained / incorporated an arbitration clause. Additionally, there was a subsequent letter of undertaking containing an arbitration clause. The English High Court held that the arbitration clause in the letter of undertaking replaced the four prior arbitration clauses and, thus, regarded the subsequent arbitration clause as a freestanding arbitration agreement. One wonders if the court would have reached the same conclusion if it had regarded the subsequent arbitration clause as merely varying the prior arbitration clauses, as the losing party had contended.

To avoid potentially costly litigation on this issue, it remains advisable for parties to expressly state the law governing their arbitration agreement. As explained above, adopting institutional rules and / or a Model Clause does not always offer certainty.

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Milan and Santiago Arbitral Institutions adopt Dispute Boards

Mon, 2017-01-02 22:43

Yasemin Çetinel, Elina Mereminskaya and Roberta Regazzoni

Çetinel Law Firm For Dispute Resolution Board Foundation (DRBF)

On January 1, 2016 the Milan Chamber of Arbitration (“Milan CAM”), issued Rules for Dispute Boards (“Milan Rules”) exactly one year after the Arbitration and Mediation Center of the Santiago Chamber of Commerce (“CAM Santiago”) did so in Chile (“Santiago Rules”). Milan CAM has around 950 mediation filings per year and over 130 arbitration proceedings each year. According to the current statistics, CAM Santiago manages over 250 arbitral cases per year, 21 per cent of which are construction arbitrations. Both entities are therefore prominent institutions in alternative dispute resolution in their respective countries and any new procedures put forward by them are worth consideration.

Types of DBs

The Milan Rules’ aim is to focus on dispute prevention. The boards are called Dispute Resolution Boards. The Board issues what are described as recommendations- although they are binding if not challenged within 30 days.

The Santiago Rules on the other hand, following the ICC approach, allow for all three types of DB: Dispute Review Board (DRB) issuing non-binding recommendation, Dispute Adjudication Board (DAB) issuing binding decision or Combined Dispute Board (CDB) issuing decision or recommendation. A CDB can only issue a Decision, without both parties consent, a) for reasons of urgency or other relevant causes,(for example, a Decision can simplify a contract’s performance or prevent significant harm being caused to any of the parties); b) if a Decision would prevent interruption of the contract; or c) if a Decision is required to preserve evidence.

Appointment of DBs

Milan CAM states it will promote the use of DBs in long-term contracts in general and in those contracts which involve multiple interfaces.

Milan CAM took a leading position in identifying dispute board members and published a first short list of potential DRB members to start a debate in Italy among the stakeholders. This list is composed of both local and international practitioners, including lawyers and engineers.

By Legislative Decree n. 50/2016, Italy also recently introduced a “legal board” concept as an ADR tool in public tenders whereby such “legal board” members may issue “proposals for resolution” of disputes and should such proposals be accepted and signed by the parties, it becomes a binding document. This is in effect another form of dispute board in the early stages of a project.

CAM Santiago will appoint DB members from two lists: first, its arbitrators’ roster; and second, a list of approved technical experts. CAM Santiago keeps a roster for domestic arbitration only made up of local lawyers, while in international arbitration the appointments are made on an ad-hoc basis. However, Article 20 of the CAM Santiago Bylaws allows for temporary incorporation of external arbitrators. It is assumed that this provision can be used for DB appointments as well. The list of technical experts, has not been established yet. CAM Santiago is working on it in collaboration with the Chilean Construction Chamber. There is no limitation in the Santiago Rules regarding nationality or profession of the technical experts. According to the information shared by CAM Santiago, first references to Santiago Rules, have already been written into some construction contracts.

Other Features

Under Milan Rules, the DB does not have any authority to unilaterally extend its term, for example, to allow it to issue a pending recommendation. The term may only be extended by both parties’ agreement. Santiago Rules take the same approach. This feature is in contrast with ICC dispute board rules where boards have a discretion to extend their terms.

It will certainly be interesting to monitor the progress made by each of these institutions both in how often they are asked to appoint and to what extent they embrace a wider disciplinary and regional selection than traditional arbitration appointments.

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