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No Deliberations, No Enforcement in Austria: Different Reasoning by the Supreme Court, Same Result?

Thu, 2020-05-14 03:00

In a recent decision of November 2019 the Austrian Supreme Court (“OGH” in German) considered whether an arbitral award rendered by the Chamber of Industry and Commerce of Belarus shall be declared enforceable and emphasized the importance of deliberations in the context of the ordre public standard to reach an enforceable award.

In a nutshell, the Supreme Court held that excluding a co-arbitrator in fact from the deliberations and general decision-making process, thereby also preventing her/him from influencing the decision-making of the other arbitrators, infringes the procedural ordre public, i.e. the body of principles that underpin the operation of the legal system in Austria.

 

Facts of the Case: Arbitrator Excluded from Deliberations

The following facts are known from the Supreme Court’s decision: The claimant sought to obtain a declaration of enforceability for Austria regarding an arbitral award rendered on April 15, 2015 by the Chamber of Industry and Commerce of Belarus. The arbitral tribunal consisted of three arbitrators: two party-appointed arbitrators and one presiding arbitrator, Mr. A.1)The author is not aware of the parties‘ names. The abbreviations used only serve the purpose to enhance the article’s readability. jQuery("#footnote_plugin_tooltip_9087_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9087_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

After the evidentiary proceedings were concluded, an initial meeting between the three arbitrators was scheduled. However, the meeting ended without a decision on the merits of the case. The arbitrator nominated by the respondent, Mr. R., was thus given the prospect of additional meetings in order to come to a decision. Yet, Mr. A. took it upon himself to subsequently draft an award without contacting, informing or discussing the draft with Mr. R.

Mr. A. then requested Mr. R. to sign the draft award he had prepared and which in the meantime had already been signed by Mr. A. and the arbitrator nominated by the claimant. While studying the signed draft award Mr. R. noticed that the award also covered requests submitted by the parties after the evidentiary proceedings were concluded (including but not limited to a request to reopen the procedure). And while Mr. R. was favorable to these requests, Mr. A. quashed them in his draft award.

Mr. R. thus raised his concern that the three arbitrators neither had a concluding discussion regarding the main issues of the case nor had there been a discussion involving Mr. R. regarding the requests submitted by the parties after the evidentiary proceedings’ conclusion. In his response, Mr. A. merely referred Mr. R. to the possibility of a dissenting opinion.

Considering these facts, the lower instances rejected both the claimant’s application for declaration of enforceability and the applications to grant enforcement.

 

Decision of the Austrian Supreme Court

Generally, the Austrian Supreme Court deals with remedies against the judgement of the Courts of Appeal in civil matters and is the first and final instance in annulment claims regarding arbitral awards and proceedings in connection with the constitution of arbitral tribunals, amongst others.

Access to the Supreme Court is limited in two ways: by considering the value of the dispute and by restricting access to the Court to matters which raise a substantial question of legal relevance. A legal issue is considered to raise a substantial question of legal relevance if the lower court’s decision departs from the relevant rulings of the Supreme Court, if there is no case law on the issue in question, or if this issue has not been dealt with consistently in the Court’s past rulings.

In the case at hand, the Supreme Court noted the lack of a substantial question of legal relevance and largely followed the lower instances’ reasoning.

The Court confirmed the decision of the lower court in that it is preferable for all arbitrators to be physically present during the deliberations regarding the merits of the case, especially if the award is subject to a majority vote. Yet, the deliberations between the arbitrators may also be conducted via phone, videoconferencing or in writing.

Bilateral deliberations between two arbitrators are even acceptable according to the Supreme Court, as long as these deliberations do not lead to the factual exclusion of a third arbitrator from the decision-making process.

An arbitrator, who is overruled by his colleagues, must have had the chance to present his opinion to his colleagues and thus to influence the decision-making of the other arbitrators. However, if the arbitrator, who was overruled by his colleagues, is presented with his colleagues’ finalized opinion, the decision-making process leading to the arbitral award is severely tainted.

The Supreme Court upheld the decision of the lower court in considering that Mr. R. was indeed confronted with a finalized opinion by his colleagues, which essentially constituted Mr. R’s factual exclusion from the decision-making process and effectively barred him from the possibility to influence the decision-making of his colleagues.

This, as per the Supreme Court, infringes the procedural ordre public. It is interesting to note, however, that the Supreme Court did not refer to the public policy exception found in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”). Instead, it simply upheld the lower-instances’ decisions and stated that enforcing the arbitral award infringes the Austrian ordre public.

The Supreme Court also noted that, contrary to the claimant’s view, the lower instances are not “sweeping aside” the judicial decisions taken in a Belarusian annulment proceedings, because the relevant evaluation criterion in the case at hand is the Austrian legal order, which has not yet been evaluated. The legal view taken by the lower instances moreover does not mean that unanimity is ultimately required if the arbitrators have dissenting opinions, because the matter to consider is a fair and correct decision-making process.

 

Analysis of the Supreme Court decision – Emphasizing the Importance of Deliberations

In practice, objections to the enforcement of arbitral awards based on an infringement of the ordre public are fairly common, but very rarely successful. This is partly due to the narrow definition of the ordre public standard according to the Supreme Court’s case law.

Austria has ratified the New York Convention conceived to facilitate the recognition and enforcement of foreign arbitral awards in the member states of the convention. The relevant Austrian procedural provisions on the enforcement of arbitral awards are found in the Austrian Code of Civil Procedure (Zivilprozessordnung) and the Austrian Enforcement Act (Exekutionsordnung).

And while the New York Convention basically banished the so-called “double-exequatur” proceedings requiring applicants to get an arbitral award rendered enforceable in both the country where the award was issued and the country where enforcement was sought, trying to get foreign arbitral awards recognized and enforced in Austria occasionally still is an uphill battle.

This is due to the Austrian courts’ interpretation of the form requirements provided for in Article IV New York Convention.

The decision at hand is an exceptional case, because it does not concern the form requirements stipulated in the New York Convention, which are typically the basis for rejecting an application for declaration of enforceability; rather, the Supreme Court refers to an infringement of the procedural ordre public when rejecting the claimant’s applications.

Indeed, the fact that an arbitrator was objectively excluded from the deliberations and then confronted with a finalized opinion by his colleagues constitutes a major flaw preventing a fair and correct decision-making process according to Austrian law. The decision of the Supreme Court reflects what seems to be an international consensus regarding the importance of deliberations in arbitration.

The Supreme Court stated that it is not per se improper for two arbitrators to deliberate amongst themselves, provided that the deliberations do not reach an intensity which would effectively exclude the third arbitrator. This approach is also adopted by German law.2)See Schlosser in Stein/Jonas, dZPO23 § 1052 Rz 2. jQuery("#footnote_plugin_tooltip_9087_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9087_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Similarly, the lack of proper deliberations on contentious issues has been relied upon as a ground for annulment in Sweden as early as 1924 (see Årsbackaträvaruaktiebolag v. E. Hedberg, NJA 1924 p. 569).

In a more recent case, an arbitral award rendered by a tribunal in Spain was set aside because one of the arbitrators was excluded from deliberations. Namely, in the now infamous Puma Case, the chairman and one co-arbitrator held the final part of the deliberations without informing the third one, changed the previously agreed content of the award, signed the award and even notified the parties on the same day.

The Supreme Court’s decision also (implicitly) confirmed the importance of the principle of collegiality for the deliberative process; a similar stance was taken in the annulment of the award rendered in the Guangying Costumes v. Eurasia case, in which an arbitrator was de facto excluded from the deliberation process.

Apart from infringing the ordre public in most jurisdictions, the fact that an arbitrator is effectively excluded from the opportunity to deliberate and to convey his or her opinion on the final draft of an award, the arbitral award itself is also at risk of annulment.

This decision should serve as a sharp reminder to arbitrators and counsels alike, not to overlook the ordre public of the state in which the arbitral award will be enforced, when conducting the proceedings and issuing an award.

References   [ + ]

1. ↑ The author is not aware of the parties‘ names. The abbreviations used only serve the purpose to enhance the article’s readability. 2. ↑ See Schlosser in Stein/Jonas, dZPO23 § 1052 Rz 2. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Arbitration in the WTO: Changing Regimes Under the New Multi-party Interim Appeal Arbitration Arrangement

Thu, 2020-05-14 01:00

Since 2017, the appointment of members of the Appellate Body (‘AB’) of the Dispute settlement system of the World Trade Organisation (‘WTO’) has been blocked by the United States (‘US’). This has disrupted the functioning of the WTO dispute settlement system. The US claims that it has blocked the appointment for serious reasons: the AB is guilty of judicial overreach, interpreting WTO agreements in a manner which they were never intended to apply; the AB creates new rights and provides decisions on issues not raised by the parties; and, due to the nature of the consensus requirement, there is no check on the adoption of AB’s decisions.

To resolve this situation, the European Union (‘EU’) and 15 other Members of the WTO have reached an arrangement to arbitrate as between themselves trade disputes under Article 25 Understanding on Rules and Procedures Governing the Settlement of Disputes (‘DSU’ are the governing rules and procedure for dispute settlement). This particular arrangement, called a ‘Multi-party interim appeal arbitration arrangement’ (‘MPIA’), functions as a stop-gap measure to replace the AB for the time being as it remains inoperative.

The first official step towards MPIA dates back to May 2019, when the EU circulated a draft text for an interim appeal arbitration process. In July 2019, the EU and Canada agreed on such an arrangement in the event the AB is unable to hear cases. At the time of writing, 20 WTO Members have taken up the opportunity to join MPIA. However, the participation in MPIA remains open for other WTO Members to join (para 12).  As per the procedure mentioned in MPIA, the participating members of MPIA shall notify the Dispute Settlement Body of the WTO of their intention to join MPIA. (para 12).

 

The dispute settlement mechanism in the WTO

Under the DSU, a WTO Member can seek consultation with another WTO Member in relation to WTO trade disputes. When consultation fails, the complainant can request the Dispute Settlement Body (DSB) to establish an ad hoc Panel (i.e., First Instance body) consisting of three members to hear the dispute. The DSB is responsible for overseeing the entire dispute settlement process. If parties decide to appeal the Panel report to the AB, the report is not adopted by the DSB (Article 16.4 DSU and Article 17 DSU). Normally, the dispute at appellate stage is heard by three members. However, in December 2019, the terms of two of the three remaining members of the AB had expired and in the absence of appointment of members, there is no existing AB to hear the appeals. Due to this, a party to the dispute can now appeal and prevent the adoption of, and compliance with, the report. For example, the US appealed in a dispute between the US and  India (DS436), and because at the time there was no AB to hear the appeal, this procedural move prevented the adoption of the Panel report by the DSB.

 

What kind of a mechanism is expected under Article 25 DSU?

The arbitration mechanism under Article 25.1 DSU is an ‘expeditious’ alternative mechanism that “can facilitate the solution of certain disputes that concern issues that are clearly defined by both parties.” This particular provision can be interpreted in two ways. A narrow interpretation of ‘certain disputes’ in Article 25.1 DSU would restrict arbitration of all the disputes that could actually be raised before the Panel or the AB. On the other hand, a broader interpretation of Article 25.1 DSU would allow all trade disputes to be arbitrated that are ‘clearly’ defined by the parties. The latter interpretation is the one that has gained support in by the DSB. In US-Section 301 Trade Act (2000), for example, the panel ruled that

all Members [are required] to ‘have recourse to’ the multilateral process set out in the DSU when they seek the redress of a WTO inconsistency. In these circumstances, Members have to have recourse to the DSU dispute settlement system to the exclusion of any other system, in particular a system of unilateral enforcement of WTO rights and obligations.

The reason can also be that Article 23.1 DSU allows WTO Members to have recourse to all of the WTO dispute settlement mechanism, including arbitration under Article 25 DSU. Therefore, an arbitration mechanism, as seen under MPIA, is permitted under the DSU.

Article 25.4 DSU states that Articles 21 and 22 DSU are applied “mutatis mutandis” to arbitration awards, while the same is mentioned in MPIA (Annex 1, para 17). Article 21 DSU provides for a surveillance mechanism ensuring a prompt compliance with the recommendations and rulings in Panel or AB reports. When the recommendations and rulings are not implemented within a reasonable period of time, under Article 22 DSU, the complainant can seek compensation from the respondent or suspension of concessions to the respondent. Similarly, the arbitration awards under Article 25 DSU are subject to all the procedures and rules of the DSU such as surveillance and monitoring of implementation and compensation and suspension of concession. This means that when the parties choose arbitration as a recourse, they would not lose any of the benefits that are afforded through the DSB; the MPIA notes that appeal arbitration procedure will be based on the substantive and procedural aspects of Appellate Review pursuant to Article 17 DSU (para 3).

To date, there has been only one dispute, United States- Section 110(5) of US Copyright Act, in which the parties resorted to arbitration under Article 25 DSU. The procedure was not used as an alternative to the panel and AB procedure, but at the stage of implementation, when the panel report had already been adopted.

 

How the MPIA is different from appellate proceedings within the DSB

The MPIA differs in scope to appellate proceedings within the DSB. MPIA applies to all future disputes between participating members including the compliance stage of such disputes as well as disputes pending on the date of the communication, except if the interim panel report (see Article 15 DSU) has already been issued on that date (para 9). An appeal shall be limited to issues of law and legal interpretations covered in the panel report (Annex 1, para 9). The parties to the dispute when mutually agree are free to deviate from the procedure prescribed in the appeal arbitration agreement annexed as Annex 1 in MPIA.

The MPIA also differs in objective. Participating members of MPIA will resort to arbitration as an appeal procedure, as long as the AB is not able to hear the appeals of panel reports (para 1). This means that it is a temporary arrangement and will cease to apply once the AB is operational again. While MPIA exists, the participating members of MPIA cannot file appeals for any trade disputes as between themselves under Articles 16.4 and 17 DSU (para 2).

The structure of these mechanisms also differs. For MPIA, appeals will be heard by three arbitrators selected from a pool of ten standing arbitrators composed by the participating members (para 4). Arbitrators may come from non-participating members but can be removed at the request of the party at dispute (footnote 2). The selection of arbitrators will be according to the same principles and methods applied to form the AB under Article 17.1 DSU, Rules 6(2) of Working Procedures for Appellate Review and procedure mentioned in the Annex 2 of MPIA (para 6). Further, participating members are responsible to provide the arbitrators with appropriate administrative and legal support which will be separate from the WTO Secretariat staff and its division (para 7).

Finally, the procedures also differs. In order to initiate an arbitration under MPIA, a ‘Notice of Appeal’ is filed with the WTO Secretariat no later than 20 days by the parties to the dispute after suspension of the panel proceedings (Annex 1, para 5). This Notice is also issued to other parties and to third parties. MPIA requires the arbitrators to issue an award within an ambitious time limit of 90 days from the date of filing of the Notice of Appeal (Annex 1, para 12). On a proposal from arbitrators, parties to the dispute may agree to extend the 90-day time limit (Annex 1, para 14). However, the arbitrators are allowed to adapt the timetable for appeals provided in the Working Procedures for Appellate Review after consulting the parties to the dispute (Annex 1, para 11).

 

Future outcome

MPIA shows commitments of the WTO Members to uphold the rule-based system under WTO agreements, but not all the Members are ready to bind themselves to the arbitration agreement and give up their right to appeal at the AB. For example, India has refused to join MPIA as joining MPIA means giving up its right to appeal in the AB. Interestingly, MPIA will now create a separate category of appellate reports since the arbitration awards are not required to be adopted by the DSB. This is an unresolved issue since the WTO has not expressed its support or otherwise to MPIA till date.

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Termination of Intra-EU BITs: Commission and Most Member States Testing the Principle of Good Faith under International Law

Wed, 2020-05-13 06:30

The long-awaited Agreement to terminate intra-EU BITs (bilateral investment treaties) was signed on 5 May 2020 (the “Termination Agreement”). According to the European Commission, the Termination Agreement “implements the March 2018 European Court of Justice judgment (Achmea case), where the Court found that investor-State arbitration clauses in [intra-EU BITs] are incompatible with EU Treaties.”

The road the EU has taken to arrive at this point was described in a previous KAB post, so the aim of this post is to focus on two controversial provisions and provide some preliminary thoughts on their impact. I will also briefly consider the position and future of the Member States that chose not to sign the Termination Agreement.

 

Termination of Sunset Clauses and Pending Arbitrations

The two provisions of the Termination Agreement that have given and will continue to give rise to attention include (i) Articles 2 and 3, which terminate the sunset clauses in BITs and (ii) Articles 5 and 7, which purport to terminate all arbitrations under them commenced after the Achmea judgment. The interference with vested rights of third parties in the case of the former, and the arguably retroactive nature of the provision in the latter, renders the validity and application of these provisions suspect, as a matter of international law.

The Contras case (Case concerning Military and Paramilitary Activities in and against Nicaragua (Nicaragua v. United States)) provides an interesting analogy: Three days before Nicaragua seised the International Court of Justice of its case, the United States purported to qualify its declaration accepting the compulsory jurisdiction of the Court under Article 36(2) of the Statute by a notification that excluded disputes with Central American states from its scope.  The original declaration included a 6-month termination period. The ICJ held that the notification was ineffective, pointing out that the termination notice in the original declaration was “inescapable” (Jurisdiction and Admissibility, Judgment, ICJ Reports 1984, p. 392, para. 61). The Court emphasised the principle of good faith in arriving at its conclusion (para. 60).

It may also be worth noting that under the Vienna Convention on the Law of Treaties, treaties do not generally produce retroactive effects (Art. 28) and termination of a treaty “does not affect any right, obligation or legal situation of the parties created through the execution of the treaty prior to its termination” (Art. 70(1)(b)).

While it is no secret that the EU Commission has disagreed for a long time with the jurisdiction of investment tribunals under intra-EU BITs, it cannot prevent such tribunals from ruling on the validity and effect of these clauses in existing and possible future cases. All it can do is try to influence the outcome (as it has done in numerous cases in the past), most likely by seeking to appear as an amicus curiae. Ultimately the Commission can bring infringement proceedings before the CJEU against the respondent state, if such arbitrations result in an award that is not to its liking, as it did in the Micula case (Cases T624/15, T694/15 and T704/151)Technically the cases were brought by the Micula brothers and their companies, challenging the Commission’s decision to declare Romania’s partial payment of the sum awarded in ICSID Case ARB/05/20 incompatible state aid. The General Court upheld the application in a decision discussed in a KAB post by Guillaume Croisant. jQuery("#footnote_plugin_tooltip_5109_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });).

This would not contribute to the coherence of systems of international law (of which EU law is one, even if the Commission and EU lawyers do not always see it that way) or create legal certainty. While the Member States must have taken this risk into account when deciding to sign the Termination Agreement, the same cannot be said for EU investors that may have relied on the additional protection provided by an existing BIT (including its sunset clause) when making their investments. Most such investors will not have the appetite or stamina to pursue proceedings under the current uncertain legal regime, leading to the signatories to the Termination Agreement and the Commission having achieved their aims, regardless of the strict legal effect of Articles 2 and 3 of the Termination Agreement.

By contrast, those that are already involved in arbitrations that have ostensibly been unilaterally terminated (or the jurisdiction of the tribunals hearing them withdrawn) under Articles 5 and 7 may have invested enough in their disputes to wish to see them through, even in light of the serious uncertainties that surround the enforceability of any award that they may obtain.2)A further option is open for parties to any arbitration proceedings that were commenced but not concluded before the Achmea judgment, namely to enter into “structured dialogue” with a facilitator in order to try to achieve a settlement, under Article 9 of the Termination Agreement. jQuery("#footnote_plugin_tooltip_5109_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Signatories – and Not Signatories – to the Termination Agreement

It is noteworthy that it has taken the Member States and the Commission over six months from the agreement on the terms of the Termination Agreement to its signature.3)The terms of the draft leaked at that time are virtually identical to those in the signed version. jQuery("#footnote_plugin_tooltip_5109_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5109_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Presumably the time was needed to try to coax all EU Member States to join the agreement, in which case the attempt appears to have failed. Four Member States have decided not to sign the Termination Agreement: Austria, Finland, Ireland and Sweden. Ireland has no BITs in force (with EU Member States or otherwise), but the other three appear not to have agreed to all the terms of the Termination Agreement and be rather opting for bilateral termination of their individual treaties – an alternative also provided in the political Declarations of January 2019 (see para. 8 of the Declaration signed by Austria and para 8. of the Declaration signed by Finland and Sweden).

It will be interesting to see how those bilateral (termination) treaties differ from the plurilateral Termination Agreement. Sweden, for example, may wish to treat pending arbitrations differently, given its ownership of Vattenfall, even though that case (Vattenfall AB v. Germany, ICSID Case No. ARB/12/12) would not have been specifically affected, being brought under the Energy Charter Treaty (the “ECT”), rather than a BIT. (The Termination Agreement does not apply to the ECT.) While the main difference between the political Declarations is on its face over the ECT, one can also detect broader concerns over “due process” and interference in ongoing proceedings in the Declaration signed by Finland and Sweden (see p. 3). Overall, the Termination Agreement clearly goes further than the Achmea judgment, which may not have been to all Member States’ liking.

Future terminations may in theory at least also be unilateral, leaving the sunset clauses intact, which could result in further infringement proceedings before the CJEU.

While the Commission on the whole got its way, it is clear that there is far less agreement among the Member States on the usefulness and legality of intra-EU BITs than the Commission press communications would suggest.

The UK has also not signed the Termination Agreement, even though its preliminary intention to do so was indicated at the time of the draft agreement, when it was still a Member State. Accordingly, the UK’s existing BITs with EU Member States will remain in force, at least until the future relationship between the UK and the EU is clarified during the ongoing negotiations.

References   [ + ]

1. ↑ Technically the cases were brought by the Micula brothers and their companies, challenging the Commission’s decision to declare Romania’s partial payment of the sum awarded in ICSID Case ARB/05/20 incompatible state aid. The General Court upheld the application in a decision discussed in a KAB post by Guillaume Croisant. 2. ↑ A further option is open for parties to any arbitration proceedings that were commenced but not concluded before the Achmea judgment, namely to enter into “structured dialogue” with a facilitator in order to try to achieve a settlement, under Article 9 of the Termination Agreement. 3. ↑ The terms of the draft leaked at that time are virtually identical to those in the signed version. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Choice of Seat or Venue: Supreme Court of India Dithers

Wed, 2020-05-13 03:00

This blog has previously discussed the issue of jurisdiction of Indian courts over foreign-seated arbitrations and the issue of Indian parties choosing a foreign seat of arbitration. However, a more fundamental issue concerns the interpretation of arbitration agreements to determine the choice of seat. Since September 2018, the Supreme Court of India (“Supreme Court”) has considered this issue on three occasions. Yet, the jurisprudence resulting from these three judgments does not provide consistent and clear guidance on this issue. Consequently, parties pursuing arbitrations having a connection to India are likely to continue facing expensive and time-consuming litigation related to this issue.

We consider each of the three judgments of the Supreme Court and identify specific areas of concern. It may be noted that all three judgments were delivered by three-judge benches composed of different judges.

 

Hardy Exploration

In September 2018, the Supreme Court delivered Union of India v. Hardy Exploration and Production (India) Inc., (2019) 13 SCC 472, the first of these three judgments. In this case, the parties had entered into a production sharing contract containing an arbitration agreement. The arbitration agreement provided that the “venue of conciliation or arbitration proceedings… unless the parties otherwise agree, shall be Kuala Lumpur…” and that “[a]rbitration proceedings shall be conducted in accordance with the UNCITRAL Model Law on International Commercial Arbitration of 1985…”. After disputes arose, the parties commenced arbitration proceedings which were held in Kuala Lumpur and resulted in an award signed in Kuala Lumpur. Union of India sought to challenge the award under the Indian Arbitration and Conciliation Act, 1996 before the Delhi High Court. It contended that the arbitration agreement did not specify the seat of arbitration and referred to the venue of arbitration only. Therefore, Kuala Lumpur was merely the venue and New Delhi was the seat of arbitration. Hardy Exploration argued otherwise.

The Supreme Court held that the parties had not chosen the seat of arbitration and the arbitral tribunal had also not determined the seat of arbitration. It further held that the choice of Kuala Lumpur as the venue of arbitration did not imply that Kuala Lumpur had become the seat of arbitration. According to the Supreme Court, the venue could not by itself assume the status of the seat; instead a venue could become the seat only if “something else is added to it as a concomitant”. The Supreme Court therefore held that Indian courts had jurisdiction to hear a challenge to the award.

The decision in Hardy Exploration is of limited assistance because it does not clearly delineate the concepts of “place”, “seat” and “venue” and because it does not identify the additional factors needed to justify treating the chosen venue as the seat of arbitration. Through this decision, the Supreme Court ultimately did not provide any clarity on this issue except the simple conclusion that a chosen venue could not be treated as the seat of arbitration in the absence of additional factors indicating that such chosen venue was intended to be the seat of arbitration.

 

Soma JV

Thereafter, in December 2019, the Supreme Court revisited this issue in BGS SGS Soma JV v. NHPC Ltd., 2019 SCC OnLine SC 1585, which concerned an arbitration agreement stipulating that “Arbitration Proceedings shall be held at New Delhi/Faridabad, India…”. The Supreme Court prescribed the following bright-line test for determining whether a chosen venue could be treated as the seat of arbitration:

  1. If a named place is identified in the arbitration agreement as the “venue” of “arbitration proceedings”, the use of the expression “arbitration proceedings” signifies that the entire arbitration proceedings (including the making of the award) is to be conducted at such place, as opposed to certain hearings. In such a case, the choice of venue is actually a choice of the seat of arbitration.
  2. In contrast, if the arbitration agreement contains language such as “tribunals are to meet or have witnesses, experts or the parties” at a particular venue, this suggests that only hearings are to be conducted at such venue. In this case, with other factors remaining consistent, the chosen venue cannot be treated as the seat of arbitration.
  3. If the arbitration agreement provides that arbitration proceedings “shall be held” at a particular venue, then that indicates arbitration proceedings would be anchored at such venue, and therefore, the choice of venue is also a choice of the seat of arbitration.
  4. The above tests remain subject to there being no other “significant contrary indicia” which suggest that the named place would be merely the venue for certain proceedings and not the seat of arbitration.
  5. In the context of international arbitration, the choice of a supranational body of rules to govern the arbitration (for example, the ICC Rules) would further indicate that the chosen venue is actually the seat of arbitration. In the context of domestic arbitration, the choice of the Indian Arbitration and Conciliation Act, 1996 would provide such indication.

The bright-line test prescribed in Soma JV was diametrically opposite to the principle laid down in Hardy Exploration. While Hardy Exploration stipulated that a chosen venue could not by itself assume the status of the seat of arbitration in the absence of additional indicia, Soma JV prescribed that a chosen venue for arbitration proceedings would become the seat of arbitration in the absence of any “significant contrary indicia”.

Although the bright-line test prescribed in Soma JV provided much needed clarity, it was not without its own share of problems. The Supreme Court did not identify which factors constitute “significant contrary indicia” and thereby displace the conclusion that a chosen venue is actually the seat of arbitration. It also did not consider whether the existence of a jurisdiction clause in favour of the courts of a place other than the chosen venue or the choice of curial law of a place other than the chosen venue constituted “significant contrary indicia”.

In addition, the Supreme Court wholeheartedly adopted the “Shashoua principle”, a principle that had first been articulated in the specific context of London arbitration. This principle was articulated by the England and Wales High Court in Roger Shashoua and Ors. v. Mukesh Sharma, [2009] EWHC 957 (Comm) wherein the High Court held that the chosen venue (London) was the seat of arbitration because the parties had: (a) chosen London as the venue of arbitration; (b) not designated any other place as the seat of arbitration; (c) chosen a supranational body of rules to govern the arbitration, and (d) there were no contrary indicia. The High Court’s decision was premised on London arbitration being “a well known phenomenon which is often chosen by foreign nationals with a different law”. This underlying rationale evidently did not apply in the Indian context.

It may be noted that the Supreme Court in Soma JV also held that its earlier decision in Hardy Exploration was per incuriam since it failed to follow the “Shashoua principle” approved by the five-judge bench decision in Bharat Aluminium Co. v. Kaiser Aluminium Technical Services, (2012) 9 SCC 552. As a result, it appeared that Hardy Exploration was no longer good law and Soma JV would hold the field instead.

 

Mankastu Impex

Finally, in March 2020, the Supreme Court yet again considered the issue of choice of seat in arbitration agreements in Mankastu Impex Pvt. Ltd. v. Airvisual Ltd., 2020 SCC OnLine SC 301.

In this case, Mankastu (an Indian company) and Airvisual (a Hong Kong company) had entered into an MoU containing an arbitration agreement. The arbitration agreement provided that “[a]ny dispute, controversy… shall be referred to and finally resolved by arbitration administered in Hong Kong” and “[t]he place of arbitration shall be Hong Kong…”. The governing law clause in the MoU provided that “[t]his MoU is governed by the laws of India… and courts at New Delhi shall have the jurisdiction.” Once disputes arose between the parties, Mankastu approached the Supreme Court under the Indian Arbitration and Conciliation Act, 1996 for appointment of a sole arbitrator.

Mankastu argued that since Indian law was the governing law and courts at New Delhi had jurisdiction, the seat of arbitration was New Delhi, and accordingly, the Supreme Court could appoint a sole arbitrator. It further argued that Hong Kong was only the venue of arbitration and not the seat and relied on Hardy Exploration for this purpose.

On the other hand, Airvisual contended that since the arbitration agreement provided that the place of arbitration shall be Hong Kong and such arbitration shall be administered in Hong Kong, the seat of arbitration was Hong Kong. Accordingly, Indian courts had no jurisdiction to appoint a sole arbitrator. It relied on Soma JV for this purpose.

In response, Mankastu incorrectly argued that since Hardy Exploration and Soma JV were both judgments from a three-judge bench, Soma JV could not have decided that Hardy Exploration was per incuriam and therefore Hardy Exploration continued to be good law.

The Supreme Court, instead of decisively settling the controversy by affirming Soma JV, decided to sidestep it altogether. It noted that the use of the expression “place of arbitration” could not decide the intention of the parties to designate that place as the seat of arbitration and such intention had to be determined from other clauses in the agreement between the parties and their conduct. The Supreme Court held that the choice of Hong Kong as the “place of arbitration” itself did not lead to the conclusion that the parties had chosen Hong Kong as the seat of arbitration. However, because the parties had also agreed that such arbitration was to be administered in Hong Kong, the Supreme Court ultimately held that the parties had chosen Hong Kong as the seat of arbitration.

 

Conclusion

Although the result in Mankastu Impex is correct insofar as Hong Kong was determined to be the seat of arbitration, the Supreme Court’s disinclination towards affirming Soma JV has cast doubt on the precedential value of Soma JV. Moreover, although the Supreme Court did not explicitly follow Hardy Exploration, it appears to have adopted a similar approach in reaching its conclusion, particularly by emphasising the need for additional evidence of the intention of parties’ rather than the mere use of the expression “place of arbitration”.

As a result, it is unclear whether Hardy Exploration remains good law or the bright-line test in Soma JV holds the field. The bright-line test laid down in Soma JV is certainly clearer, more objective and aligned with the principle of party autonomy. Therefore, it merits consideration and affirmation by the Supreme Court at the next suitable opportunity. In the meantime, parties would be well advised to use express language referring to the “seat” of arbitration specifically to avoid unnecessary litigation on this issue.

 

Anjali Anchayil and Ashutosh Kumar are advocates practising in New Delhi, India. The views expressed in this article are personal.

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Belt and Road and the International Financial Architecture

Tue, 2020-05-12 03:00

China’s Belt and Road Initiative (“BRI”) is well known as the largest infrastructure construction program in world history.1)This post is expressed as Michael J. Bond’s personal opinion and does not represent the views of any organization or party. jQuery("#footnote_plugin_tooltip_1571_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); President Xi Jinping announced its two components in 2013; one is a land-based Silk Road Economic Belt and one a sea-based 21st Century Maritime Silk Road. His grand plan includes overland and maritime work to build bridges, highways, communications facilities, ports, railroads, pipelines, power systems, hydroelectric dams, and airports crossing 70 or more country borders connecting China to the rest of Asia, Europe, the Middle East, Africa, and South America. Further details on BRI’s scale and scope can be reviewed on the PRC government’s Belt and Road Portal.

Most of the reporting on BRI addresses allegations of corruption, less developed countries taking on excessive debt, or the economic viability of the BRI projects.2)See, e.g., John Hurley, Scott Morris, Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, Center for Global Development, CGD Policy Paper 121, March 2018; and reports in the Financial Times on April 14, 2019, July 18, 2019, and December 10, 2019. jQuery("#footnote_plugin_tooltip_1571_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This much is known. Few, however, have noticed that BRI also is fostering very fundamental changes to the world’s financial architecture.

 

Changes to financial architecture

First, some history. The US dollar has been the world’s reserve currency since the Bretton Woods accords following the end of the Second World War. Even after the US left the gold standard in 1971, the world’s central banks were content to hold dollars, development banks funded projects in dollars, and world-wide commodities, including oil, were priced in dollars. As the issuer of dollars and dollar denominated Treasury bank notes, which were as good as gold, the US government held sway over the function of the international financial system.

Being in a position to lead the banks who had no choice other than to use dollars with a connection to the US, the US government’s power to impose its will was essentially unchallenged. As paper money fell out of use in favor of credit cards and other electronic payment systems, all transactions of any moment passed one way or another through processing systems in New York. That meant any transaction that touched US soil, even if only in a digital way, subjected the transferring parties to US jurisdiction. This fact informed the power to impose punitive economic sanctions on nations such as Libya, Iraq, Iran, Cuba, North Korea, Russia and their citizens.

A hundred years ago, when it was said the sun never set on the Union Jack, the Bank of England was similarly situated with the pound sterling to ensure an orderly and predictably capital friendly international payments regime. Seeking to hang on to what power remains, Brexit can be viewed as an effort to preserve sterling’s international status. In the meantime, the US Federal Reserve, the International Monetary Fund and its World Bank, which was born as the International Bank for Reconstruction and Development, took the lead. With monetary union in Europe, its European Central Bank and the Euro are vying for a place at the table. The Chinese have learned how to play by the old rules.

China tried once before over 500 years ago. Walter B. Wriston, former Chair of Citibank and a prolific writer about the impact of the information revolution on international finance wrote, “China was the first nation to issue paper currency, having done so in the eleventh century, but soon had to abandon the practice as its currency was nowhere acceptable.”3)Walter B. Wriston, “The Twilight of Sovereignty”, Fletcher Forum of World Affairs, 1993. jQuery("#footnote_plugin_tooltip_1571_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); 25 years ago, looking to the future at what was coming, he presciently observed, “[t]he velocity of change in economics, technology, science, and military capabilities is shifting the tectonic plates of national sovereignty and power.” Mr. Wriston was right.

Professor John A. Mathews of Macquarie University reports that the BRI is about to challenge the world’s reserve currency, payments systems and basis of commodity pricing.4)John A. Mathews, “China’s Long Term Trade and Currency Goals: The Belt & Road Initiative”, The Asia-Pacific Journal, January 1, 2019 (“Mathews”). jQuery("#footnote_plugin_tooltip_1571_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Traditionally, China’s currency, the yuan which is also known as renminbi (“RMB”), was not freely convertible, but that is changing as China internationalizes RMB. The BRI contracts favor Chinese developers, contractors and suppliers and usually require payments in RMB. To finance the BRI projects, China established its own international development banks, including a new Asian Infrastructure Investment Bank (“AIIB”). In 2013, the UK issued the first sovereign renminbi bond by a western government. The Financial Times reports, “the UK has been keen to establish the City of London as a platform for overseas business in the Chinese currency as it starts to play a bigger role in the global economy.”5)“US attacks UK’s constant accommodation with China”, Financial Times, March 12, 2015. jQuery("#footnote_plugin_tooltip_1571_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

For domestic payments, while American Express was granted approval to operate in China, Visa and Mastercard are still frozen out.6)“China’s central bank delays market entry for Visa and Mastercard”, Financial Times, January 13, 2019. jQuery("#footnote_plugin_tooltip_1571_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Essentially scale jumping over the West’s credit card payment systems, China soon will roll out a digitization of the RMB. The very concept of money is changing rapidly. As Mr. Wriston predicted in 1993, the Information Standard has replaced the Gold Standard.

China imports more oil than any other country and pays Russia, Iran and Venezuela for oil in RMB; Prof. Mathews speculates that Saudi Arabia soon may follow suit.7)Mathews. jQuery("#footnote_plugin_tooltip_1571_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The RMB is now convertible to gold in Shanghai and Hong Kong. In March 2018, China established a RMB based oil futures contract on the Shanghai International Energy Exchange that, in its first four months traded an equivalent of US $538 billion and may eventually challenge Europe’s Brent and the West Texas Intermediate oil pricing benchmarks now traded in London and New York.

Prof. Mathews reports China recently established offshore RMB clearing hubs.8)Ibid. jQuery("#footnote_plugin_tooltip_1571_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); These are not located in Brussels where the SWIFT international payments system is headquartered. Further Prof. Mathews observes that BRI’s RNB based trade and investment “promises to promote Chinese soft power while serving as a means for countries to evade US sanctions.”9)Ibid. jQuery("#footnote_plugin_tooltip_1571_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The power to impose sanctions is a demonstration of sovereignty. As China imposes its will to reorganize the assumptions forming the basis of the international financial system, the US’s sovereign power may diminish, just as Mr. Wriston predicted.

 

Dispute resolution in the new financial architecture: quo vadis?

The impact, if any, of these changes to the underpinning of the world’s financial architecture on international commercial arbitration is difficult to predict.

My view is that these potential changes to the international financial architecture should have no immediate impact on international commercial arbitration. Indeed, in November 2019 China announced, in a joint declaration with arbitration institutions from the Belt & Road Countries, its intent to promote arbitration for dispute resolution as a fair way of solving trade disputes10)“Arbitration Institutions to form mechanism under Belt and Road Initiative” November 8, 2019. jQuery("#footnote_plugin_tooltip_1571_10").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Lu Pengqi, Deputy Director of the China Council for Promotion of International Trade, acknowledged that arbitration differs from country to country along the Belt & Road, which are mostly emerging economies and developing countries with various concepts, laws and regulations. “We hope international arbitration institutions can promote the building of a community of arbitration laws under the Belt & Road Initiative by upholding the concepts of opening, sharing and serving, and facilitate the worldwide application of resolutions on a variety of disputes.”11)Ibid. jQuery("#footnote_plugin_tooltip_1571_11").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_11", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); And according to Luo Dongchuan, Vice President of the Supreme People’s Court, China will advance its arbitration system reform and make efforts in building an arbitration friendly judicial environment.12)Ibid. jQuery("#footnote_plugin_tooltip_1571_12").tooltip({ tip: "#footnote_plugin_tooltip_text_1571_12", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); All practitioners will welcome those optimistic forecasts.

All construction projects include risks of potential loss and claims, and the larger the project, the larger those risks. As the BRI projects mature, we can expect a growing volume of claims will be presented to the arbitral institutions chosen by the parties. Because China and most of its BRI partner countries are signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, the New York Convention, arbitration awards should be enforceable worldwide whether rendered in US dollars, British pounds, Euro or RMB.

Further to a large extent, the likely impact will turn on the reaction of the US administration and its financial allies among the capitalist economies, all of whom benefit from a certain and reasonably stable reserve currency.

In the near term, I would expect parties will adjust their claims as needed to accommodate the requirement for compensation for just claims under principles including pacta sunt servanda.  By way of example, investors and lenders have learned to accommodate sharia law’s prohibition on recovery of interest. Parties will adjust to a system based upon a new or alternative reserve currency. In the longer term, instability should make a neutral de-localized forum for dispute resolution even more desirable. To apply Karl Polyani’s double movement, I predict the world’s investors and traders will find a way to accommodate the more diffuse sovereignty presented by another reserve currency.

 

Conclusion

While the world’s financial infrastructure morphs, the current US administration’s talking points with China appear to focus on the balance of trade and intellectual property amongst others. In this era of change, as Ted Turner once put it, we can “lead, follow or get out of the way”. But we should do so with our eyes open. These issues and more will still be with us once the world shakes off the current coronavirus pandemic.

References   [ + ]

1. ↑ This post is expressed as Michael J. Bond’s personal opinion and does not represent the views of any organization or party. 2. ↑ See, e.g., John Hurley, Scott Morris, Gailyn Portelance, “Examining the Debt Implications of the Belt and Road Initiative from a Policy Perspective”, Center for Global Development, CGD Policy Paper 121, March 2018; and reports in the Financial Times on April 14, 2019, July 18, 2019, and December 10, 2019. 3. ↑ Walter B. Wriston, “The Twilight of Sovereignty”, Fletcher Forum of World Affairs, 1993. 4. ↑ John A. Mathews, “China’s Long Term Trade and Currency Goals: The Belt & Road Initiative”, The Asia-Pacific Journal, January 1, 2019 (“Mathews”). 5. ↑ “US attacks UK’s constant accommodation with China”, Financial Times, March 12, 2015. 6. ↑ “China’s central bank delays market entry for Visa and Mastercard”, Financial Times, January 13, 2019. 7. ↑ Mathews. 8, 9. ↑ Ibid. 10. ↑ “Arbitration Institutions to form mechanism under Belt and Road Initiative” November 8, 2019. 11, 12. ↑ Ibid. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Corporate Restructuring in Investor-State Disputes: Can We Predict Tribunals’ Decisions?

Mon, 2020-05-11 03:00

Traditionally, nationality for corporate entities has been regulated by national law, often by reference to whether a corporation has a seat in a country or was incorporated under its laws. However, international investment law has departed from the generally accepted rules of international law on the nationality of corporate persons.

Already in the 1960s, the drafters of the ICSID Convention noted that the system of international investment law could add further criteria which would help qualify investors as ‘foreign’. More specifically, they agreed to include the criterion of control in the ICSID Convention. Qualifying investors as foreign on the basis of control rather than place of incorporation or business has also appeared in various international investment agreements.1)See, e.g., Documents Concerning the Origin and the Formulation of the Convention. Volume II, Part 1. pages 78-80. jQuery("#footnote_plugin_tooltip_7332_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7332_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The British Institute of International Law (BIICL) and Baker McKenzie recently concluded a study examining how international tribunals approach the use of corporate restructuring by corporations to benefit from international investment agreements. It sheds light on how tribunals approached this question in the past and, to some extent, will help shape legitimate expectations of parties involved in investor-state disputes in the future.

 

Separating Domestic and Foreign Companies

Foreign investors may prefer to incorporate locally for many reasons but most frequently they do so because of tax considerations. Host states themselves frequently require foreign-owned companies to be locally incorporated to qualify for government procurement, to benefit from subsidies, to enter certain sectors of the economy or for other reasons. If such companies are not treated as ‘foreign’, a large proportion of foreign investment would not be protected by international law.

However, separating truly foreign from domestic companies often presents challenges to investor-state tribunals since most investment treaties aim to protect foreign, rather than domestic investors. This led many tribunals to pierce the corporate veil in order to reveal the shareholders or natural persons affected by adverse actions of the host state.

The existence of corporate groups with complex ownership structures, nominees and various forms of disguised ownership further complicates the determination of whether an investor is foreign and is, thus, eligible for protection under international investment agreements. Investor-state tribunals have developed different approaches on whether the effective control of a claimant over a relevant entity must be merely legal or also factual.2)See also footnote 25 of the report listing a number of cases where tribunals took very different approach on this matter. jQuery("#footnote_plugin_tooltip_7332_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7332_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); That has resulted in what some states view as frivolous claims which harm the reputation of host states, and generate a regulatory chill, as was recently discussed by the UNCITRAL Working Group III.

 

Corporate Restructuring as an ISDS Problem

The currently ongoing investor-State dispute settlement reform discussions touched upon corporate restructuring. Although the UNCITRAL Working Group III has not yet addressed the issue of corporate restructuring in great detail, concerns were expressed with respect to the lack of mechanisms to address frivolous or unmeritorious claims (para. 122), including limitations on the standing of investors (para. 118) and divergent interpretations relating to jurisdiction and admissibility (para. 15).

All these problems may involve determining the nationality of the investor, whether it can be treated as foreign and thus eligible for treaty protections. Usually answering these questions requires interpretation of broad treaty standards in the absence of detailed guidance in the treaty itself. Both the parties and tribunals may also struggle to get a good sense of whether there was a consensus on issues of corporate restructuring and investment protection in dozens of earlier arbitral awards dealing with similar issues.

In the context of investor-state disputes, the term ‘corporate restructuring’ usually refers to decisions to incorporate companies in certain jurisdictions to benefit from more favourable conditions, most commonly related to tax matters but also to investment treaty protections. The Corporate Restructuring and Investment Treaty Protections study demonstrates when such restructuring is seen as permissible under international investment agreements and when the respondent states successfully object to the jurisdiction of the arbitral tribunals.

 

State Objections Based on Corporate Structuring

The BIICL/Baker McKenzie study shows that the top five most successful objections of respondent states were based on the interpretation of the relevant treaty clause, the timing of restructuring, the existence of genuine economic activities of the claimant entity as well as examination of the underlying reason for corporate restructuring (including the abuse of process).

In practice, tribunals distinguish between original investment structuring and subsequent restructuring. Where the claim is brought by the original investor, tribunals tend to abide by the strict wording of the treaty. But where the claimant is not the original investor, the tribunals are more likely to apply additional criteria, e.g. considering whether the corporate restructuring was an abuse of process or applying the Salini test for identifying an investment.

For example, the Phoenix Action Ltd v. Czech Republic case involved the insertion of an Israeli entity into a domestic Czech investment structure after a dispute with the government had arisen. The respondent state’s objection prevailed on the sole basis that the investment was not bona fide, as the local entities were acquired at a later stage with the sole purpose of benefiting from the Israel-Czech Republic investment treaty.

While the study found no meaningful effect of differences between various applicable arbitration rules (e.g. ICSID, UNCITRAL or ICSID Additional Facility), the exact language of the relevant treaty matters. For example, in nearly 80% of cases, investors succeeded with overcoming the jurisdictional objections of respondent states because tribunals held that there was no scope to imply any additional requirements into the definitions of ‘investor’ and ‘investment’.

 

Timing of Restructuring and Genuine Economic Activities Matter

Investor-state tribunals pay particular attention to whether the restructuring was effectuated before or after the dispute arose and whether such dispute was foreseeable to the investor at the time of the restructuring. Such analysis was also key as part of the ‘abuse of process’ objection. Where the investment structure was in place from the outset, only in one fifth of all cases respondent states succeeded with their objections.

Moreover, if the tribunals find that the company engaged in a genuine economic activity in the respondent state, in nearly all cases, the investors were able to overcome jurisdictional objections. In the absence of such activity in the respondent state, tribunals almost always agreed with the respondent state’s objections (90%).

In the absence of detailed guidance in relevant international treaties, tribunals have significant freedom in deciding on the permissibility of corporate restructuring. However, certain trends have already crystallised and are likely to prevail in practice. These trends can also subsequently find reflections in reformed international investment agreements or practice of investor-state tribunals. Also, these findings will help investors to structure their business activities in order to benefit from international investment agreements.

Read the full study:

Ed Poulton, Yarik Kryvoi, Ekaterina Finkel and Janek Bednarz, Corporate Restructuring and Investment Treaty Protections, BIICL/Baker McKenzie, London, 2020

References   [ + ]

1. ↑ See, e.g., Documents Concerning the Origin and the Formulation of the Convention. Volume II, Part 1. pages 78-80. 2. ↑ See also footnote 25 of the report listing a number of cases where tribunals took very different approach on this matter. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Event Report: CISG and Arbitration, Old Friends Still Getting to Know Each Other

Sun, 2020-05-10 04:00

The year 2020 marks the 40th anniversary of the United Nations Convention on Contracts for the International Sale of Goods (CISG), one of the most important substantive instruments in international commercial law. To celebrate this occasion, the ICDR Young and International (Y&I) group and NYU’s Center for Transnational Litigation, Arbitration, and Commercial Law organized a conference on 3 February 2020 entitled “CISG in International Arbitration”.

The conference opened with comments from Dr. Friedrich Rosenfeld (Partner, Hanefeld Rechtsanwälte), who presented broadly on the issue of the law applicable to the merits in international arbitration.1)This presentation was based on a forthcoming article, see F. Rosenfeld / F. Ferrari, ‘The Law Applicable to the Merits in International Commercial Arbitration’, forthcoming in: A. Bjorklund / F. Ferrari / S. Kröll, Cambridge Compendium of International Commercial and Investment Arbitration (Cambridge University Press, 2020). jQuery("#footnote_plugin_tooltip_5034_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5034_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Dr. Rosenfeld explained that, while courts would normally use the forum’s conflict of law rules, arbitrators are not bound by the same conflict rules as courts at the seat. Instead, arbitrators should use autonomous conflict of law rules, such as art. 28 of the UNCITRAL Model Law or art. 31 of the ICDR Rules. Such rules are supportive of party autonomy, as they allow parties not only to choose any applicable law, but their reference to “rules of laws” also allows a choice of soft law like the UNIDROIT Principles or lex mercatoria; beyond this, parties may even instruct arbitrators to decide on the basis of equitable principles. Absent parties’ agreement, arbitrators are granted discretion to decide the applicable law. As far as the exercise of this discretion is concerned, some conflicts rules expressly require arbitrators to identify an additional conflicts rule outside the arbitration framework (voie indirecte), whilst others allow arbitrators to directly select the applicable law without such a detour (voie directe).

Dr. Rosenfeld asserted that, in practice, most arbitrators would seek guidance from existing conflict rules—even under the voie directe. An example of such a conflicts rule is the closest connection rule found in the Rome Convention, which presumes that the law with the closest connection is that of the country where the characteristic obligation is performed. Finally, Dr. Rosenfeld explained that the choice of law framework is subject to limitations by overriding mandatory rules, which arbitrators should follow even against the parties’ agreement.

Subsequently, Marco Torsello (Partner, ArbLit) discussed the applicability of the CISG in arbitration. He explained that, in litigation, only courts of contracting states would consider the applicability of the CISG. The court would in that case consider the internationality (different places of business) and the territoriality requirements (those places of business must be in contracting states as per art. 1(1)(a), or the conflict rules must lead to the law of a contracting state as per art. 1(1)(b)). The court would also review the CISG applicability ratione materiae and that the case is not covered by any exclusion. However, an arbitral tribunal is not a state forum, so Mr. Torsello argued that arbitrators are not bound by art. 1(1)(a) of the CISG, which cannot even be regarded as a conflict rule because it is merely an applicability requirement. In practice, arbitrators have normally applied the CISG when the requirements of art. 1(1)(a) are met, but Mr. Torsello indicated that this is rather an expression of arbitration’s discretion in applying autonomous conflict rules. Equally, as per art. 1(1)(b), when these autonomous rules lead to the application of the law of a contracting state, the arbitrators should apply the CISG. This outcome would not be affected by an art. 95 reservation, because while such reservation would make art. 1(1)(b) inapplicable in court, arbitrators are not state forums and would not be bound by reservations. The same would be true regarding art. 96 reservations (which exclude the CISG’s freedom of form), but this issue might need to be considered by the arbitrators as a matter of public policy.

After a short break, Prof. Kevin Davis (NYU School of Law) discussed the battle of the forms under the CISG. He described the typical scenario as one in which one party submits an offer with his standard form, and the other party accepts it but also sends his own standard form. In these situations, the CISG generally follows what is called the mirror image rule: the second form would be a counteroffer, which would be accepted if, for example, performance of the contract is initiated, and the first form would be deemed rejected. Art. 19(2) of the CISG also allows a combination of the forms if the reply does not materially alter the terms of the offer, absent an objection from the other party. Nonetheless, art. 19(3) provides a broad list of illustrations of what constitutes a material alteration, and although some scholars argue that art. 19(3) establishes only a rebuttable presumption, this position is difficult to reconcile with the text of the CISG. As a result, the mirror image rule would normally apply, subject to modulations by usages and practices between the parties. Once the applicable standard form is identified, Prof. Davis explained that it would need to be interpreted according to art. 8 of the CISG. For example, if the form includes additional terms by reference, determining if the incorporation is effective would require considering all of the relevant circumstances. In particular, it will be necessary to consider if the parties truly understood what these additional terms mean, which is a factual issue that cannot be decided only on motions.

Afterwards, Gretta Walters (Counsel, Chaffetz Lindsey) addressed specific performance under the CISG. She highlighted that art. 46, which covers specific performance, is the first substantive remedy the CISG presents for buyers, consistent with the goal of preserving the contractual relationship. Although art. 46 does not limit the kinds of specific performance that a buyer may seek, art. 28 provides that a court is not required to order specific performance if it considers that it would not do so under its own domestic law. Ms. Walters described how the drafters of the CISG had in mind that civil law countries tend to prefer specific performance, while common law ones often rather award damages, and art. 28 reflects this difference. Although it could be argued that art. 28 could lead to a lack of uniformity in how courts apply the CISG, she argued that, in practice, most parties have claimed damages and such lack of uniformity has not resulted. As to whether art. 28 would apply in arbitration, Ms. Walters concluded that, as remarked by Mr. Torsello, arbitrators are not a state forum and are therefore not bound by art. 28, an idea reinforced by this article’s reference exclusively to courts and not arbitrators. Nevertheless, she noted that the CISG contains some limitations to specific performance. For instance, specific performance cannot be requested together with inconsistent remedies (such as contract avoidance or price reduction), and substitute goods can only be demanded if the lack of conformity constitutes a fundamental breach.

Finally, Prof. Clayton Gillette (NYU School of Law) analyzed economic hardship under the CISG. He indicated that it is unclear whether hardship was intended to be covered by the CISG. Prof. Gillette analyzed four possible approaches. First, it could be argued that art. 79 of the CISG, which deals with exemptions from performance, encompasses hardship as a potential impediment. This position seems to be prevalent at least in civil law countries. Another interpretation would argue that the existence of hardship is generally governed by the CISG, but the strict language of art. 79 excludes the possibility of considering it an impediment. An alternative approach argues that hardship is governed by the CISG, but not by any specific article, which means that it must be decided in conformity with CISG’s general principles, as per art. 7. Finally, it is also possible that hardship is not governed by the CISG, in which case the issue would be decided by the law applicable pursuant to private international law rules. Prof. Gillette stated that, assuming the CISG governs hardship, art. 79 also requires it to be unforeseeable or unavoidable. He criticized some courts’ narrow interpretation of this requirement that focuses on the price increase for the specific contract, ignoring the underlying reason for the price change and the general volatility of the market. Along the same lines, he argued that some companies might knowingly enter into some contracts with high price volatility as part of a portfolio of contracts, so the company’s financial health would not be affected even if those contracts are subject to large price increases.

A related issue not directly addressed by the speakers is whether the CISG can apply to arbitration agreements. This has generated some controversy, mostly focused on whether the CISG’s freedom of form in art. 11 would prevail over the form requirement in art. II of the New York Convention, especially if, as explained by Mr. Torsello, art. 96 reservations would not bind arbitral tribunals. A common argument against it is that art. 90 establishes that the CISG does not prevail over any previous international treaty, which would include the New York Convention. However, art. VII(1) of the New York Convention could point in the opposite direction, as it states that the New York Convention shall not deprive any party of any right to recognition and enforcement under more favorable laws or treaties, which could arguably encompass the CISG’s freedom of form. For the purpose of contract formation, art. 19(3) of the CISG indicates that dispute settlement clauses are material terms, which seems to support the idea that at the very least the CISG’s rules on formation explained by Prof. Davis could apply to arbitration agreements. As we progress through the year, it is to be expected that, despite postponements due to COVID-19, there will be many other events around the globe about the CISG, so hopefully the celebration of the CISG’s 40th anniversary will serve to provide more clarity on these questions and to promote a better understanding of the CISG.

References   [ + ]

1. ↑ This presentation was based on a forthcoming article, see F. Rosenfeld / F. Ferrari, ‘The Law Applicable to the Merits in International Commercial Arbitration’, forthcoming in: A. Bjorklund / F. Ferrari / S. Kröll, Cambridge Compendium of International Commercial and Investment Arbitration (Cambridge University Press, 2020). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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IP Arbitration in Brazil: What is the Current Scenario?

Sun, 2020-05-10 03:00

International background on IP arbitration

The past decade has witnessed a substantial growth in the use of arbitration to solve Intellectual Property (“IP”) disputes. To the day, the WIPO Arbitration and Mediation Center (“WIPO Center”) has administered over 650 arbitration, mediation and expert determination cases, a number which grows faster every year, as portrayed by the ascending curve below:

 

[Source: WIPO – World Intellectual Property Organization]

 

In the US, the American Arbitration Association has handled 110 IP arbitration cases only in 2016. Across the Pacific, by 2014 the Japan Intellectual Property Arbitration Center had managed some 130 mediation and arbitration proceedings.

Looking to the future, numbers brought by the 2016 International Dispute Resolution Survey conducted by the Queen Mary University of London, which focused specifically on Technology, Media and Telecommunications (“TMT”) disputes, show that 82% of practitioners and in-house counsels from all over the globe indicate that there will be an increase in the use of arbitration to solve TMT conflicts in the years to come. Likewise, 92% of the respondents trust that “international arbitration is well suited for TMT disputes”.

 

Challenges to the development of IP arbitration in Brazil

In Brazil, however, the use of arbitration in IP conflicts is still sprouting. For instance, numbers released in 2014 by the CAM-CCBC – Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada, a leading arbitral institution in Brazil and Latin America, showed that IP-related proceedings represented only 3% of the center’s total caseload.

It is still unclear why the Brazilian IP community remains reluctant to arbitration. From our experience, we can safely state that it is not yet common for national players to insert arbitration clauses in IP contracts. The main reason for this appears to be that since both IP and arbitration are two specific legal fields, locally covered by two selected groups of practitioners, the Brazilian IP community has not yet realized the full advantages of using arbitration to solve their IP conflicts.

As an example, it is not rare for experienced Brazilian IP practitioners to believe that arbitration excludes from the parties the possibility to pursue pre-arbitral interim measures before state courts, even though such guarantee is expressly provided for in article 22-A of the Brazilian Arbitration Act. At the end of the day, it seems that most local IP practitioners are not yet acquainted enough with the particularities and advantages of arbitration, therefore preferring to keep their disputes before familiar local courts (a tendency that had already been noticed by Prof. David Caron when commenting on IP arbitration in the US in the early 2000s).

Another factor that may contribute to such outcome is that, in Brazil, some scholars have raised concerns as to the arbitrability of IP disputes. The issue would emerge in situations where the respondent to the arbitration challenges the validity of the claimant’s registered IP right, therefore creating a scenario in which the arbitrators may have to invalidate an act undertaken by a state authority (the Brazilian Patent and Trademark Office – “BPTO”).

According to Selma Lemes and José Rogério Cruz e Tucci, any decisions concerning the validity of IP rights would exceed an arbitral tribunal’s powers. Other authors pose a different view, such as the one stressed by Trevor Cook and Alejandro I. Garcia: “an arbitral award is […] effective only inter partes, and has no effect in rem, so a determination that a registered IPR is invalid will only have effect as between the parties to the arbitration – the registered IPR in issue […] will remain in full force and effect on the register as against the rest of the world”.1)COOK, Trevor; GARCIA, Alejandro I.. International Intellectual Property Arbitration, Kluwer Law International, 2010, p. 7. jQuery("#footnote_plugin_tooltip_2177_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This position is also shared by Daniel Levy, Rafael Atab de Araujo2)ARAUJO, Rafael Atab. A Arbitragem Comercial Internacional e a Propriedade Intelectual: arbitrabilidade e questões práticas, no Brasil e no Direito Comparado. 2011. Dissertação (Mestrado em Direito Internacional e da Integração), Faculdade de Direito, Universidade do Estado do Rio de Janeiro, 2011, p. 100. jQuery("#footnote_plugin_tooltip_2177_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Luiz Guilherme Loureiro.3)LOUREIRO, Luiz Guilherme de A. Vieria. Arbitragem e Propriedade Industrial. Revista de Direito Privado. v. 5, a. 2, jan./mar. 2001, p. 154-155. jQuery("#footnote_plugin_tooltip_2177_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); According to them, an arbitral tribunal would have powers to incidentally decide upon validity issues, rendering a decision with no erga omnes effects.

In this perspective, the Brazilian Industrial Property Law (“Brazilian IP Law”) states in its articles 57 and 175 that patent and trademark invalidity actions must be filed before the federal courts, since the BPTO, a federal authority, must intervene on the case. Infringement actions, on the other hand, shall be filed before the state courts (with no participation of the BPTO), and, in such proceedings, it is common for the defendant to argue that the plaintiff’s IP rights in issue is invalid. When this happens, the state judge shall incidentally decide upon the validity claim, since article 56, 1st paragraph of the Brazilian IP Law provides that “patent invalidity shall be raised as a defense at any time”. Even though the aforementioned disposition only refers to patents, Brazilian courts have long established that it applies to trademarks as well (see, e.g., TJSP, Apelação n. 9219541-09.2005.8.26.0000, Des. Rel. Oscarlino Moeller, j. 01/01/2009).

In view of this, it is reasonable to conclude that since the Brazilian IP Law does not pose any barriers to the rendering of incidental decisions by state judges as to the validity of IP rights, the same rule shall apply to arbitrators, which are considered to be “judges in fact and in law”, in accordance to article 18 of the Brazilian Arbitration Act. In other words, an arbitral tribunal applying Brazilian law could use the guarantee contained in article 56, 1st paragraph of the Brazilian IP Law to render a decision with inter partes effects as to the validity of an IP right in the course of the arbitration. Hence, it is our understanding that IP disputes are fully arbitrable under Brazilian law. There remains, however, one potential risk to the broad use of arbitration in disputes which address validity issues: the current understanding of the Brazilian Superior Court of Justice (“STJ”) regarding article 56, 1st paragraph of the Brazilian IP Law.

Ever since 2012, the STJ has repeatedly ruled that article 56, 1st paragraph shall be disregarded, being state judges prevented from issuing incidental declarations as to the validity of IP rights in the course of infringement lawsuits (see, e.g., here). In such occasions, the invalidity claim shall be addressed in a parallel lawsuit before the federal courts, remaining the infringement action suspended pending a final decision on the validity issue (see, e.g., here). As a result, there could be a risk that arbitrators, like state judges, feel compelled to suspend the arbitration in case a validity issue is raised in the course of the proceeding, in order to prevent future challenges to the arbitral award. As to this moment, there is no case law addressing this precise matter.

In order to cast legal certainty over the arbitrability of IP controversies in Brazil, Nathalia Mazzonetto proposes an alteration in the text of the Brazilian IP Law, so as to encompass an express provision authorizing the use of arbitration in IP disputes, including those in which the validity of the respective IP right has been questioned.4)MAZZONETTO, Nathalia. Arbitragem e Propriedade Intelectual: aspectos estratégicos e polêmicos. São Paulo: Saraiva, 2017. p. 257. jQuery("#footnote_plugin_tooltip_2177_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The author goes even further, suggesting that invalidity decisions rendered in the course of arbitral proceedings should produce erga omnes effects, an approach which has already been adopted in Belgium5)Belgian Patent Law, article 51(1). jQuery("#footnote_plugin_tooltip_2177_5").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Switzerland.6)Decision of December 15th, 1975 of the Federal Office of Intellectual Property. jQuery("#footnote_plugin_tooltip_2177_6").tooltip({ tip: "#footnote_plugin_tooltip_text_2177_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

Arbitration is yet to be embraced by the Brazilian IP community. In our experience, this derives from the fact that local IP practitioners do not seem to be sufficiently acquainted with the full advantages that the use of arbitration could bring to their clients’ dispute resolution policies.In an attempt to fill this gap, some important initiatives have already been put into action by the Brazilian IP community, namely the creation of (i) the Brazilian Arbitration Committee’s Study Group on IP Arbitration and Mediation; and (ii) the CSD-ABPI – Centro de Solução de Disputas em Propriedade Intelectual, a dispute resolution center specialized in IP conflicts, administered by the Brazilian Intellectual Property Association.

Additionally, the concerns raised by some scholars as to the arbitrability of IP disputes (especially in light of the Superior Court of Justice’s current understanding) may contribute to the reluctance of referring those disputes to arbitration. It must be clear, however, that the arbitrability issue related to IP conflicts can only be raised when the validity of the underlying IP right is challenged. Even though such challenges are common in infringement actions before state courts, the same hardly ever occurs in arbitral proceedings, where disputes emerge out of contractual grounds, such as disagreements over (i) the payment of royalties, (ii) the definition of the licensed product, (iii) the obligations and limitations of the licensee as to the use of the licensed right, among others.

In one way or the other, it is time for the Brazilian legal community to open their eyes to alternatives that go beyond litigation when it comes to addressing IP conflicts. Arbitration has proven to be an extremely cost-efficient dispute resolution method, due to its agility, neutrality, specialty and confidentiality. As demonstrated by the abovementioned statistics, the use of arbitration to solve IP conflicts is a global trend, which Brazil would do well to follow.

References   [ + ]

1. ↑ COOK, Trevor; GARCIA, Alejandro I.. International Intellectual Property Arbitration, Kluwer Law International, 2010, p. 7. 2. ↑ ARAUJO, Rafael Atab. A Arbitragem Comercial Internacional e a Propriedade Intelectual: arbitrabilidade e questões práticas, no Brasil e no Direito Comparado. 2011. Dissertação (Mestrado em Direito Internacional e da Integração), Faculdade de Direito, Universidade do Estado do Rio de Janeiro, 2011, p. 100. 3. ↑ LOUREIRO, Luiz Guilherme de A. Vieria. Arbitragem e Propriedade Industrial. Revista de Direito Privado. v. 5, a. 2, jan./mar. 2001, p. 154-155. 4. ↑ MAZZONETTO, Nathalia. Arbitragem e Propriedade Intelectual: aspectos estratégicos e polêmicos. São Paulo: Saraiva, 2017. p. 257. 5. ↑ Belgian Patent Law, article 51(1). 6. ↑ Decision of December 15th, 1975 of the Federal Office of Intellectual Property. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Exclusive Application of UNIDROIT Principles to Cure the Parties’ Disagreement on the Lex Contractus: a View from France

Sat, 2020-05-09 03:00

The Paris Court of Appeal recently upheld an ICC award where the arbitral tribunal exclusively applied the UNIDROIT Principles of International Commercial Contracts (‘the Principles’) as lex contractus failing any agreement on the applicable law between the parties.

This recent development deserves further analysis as it confirms French courts’ favourable attitude towards the application of the Principles in international arbitration and illustrates good arbitral practice where the contract is silent as to the applicable law.

 

Evolution of the UNIDROIT Principles’ Scope of Application

In the 1994 initial version, the Principles limited their application to circumstances where (i) the parties had directly chosen them as lex contractus (Preamble, para. 2), (ii) the parties had indirectly chosen them in broadly referring to the lex mercatoria or general principles of law (para. 3), (iii) the applicable law did not provide for a relevant answer (para. 4), or (iv) it was necessary to interpret an international uniform instrument (para. 5).

A decade later, the Principles’ ambitious drafters rewrote paragraph 4 of the Preamble and extended their application where the parties had not chosen any law to govern their contract, be it by silence or disagreement (Preamble of the 2004 Principles, para. 4). The Preamble remained unchanged in the 2010 and 2016 Principles.

 

Arbitral and French Judicial Practice on UNIDROIT Principles

Most of ICC cases referring to the Principles have used them as a means of interpreting and supplementing national law (e.g. ICC cases 15956, 16314, 19272) or international uniform instruments, such as the CISG (e.g. ICC cases 14633, 16369) and the 1964 Hague Convention (ICC case 8547).

Where the contracting parties have not agreed on the applicable law and the arbitration is Paris-seated, ICC arbitral tribunals enjoy great freedom to determine the lex contractus, in accordance with Art. 1511 of the French Code of Civil Procedure (‘CCP’) and ICC Rule 21(1).

No established practice emerged as to how to justify the application of the Principles where the parties remained silent or disagreed. Arbitrators have used different criteria including e.g. the lack of satisfactory connecting factors (ICC cases 13012, 15089), the international nature of the contract (ICC case 9875), or the contract’s reference to the INCOTERMS (ICC case 8502). In some instances, Tribunals have inferred a negative choice excluding national rules from the parties’ rejection of each other’s national law and their choice to resort to arbitration in order to apply the Principles. This is particularly the case with State contracts (e.g. for supply of goods or construction in ICC cases 7110, 7375, 10385), although not exclusively (ICC case 15089). The Principles have also been applied when the contract had been concluded under “economic duress” (ICC case 13009), and even ex officio without any justification (ICC case 12698).

Under French judicial practice, the Principles’ applicability is narrowed as French courts rely on their own conflict-of-law rules. In cases unrelated to arbitration, courts have very rarely relied on the Principles as a means of interpretation of international instruments, be it suggested by a party (Reims Court of Appeal, 6 September 2012, no. 11/02698; Court of Cassation, 17 February 2015, no. 12-29.550) or not (Grenoble Court of Appeal, 24 January 1996, Harpert Robinson; 23 October 1996, GAEC v Teso Ten Elsen). In setting-aside proceedings, the Paris Court of Appeal held that an arbitral tribunal applying the Principles to supplement the national law chosen by the parties does not violate its mandate within the meaning of Art. 1520(3) of the CCP (5 March 1998, Forasol v. CISTM).

 

A Recent View: ICC Case 20731(2017)

In a recent award in ICC Case 20731(2017), the Principles were applied under the Preamble’s most challenging hypothesis of application (para. 4) to cure the contract’s silence and the parties’ failure to agree on the applicable law during the proceedings.

In this case, a dispute arose between an Indian company -supplier- and a Romanian company -buyer- (together, ‘the Parties’) in relation to an agreement for the supply of stainless-steel tubes. Only providing for “Arbitrage: cour d’arbitrage de Paris”, the very succinct arbitration agreement did not provide for any choice of law.

From the outset of the proceedings, the tribunal invited the Parties, in a first procedural order, to “examine” the law applicable to the dispute, including transnational rules of law. Each party claimed that its own domestic law was applicable to the contract but both agreed on the use of the so-called direct method. Relying on this agreement and its freedom to determine the applicable law, the tribunal decided in a third procedural order that the Principles would apply to the dispute.

Interestingly, the tribunal did not ground its choice on the Parties’ negative choice excluding national rules but rather explicitly relied on (i) its empowerment to determine the “most appropriate” applicable law, (ii) the “largely international” nature of the contract as well as (iii) the parties’ agreement for the determination of the applicable law in accordance with the voie directe method. This reasoning offers a convincing rationale as it safeguards the parties’ autonomy and favors a neutral solution that consolidates the award’s legitimacy.

 

A Valid Award Under Art. 1520(3) of the CCP

Under the scrutiny of the Paris Court of Appeal, the award was fully upheld on 25 February 2020 (n°17/18001).

The Court dismissed the supplier’s claim that the arbitral tribunal, by applying the Principles, had “ruled without complying with the mandate conferred upon it” as per Art. 1520(3) of the CCP. It tersely considered that the Parties “failed to agree on the application of Indian law to the dispute and the arbitrators did not rule in equity but in law, applying the 2010 UNIDROIT Principles”.

Under French law, absent any choice of law, the determination of the applicable law is entirely left to the arbitral tribunal, which must decide the dispute “in accordance with the rules of law it considers appropriate” (Art. 1511 of the CCP). Arbitrators are free to use the method of their choice and their determination and implementation of the lex contractus are not reviewed by the annulment judge in order to avoid re-examination of the merits of the dispute (Court of Cassation, 22 October 1991, no. 89-21.528; Paris Court of Appeal, 24 November 2005, BVBA v. Cat et Co).

Accordingly, the application of the Principles in accordance with paragraph 4 of the Preamble is not a ground to set-aside an award. A party dissatisfied with the lex contractus applied by the arbitral tribunal may only be successful before French courts if it demonstrates that the arbitrators did not apply the rules of law chosen by the parties. This certainly explains the supplier’s claim that the tribunal should have applied Indian law, allegedly “the law chosen by the parties”, in order to comply with its mandate. In such circumstances, it sufficed for the Court to note the Parties’ uncontroversial disagreement on the applicable law in order to dismiss the supplier’s request.

The Court thus limited its analysis to the determination of a disagreement between the Parties on the lex contractus. To this purpose, the Court relied its analysis on the procedural steps taken by the tribunal. Since it had already decided in a procedural order that the Principles were applicable to the dispute failing any agreement on the applicable law, the Court simply observed that the award was “in compliance with this decision”. By requesting from the Parties specific submissions on the applicable law as soon as the proceedings started, the arbitral tribunal crystallised their disagreement on this issue and thus secured the validity of its award.

 

Conclusion: The UNIDROIT Principles, a Valid Set of “rules of law

Although predictable, the upholding of the award on this ground is of interest in two respects:

(i) First, the Paris Court confirms that an arbitral tribunal may validly make exclusive application of the Principles in the event the contract is silent and the parties subsequently fail to reach an agreement on the applicable law.

Such a ruling complies with the wording of both ICC Rule 21(1) and Art. 1511 of the CCP, which broadly refer to “the rules of law” available to arbitrators, rather than merely “law”, as in e.g. Art. 46 of the UK Arbitration Act, Art. 1051(2) of the German ZPO or Art. 28 the UNCITRAL Model Law. This textual difference has been interpreted as possibly denying arbitrators in these jurisdictions the right to apply non-national rules of law, as the word “law” would exclusively refer to national legislative provisions. The Court’s ruling is also fully consistent with its previous case-law, according to which an arbitral tribunal does not exceed its mandate by applying the lex mercatoria absent any choice-of-law agreement (Paris Court of Appeal, 13 July 1989, no. 88-18887, Valenciana v. Primary Coal).

This decision makes clear that the Principles, just like the lex mercatoria, qualify as “rules of law” within the meaning of Art. 1511 of the CCP, available to arbitrators under French law absent any choice-of-law agreement between the parties.

(ii) Second, in line with this finding, the Court also confirms that an arbitral tribunal applying the Principles does not rule in equity. Under French law, an award may be set aside when the arbitral tribunal ruled as amiable compositeur without any empowerment to do so, in breach of Art. 1512 of the CCP. The Court thus makes a clear distinction between the application of the Principles, which are a particular set of legal rules (“a system of principles and rules of contract law which are common to existing national legal systems or best adapted to the special requirements of international commercial transactions” as per Art. 4(a) of the Preamble’s official commentary) and the concept of amiable composition, in full consistency with the Court of Cassation’s previous ruling that an arbitral tribunal applying the lex mercatoria does not rule in equity (Court of Cassation, 22 October 1991, no. 89-21.528).

This shining example of application of the Principles under paragraph 4 of the Preamble contributes to their diffusion and constitutes a perfectly good arbitral practice where the contractual framework to an international commercial dispute is silent as to the applicable law, the only limit to the Principles’ exclusive application being their non-exhaustive character.

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Evidence of Odebrecht’s Corruption and Third-Party Rights: Arbitration Highlights of the Ruta del Sol Award

Fri, 2020-05-08 03:00

The Ruta del Sol arbitral award was one of the most important awards in 2019 in Colombia and possibly in the entire region. The arbitral tribunal sitting to resolve the Ruta del Sol arbitral proceeding (the “Tribunal”) determined the consequences of securing an infrastructure concession contract in Colombia through corrupt practices and served as pioneers for such determination, setting a precedent for future arbitral tribunals convened to resolve a dispute involving similar facts. The Tribunal declared the Concession Contract executed by the parties in connection with the Ruta del Sol Project null and void for illegal purposes and abuse of power. In light of such declaration, the Tribunal ordered payments be made to the parties involved -including third parties in good faith-, in accordance with Law 1882 of 2018.

The award serves as an important precedent for project finance transactions and for the infrastructure sector generally in the region. As it relates to arbitration, it raises several interesting topics, including (i) the way the Tribunal handled the evidence related to acts of corruption and (ii) the intervention of third parties interested in the issue being resolved through the arbitral proceeding, both of which we discuss in further detail below.

 

Background of the dispute

On January 14, 2010, the Colombian National Agency of Infrastructure (“ANI”) and the concessionaire Concesionaria Ruta del Sol S.A.S. (the “Concessionaire”) entered into the third generation Concession Contract No. 001 of 2010 (the “Concession Contract”) for the construction, operation and maintenance of Sector 2 of Ruta del Sol, a national toll road project (the “Ruta del Sol 2 Project”) for approximately US$ 935,000,000 (approximately COP$ 3,2 billions). The Concession Contract required the Concessionaire to extend the Ruta del Sol 2 Project 528 kilometers. The Concessionaire was formed by Odebrecht, holding 62% of its equity interests, Grupo Aval (the largest Colombian financial group) through Corficolombiana and Episol collectively holding 33% of its equity interests and Grupo Solarte holding the remaining 5%.

Obtaining financing for the performance of the obligations under the Concession Contract was the Concessionaire’s responsibility. The Concession Contract required the Concessionaire to provide the resources (including financial resources) to carry out all of its obligations thereunder. The primary source of financing was debt from financial institutions that was secured with the Ruta del Sol 2 Project and the proceeds generated by such project.

Toward the end of 2016 and in the beginning of 2017, Odebrecht admitted to paying bribes to obtain infrastructure contracts throughout Latin America, including Colombia, which brought the Ruta del Sol 2 Project within the scope of the corruption scandal. Odebrecht specifically confessed to having paid bribes in exchange for being awarded the Ruta del Sol 2 Project, which later followed a confession by the Vice Minister of Transport, Gabriel Ignacio García Morales, to having accepted the bribe payments. The Public Prosecutor’s office in Colombia found that the bribes paid to be awarded the Ruta del Sol 2 Project amounted to US$ 6,5 million. As a result of such information coming to light, the Concessionaire and ANI decided to terminate the Concession Contract.

 

The Arbitral Proceeding

In 2015, the Concessionaire initiated a domestic arbitral proceeding against ANI, in accordance with the dispute resolution procedures provided for in the Concession Contract, requesting, among other things, the Tribunal to declare that ANI breached the Concession Contract by not recognizing certain events that would exclude liability and would consequently require ANI to compensate the Concessionaire for damages caused to the Concessionaire of approximately US$ 282,751,000 (COP$716,491,710,632) resulting from ANI’s breach.

ANI filed a counterclaim requesting the Tribunal to declare the Concession Contract null and void given the unlawful acts that gave rise to the Concession Contract, despite the fact that the Concession Contract had already been terminated by the mutual agreement of the parties. As a result, ANI claimed that the Tribunal should order the termination of the Concession Contract and declare that ANI is only obligated to compensate the Concessionaire for the activities performed and fulfilled prior to the termination of the Concession Contract and as long as they had benefited ANI, and further, limit the amount of such compensation to the benefit actually received by ANI.

In May 2018, the financial institutions that provided financing to the Ruta del Sol 2 Project (the “Lenders”) were admitted as co-adjuvant third parties in the arbitral proceedings.

Although the arbitral award ultimately rendered includes several legal issues that would be worth discussing, this post is limited to discussing two aspects relevant to the world of arbitration: firstly, the role the Tribunal assumed in assessing the evidence to determine corruption as a proven fact and the applicable standard of proof and secondly, the participation of third parties in the arbitral process, not bound by the arbitration clause.

 

The role of the Tribunal in obtaining and assessing the evidence regarding the corruption allegation and the applicable standard of proof

The Tribunal declared the Concession Contract and its addendums and complementary agreements null and void, because they were signed with illegal purpose and motive, considering that the Concession Contract was awarded due to an abuse of power.

In this case, different from most of the cases where a defendant alleges bribery, but cannot overcome the complex burden of proof associated with that type of allegation, the Tribunal already had apparently sufficient evidence of the illegal actions, including an admission by the relevant parties involved in both the Ruta del Sol 2 Project and the broader corruption scandal.

The Tribunal’s decision is based mainly, but not only, on the report of the United States Department of Justice and the plea agreement entered into with Odebrecht, where the company admitted to the criminal activities developed in different countries in Latin America, including Colombia, to win bids for infrastructure projects. As part of the plea agreement, Odebrecht had to file criminal complaints in each country where it carried out illegal actions. Given this requirement, Luis Antonio Bueno Junior, Odebrecht’s superintendent in Colombia, filed a criminal complaint against Gabriel Ignacio García Morales, initiating a criminal procedure where Garcia admitted to the penal charges for bribery and recognized he advised Odebrecht on the preparation of a bid that would comply with all of the parameters of the bidding process in exchange for US$ 6,500,000.

Despite having this evidence of corruption, the Tribunal decided to go beyond and did not limit its determination on the evidence it obtained from the parties and other proceedings. The Tribunal assumed an active role: it undertook its own investigation, it obtained additional evidence and made its own determination regarding the validity of the corruption allegations.1)“The Arbitral Tribunal had to perform an important ex-officio evidentiary activity exhaustively described before to incorporate to the file the evidence required to take the correspondent decisions on law-grounds […]” (Free translation) Award, page 67. jQuery("#footnote_plugin_tooltip_6362_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6362_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The Tribunal, deviating from Department of Justice and the Colombian criminal authorities’ determinations, concluded that the participation of García Morales in the adjudication of the Contract went beyond simply guaranteeing that the bid presented by the Concessionaire complied with the parameters of the bidding process, but actually ensured that the Concession Contract was effectively awarded to Odebrecht through the Concessionaire.2)This finding allowed the Arbitral Tribunal to conclude the Concession Contract was entered with abuse of power and had illicit object, and therefore, fitted within the nullity grounds of a public contract under Colombian law. jQuery("#footnote_plugin_tooltip_6362_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6362_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Although there is no reference in the award regarding the standard of proof applicable to the alleged acts of corruption, the truth is that the Tribunal went far beyond the application of a balance of probabilities test. As mentioned above, the arbitrators acting pursuant to its procedural powers, gathered evidence to prove -without any doubt- the alleged corruption facts and specially the key role of Mr. García Morales, which more closely resembles a standard of clear and convincing evidence.

Thus, the Tribunal’s role illustrates two of the positions in the debates related to corruption allegations in arbitration: (i) the Tribunal assumed an inquisitor approach -usual in civil law- as opposed to an adversarial approach (which would normally let the parties prove their case), and (ii) the applicable standard of proof was closer to clear and convincing evidence -a stricter standard of proof than the balance of probabilities, which is customary in these types of civil cases. The relevance of this case in Colombia and in the region may explain an arbitrator’s decision to act as a prosecutor in a commercial arbitration involving serious corruption allegations.

 

Can Third Parties be affected by the Arbitral Award?

Why were the Lenders interested in participating in the arbitral proceeding?

One of ANI’s claims requested that the Tribunal declare the Concession Contract null and void. Article 20 of Law 1882 of 2018 – interpreted under judgment C-207 of the Constitutional Court – provides the roadmap for liquidating mutual restitution concession agreements when they are terminated early as a result of being declared null and void, including the payments that third parties acting in good faith (“tercero de buena fe”) should receive. Therefore, the determination of the Tribunal of this issue would certainly impact the Lenders and, therefore, the Lenders had an interest in being heard before a decision was rendered in the arbitral proceeding.

Through a procedural order, the Tribunal admitted the inclusion of four Lenders, based on a procedural institution contained in the Colombian Procedural General Code called coadyuvancia, which allows third parties that may be affected by a decision of the Tribunal to intervene in the arbitral proceedings. By virtue of this procedural order, such Lenders were able to submit written and oral arguments, participate in evidentiary hearings, submit closing arguments (such Lenders even filed several motions to set aside the arbitral award with the Council of the State, although such documents are not public yet).

 

In an international arbitration scenario, would such Lenders have had the possibility to participate in the proceeding?

The provisions of the Colombian Arbitration Act applicable to international arbitral proceedings contain no reference to the possibility for a third party to join such proceeding. Under the Arbitration Rules of the Bogotá Chamber of Commerce applicable to the Ruta del Sol 2 arbitration, there is no reference either. Other international arbitration rules, such as the ICC Rules provide in Article 8 for the possibility of joinder. However, such rules do not cover the possibility for a third-party to voluntarily join the arbitral proceedings without being invited. The reason is because an arbitration results from a contract agreed by parties and, therefore, no other party can intervene.

If the arbitration of the Ruta del Sol 2 Project had been deemed international under Colombian Arbitration Act, the approach of the Tribunal regarding the participation of the Lenders could have been different.

In disputes, such as this one, in which there are multiple contracts each with dispute resolution clauses that are not necessarily identical, it is very likely that the rights of third parties not involved in the arbitral proceedings may be affected by the resolution of the claims between the two parties. This situation puts on the table the principles of res judicata, right to be heard by all parties and the enforceability of the award, each of which are pillars of any legal system -regardless of its civil or common law tradition- and, also, international arbitration.

In this regard, there are two premises that are settled in international arbitration: (i) the arbitration award has res judicata effects, and (ii) the award cannot affect a third party who was not part of the arbitration. However, the interaction between these two premises is not perfect because there may be an award between party A and party B that affects party C – the case of the Ruta del Sol, if it had been an international case.

Scholars’ commentary on this issue have pointed to the following courses of action for third parties affected by an arbitral award3)See, STAVROS BREKOULAKIS “The effect of an arbitral award and third parties in international arbitration: res judicata revisited”, The American Review of International Arbitration, Vol.16; BOCHAROVA NATALIYA, “The scope of the Arbitral Award Binding Effect (Interest of “Third Parties” in International Arbitration), Russian Law Journal, Volume V (2017) Issue 2. jQuery("#footnote_plugin_tooltip_6362_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6362_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (i) the third party affected by the arbitration award has the right to go to a new competent authority to assert its rights; (ii) the authority should not be absolutely unaware of the previous decision; (iii) the third party – in some national laws – will have the right to file a motion to set aside the award before a judge – this is not the case in Colombia where there is no rule regarding the possibility of a third party filing an action for annulment against an arbitral award.

There is currently no ideal solution to resolve this problem. One mechanism that could apparently address this problem at an early stage is to design multi-party arbitration agreements. However, it does not seem to be a viable mechanism in response to the multiplicity of interests and economic relations that exist in these projects. In Colombia, no initiative related to this issue is being developed neither for the Colombian Arbitration Act, nor for the Arbitration Rules of the Bogotá Chamber of Commerce.

 

Conclusion

The arbitration related to the Ruta del Sol 2 Project has raised several legal debates, the intervention of third parties in the arbitral proceeding being one of them. Since foreign companies are currently highly active in Colombian infrastructure projects, the possibility of having international arbitration is high and so is the possibility of third parties having difficulties to be heard in those arbitral proceedings.

For the time being, we would recommend all those actors participating in infrastructure projects, to carry out a detailed analysis when designing and agreeing on the dispute resolution mechanisms in their contracts, to make sure each actor’s interests are protected.

References   [ + ]

1. ↑ “The Arbitral Tribunal had to perform an important ex-officio evidentiary activity exhaustively described before to incorporate to the file the evidence required to take the correspondent decisions on law-grounds […]” (Free translation) Award, page 67. 2. ↑ This finding allowed the Arbitral Tribunal to conclude the Concession Contract was entered with abuse of power and had illicit object, and therefore, fitted within the nullity grounds of a public contract under Colombian law. 3. ↑ See, STAVROS BREKOULAKIS “The effect of an arbitral award and third parties in international arbitration: res judicata revisited”, The American Review of International Arbitration, Vol.16; BOCHAROVA NATALIYA, “The scope of the Arbitral Award Binding Effect (Interest of “Third Parties” in International Arbitration), Russian Law Journal, Volume V (2017) Issue 2. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Africa Arbitration Academy Takes Over the Baton on Thought Leadership…Launches Virtual Hearing Protocol in Africa, for Africa

Thu, 2020-05-07 04:00

Necessity is the golden chord that lies at the base of every innovation and invention. As countries around the world continue to implement different measures to combat the COVID-19 pandemic and to contain and deal with its ramifications, all stakeholders (including businesses and institutions) are now forced to innovate and make significant changes to the ways they do business. Amongst the main lessons learnt from this crisis are: (i) the international arbitration community’s resilience and adaptation in the midst of these challenging times; (ii) the necessity and importance of working together in the face of a common adversary that does not distinguish between distant localities, different ethnicities and diverse societies; (iii) the harmony and unity that arbitral institutions could bring to a COVID-19 threatened world, as is borne out by the joint message published by certain leading institutions and emphasising the necessity of collaboration between institutions and between parties and arbitrators to discuss the impact of the COVID-19 pandemic in an open and constructive manner, in the hope of finding appropriate means to mitigate the effects thereof while ensuring the fairness and efficiency of arbitral proceedings;1)See Alison Ross, “Covid-19: leading institutions speak with one voice”, the Global Arbitration Review, 16 April 2020. jQuery("#footnote_plugin_tooltip_7122_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7122_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); (iv) the global migration to the virtual world, such that the integration of technology in dispute resolution is no longer seen as a luxury or a distant reality (it has become the new present); and (v) the inevitability of rethinking traditional processes and the indispensability of considering new and novel means for resolving disputes efficiently, through online dispute resolution, which goes well above and beyond moving traditional offline practices to the online world.

In the specific context of international arbitration, users, arbitrators and institutions are considering how best to adapt to this ‘new present’. As part of the ongoing efforts to adapt and respond to the needs of the global dispute resolution community, virtual hearings are increasingly being presented as the plausible option to proceeding with cases2)In the words of the renowned Australian arbitrator, Doug Jones, in his discussion with Global Arbitration Review (GAR) on 27.03.2020, “Just as the manufacturers of ventilators are sharing their intellectual property to enable the emergency manufacture of their products by others to save lives around the world, institutions should share their knowhow and work together to identify the most effective ways to conduct virtual hearings and to come up with solutions to some of the current problems with them.” jQuery("#footnote_plugin_tooltip_7122_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7122_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as and when appropriate and after due consultation with the parties. This is the golden chord that strikes at the heart of the new Africa Arbitration Academy Protocol on Virtual Hearings in Africa (the Protocol).

Being deeply and seriously concerned with the African dispute resolution landscape, the Africa Arbitration Academy realized that it is timely to contribute to the advent of arbitration on the Continent in the midst of the COVID-19 pandemic. The Protocol, in the main, details recommendations on virtual hearings and takes into account the specific challenges and circumstances that may arise in relation to remote hearings in Africa. The overarching objectives of the Protocol are (a) to provide guidelines and best practices for arbitrations within Africa, where a physical hearing is impracticable due to health, safety, cost, or other considerations; (b) to encourage African institutions and governments to make express references to virtual hearings in arbitration rules and laws; and (c) to serve as guiding standards, principles, and provisions to be adopted by arbitral institutions or governments in Africa when drafting their arbitration rules and laws. We summarise some of the key provisions of the Protocol in the ensuing paragraphs.

 

Preliminary Considerations, Logistics, and Pre-Hearing Arrangements 

The Protocol has useful provisions, directing parties and arbitral tribunals to agree in advance, as much as possible, upon all the technology, software, equipment, and platform to be used by all participants in the virtual hearings. Parties are required to give considerations to the level of cybersecurity required to safeguard the security and integrity of the virtual hearings and to agree to the cybersecurity measures that meet the minimum cybersecurity standards detailed under Annex I of the Protocol.

Notably, given the peculiarity of access to reliable technology in Africa, the Protocol points parties/participants who do not have access to the technology, software, and equipment to be used for virtual hearings, to approach arbitral institutions or other centres in Africa that can offer their venues  for conducting virtual hearings.

To dispense with challenges to arbitral awards rendered in cases where virtual hearings were held while there is no agreement between parties on the use of virtual hearings and/or no provisions expressly regulating such hearings under the applicable procedural rules or laws governing the arbitration, the Protocol recommends that parties shall, prior to the hearing and to the extent necessary, enter into a Pre-Virtual Hearing Agreement to expressly consent to the use of virtual hearings. The Protocol provides template Pre-Virtual Hearing Agreements in its Annex II and in Annex III – provides a Model Arbitration Clause (including Virtual Hearing Option) to be used by parties at the contracting stage.

In situations where parties fail to agree to a virtual hearing, but the arbitral tribunal considers that the dispute could be determined fairly otherwise than by physical hearing, the Protocol imbues the arbitral tribunal with power to direct, after due consultation with the parties and upon due consideration of any overriding applicable norms, that the evidentiary hearing be conducted virtually. The Protocol provides a template Cyber Protocol or Procedural Order that may be adapted and issued in this regard.

 

The Virtual Hearings and Presentation of Evidence

The Protocol provides important guidance on the conduct of virtual arbitral hearings and recommends that in scheduling hearings, the tribunal should consider the: (i) different time zones of participants; (ii) number of remote locations and the possibility for tribunal members to be in the same physical location; (iii) method of taking evidence from fact witnesses and experts to ensure that the integrity of any oral evidence is preserved; (iv) method for confirming and identifying all participants, including any technical administrator; and (v) possibility of using demonstratives, including shared screen views or electronic hearing bundle hosted on a shared document platform that guarantees access by all participants.

The Protocol prescribes minimum logistical and technical requirements for presentation of evidence by fact witnesses and experts, the use of documents during examination of witnesses, the use of interpreters and interpretation where required simultaneously in multiple languages, the use of recordings of virtual hearing to produce hearing transcripts, as well as the security and privacy considerations during a virtual hearing. A template Oath or Affirmation to be administered to any fact witness or expert in the virtual hearing, is provided in Annex V of the Protocol.

 

Hearing Protocol, Infrastructure and Technical Standard

The Protocol recommends that the infrastructure and platform for virtual hearings are user friendly, and parties are to ensure that the platform is licensed with adequate security and privacy standards. It further recommends that parties and arbitral tribunals agree on a back-up internet service provider and an alternative virtual platform or such other means for holding the hearing, to be used, should any technical or communications breakdowns occur and threaten the smooth continuation of virtual hearings.

 

Conclusion

The Protocol, together with its innovative provisions, though, optional and largely dependent on parties’ agreement, existing applicable laws, and rules of arbitral institutions; is uniquely designed around Africa and the specific issues of access to reliable technology. It has been described by users of arbitration in Africa as a welcome development and a potential game-changer in Africa’s disputes market.

References   [ + ]

1. ↑ See Alison Ross, “Covid-19: leading institutions speak with one voice”, the Global Arbitration Review, 16 April 2020. 2. ↑ In the words of the renowned Australian arbitrator, Doug Jones, in his discussion with Global Arbitration Review (GAR) on 27.03.2020, “Just as the manufacturers of ventilators are sharing their intellectual property to enable the emergency manufacture of their products by others to save lives around the world, institutions should share their knowhow and work together to identify the most effective ways to conduct virtual hearings and to come up with solutions to some of the current problems with them.” function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Threshold for Challenges in ICSID Arbitration: Interpreting the ‘Manifest Lack’ Standard

Thu, 2020-05-07 03:00

The strength of any dispute settlement mechanism will depend upon its consistency with the requirements of independence and impartiality. Disclosures made by adjudicators prior to adjudicating a dispute, and challenges raised against adjudicators during the course of dispute settlement, target a perceived absence of independence or impartiality. The purpose of this post is to juxtapose the standards of independence and impartiality applicable to adjudicators in international commercial arbitration vis-à-vis those followed in WTO dispute settlement proceedings. The post examines this issue in order to propose an acceptable standard for the purposes of investment arbitration.

Generally speaking, arbitration rules guiding international commercial arbitration permit the removal of arbitrators on the demonstration of ‘justifiable doubts’ about their independence and impartiality. The WTO Dispute Settlement Understanding (hereinafter, “DSU”) presents a higher threshold requiring a ‘material violation’ of the criteria. By contrast, investment arbitration under the ICSID Convention and Rules adheres to a standard of a ‘manifest lack’ of competence, character, and/or independent judgment; a standard which is neither as stringent as ‘material violation’ in the DSU nor as lenient as ‘justifiable doubts’ in commercial arbitration (and investment arbitration under the UNCITRAL Rules). It is my argument that the ‘manifest lack’ threshold in the ICSID regime should be interpreted in line with the higher WTO standard, rather than the lower threshold generally applicable in the international commercial arbitration context.

 

The ICSID Regime

Article 57 read with Article 14 of the ICSID Convention mandate disqualification only in circumstances where there is a manifest lack’ of character, competence or independent judgment. While it is only the ‘independence’ requirement which finds mention in the English version of the Convention, the equally authentic Spanish version requires ‘impartiality’ as well, thereby necessitating analysis of both qualities for a finding of bias.

Arbitral awards in the ICSID regime either attempt to interpret the ‘manifest lack’ standard in line with that of ‘justifiable doubts’, or acknowledge the distinction and attribute a higher threshold.

An example of the former instance can be seen in Blue Bank v. Venezuela. The Chairman of the ICSID Administrative Council noted that the phrase ‘manifest’ in Article 57 does not require material evidence to demonstrate a lack of independence and impartiality. Rather, even the appearance of dependence or bias was deemed sufficient to remove a party-appointed arbitrator. This line of argument was adopted in Burlington Resources v. Ecuador and Caratube v. Kazakhstan as well. However, the Tribunal in Caratube qualified the requirement by conceding that any challenge under the ICSID Convention imposed a heavy burden of proof on the challenging party.

On the other hand, some tribunals have acknowledged the uniqueness of ICSID arbitration in giving a different shape and form to the ‘manifest lack’ requirement. For instance, in Suez v. Argentina, the Tribunal applied a four-part test to determine whether an alleged conflict of interest demonstrates a manifest lack of independence and impartiality: proximity, intensity, dependence, and materiality. The unchallenged arbitrators, in this case, followed the reasoning of the decision in Amco v. Indonesia: “The challenging party must not only prove facts indicating the lack of independence, but also that the lack is ‘manifest’ or ‘highly probable’, and not just ‘possible’ or ‘quasi-certain’”. Subsequently, the challenge in Total v. Argentina upheld the same criteria.

Finally, as part of the ongoing Rules and Regulations Amendment Process of the ICSID, the Third Working Paper on Proposals for the ICSID Arbitration Rules Amendment did contain a proposal to amend the grounds and standard for disqualification. However, this was ultimately rejected by the Secretariat. It remains to be seen how the UNCITRAL Working Group III on Investor-State Dispute Settlement Reform influences the Rules Amendment process of the ICSID. A noteworthy development is the recent release of the first draft of the Code of Conduct for Adjudicators in Investor-State Dispute Settlement addressing issues of independence and impartiality of adjudicators in ISDS – discussed here on the blog.

 

Approaches in International Commercial Arbitration

Article 11 of the UNCITRAL Arbitration Rules 2010 sets out the standard for disclosures to be made by arbitrators prior to and during the continuance of the arbitral proceeding. Article 12 stipulates situations in which the appointment of an arbitrator may be challenged by a party. In both, the circumstances meriting disclosure or challenge must give rise to ‘justifiable doubts’ regarding the arbitrator’s independence and impartiality. A similar requirement can be seen in the LCIA Arbitration Rules as well as the ICC Rules. The IBA Guidelines on Conflict of Interest in International Arbitration supplement this threshold and contemplate circumstances that could lead to ‘justifiable doubts’ of independence or impartiality. Part II of the Guidelines consists of four non-exhaustive lists signifying the gravity of the conflict of interest- Green, Orange, Waivable Red and Non-Waivable Red.

In international commercial arbitration, this ‘justifiable doubts’ threshold has been interpreted by tribunals to imply an objective standard from a rational, third person’s point of view. The broad and permissive interpretation of the term can subject a party-appointed arbitrator to disqualification on even less-severe grounds, such as the mere appearance of bias as was in the case of Commonwealth Coatings v. Continental Casualty. While this standard might be suitable in international commercial arbitration, it is the author’s opinion that introducing the ‘justifiable doubts’ understanding into the ‘manifest lack’ requirement would be misplaced. It could lead to the dilution of the disclosure and challenge standard, and potentially exclude capable and highly-qualified arbitrators from an already small pool of experts.

The following case was governed by the ICSID Convention and Rules and left no scope for applying the UNCITRAL Arbitration Rules. Yet, the standard adopted in EDF International S.A. v. Argentine Republic was whether ‘reasonable doubts’ could exist about the arbitrator’s capacity to exercise independent judgment. This case (in addition to those in the previous section) demonstrates how the incorrect application of standards obfuscates the matter. By importing the practice prevalent in international commercial arbitration, the requirement for a grave or severe bias under the ICSID regime is eliminated.

In a similar vein, the IBA Guidelines were framed with the intention that their applicability to the field of investment arbitration would be minimal. As discussed above, the consequence of incorporating the lower UNCITRAL – IBA standard into ICSID proceedings is that the higher ‘manifest lack’ standard is misconstrued. Given that the investment arbitration community is tight knit and issues that arise in disputes are often repetitive, the borrowing of the lower standards in the IBA Guidelines and other arbitration rules would hamper the dispute resolution process and permit the removal of arbitrators on frivolous grounds.

 

WTO’s Dispute Settlement Understanding

Dispute settlement under the aegis of the WTO shares a number of similarities with investment arbitration – stakeholders are similarly numerous, risks are similarly high, and consequences are similarly grave. Additionally, both fall under the broader realm of ‘international economic law’. Members of the WTO are party to the DSU which provides for members to submit disputes for resolution. Article 8 of the DSU addresses the composition of the Panel while Article 17 addresses the composition of the Appellate Body. Common to both are certain requirements to eliminate conflict of interest and ensure that highly qualified individuals with requisite experience are appointed.

While impartiality is not specifically a pre-requisite, other stipulations such as absence of common nationality between members of the panel and the parties guarantee both independence and impartiality. Supplementing the DSU are the Rules of Conduct, Section VIII of which permits parties to challenge the appointment of an individual to a Panel or Appellate Body.

The threshold for challenging an appointment is that of providing evidence to establish a ‘material violation’ of the obligations of independence, impartiality, or confidentiality. As of the time of writing this post, no appointment to a Panel or Appellate Body has ever been formally revoked. However, after the submission of evidence showing a ‘material violation’, there have been some instances of voluntary resignations.

Given that discussions surrounding the challenge to a member are confidential, the understanding of the term ‘material violation’ is nebulous. However, it can be said that such a threshold implies that any allegation of conflict of interest must be backed by substantial evidence, and not merely create a suspicion in the mind of an objective, third party observer. It is also important to note that this higher threshold requiring a ‘material violation’ of the criteria is apposite in light of the nature of the disputes and the limited availability of individuals possessed with the expertise to resolve them.

 

Conclusion

Investment arbitration, WTO dispute settlement, and international commercial arbitration facilitate dispute resolution stemming from various aspects of transnational commerce, trade and investment. Investment arbitration, however, is unique. As it deals with States’ obligations under public international law, the effects of the award are often felt beyond the two parties to the dispute. The above analysis also reveals that there exists great congruity between investment arbitration and WTO dispute settlement with respect to the qualities required of arbitrators and the prominent nature of the disputes. It follows that similar standards of disclosure and challenge could be adopted in both, bearing in mind the high degree of analogous considerations. It must also be borne in mind that frivolous challenges permitted through a lower standard of independence and impartiality would be costly, delaying, and even put the award at risk.

Cases such as Total and Amco are landmark as they acknowledge the nuances involved in investment arbitration. They lay the ground for an elevated construction of ‘manifest lack’. Burlington Resources, EDF International and Blue Bank, on the other hand, must be distinguished in the developing ICSID jurisprudence for including ‘justifiable doubts’ within the regime. In the coming years, efforts must be made to increase consistency in the understanding of ‘manifest lack’ to reduce chances of injustice or delay, and retain the relevance of ICSID in changing times.

 

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Preliminary Discovery in International Arbitration: An Australian Perspective

Wed, 2020-05-06 03:00

The availability and scope of ‘discovery’ or document production significantly differs across jurisdictions, most notably when comparing litigation in common law and civil law courts. In the field of international arbitration, the compromise position adopted by the International Bar Association’s Rules on the Taking of Evidence in International Arbitration is to permit disclosure of documents where it is “relevant to the case and material to its outcome”.1)Article 3(3)(b). jQuery("#footnote_plugin_tooltip_9356_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9356_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This approach has been reasonably effective in practice as a compromise between the extensive discovery generally afforded in common law courts, and the very limited document production orders granted by civil law courts.

But what is the position where, before an arbitral tribunal is constituted, a party needs to obtain documents from a prospective respondent, to determine whether to even initiate a case at all?

Preliminary discovery may fill this gap. It may enable a prospective claimant to compel a prospective respondent to produce documents for the purpose of determining whether to commence legal proceedings. However, while an arbitral tribunal clearly has power to order document production once proceedings have commenced (subject, of course, to any limitations under the arbitration agreement and the applicable law), it is not clear that the tribunal’s powers extend to preliminary discovery.

This blog post will examine whether preliminary discovery is available in arbitrations seated in Australia, and offer some practical insights for litigants considering this.

 

The Australian position

The general position is that before initiating arbitration proceedings, a prospective claimant may seek preliminary discovery under domestic court procedures: see the New South Wales Supreme Court’s (“NSWSC”) judgment in nearmap Ltd v Spookfish Pty Ltd [2014] NSWSC 1790.

In this case, the plaintiff, nearmap Ltd (“nearmap”), operated a business supplying aerial and geospatial photomosaic images. It relied on innovative and confidential design processes and information. Several employees, including a former Chief Technology Officer and a Chief Operating Officer, left to operate a rival firm in the same industry, Spookfish Pty Ltd (“Spookfish”).

Nearmap was worried that its former employees retained confidential information from their employment, and that Spookfish was unlawfully using that information in its business. It sought preliminary discovery from Spookfish and its directors under the NSWSC’s procedural rules, the Uniform Civil Procedure Rules 2005 (NSW) (the “UCPR”), to determine whether to pursue proceedings against the defendants for breach of confidence (among other claims).

Spookfish resisted the application, arguing that it should be permanently stayed pursuant to an arbitration agreement between the parties, and determined by the arbitral tribunal instead. Spookfish cited s 8 of the Commercial Arbitration Act 2012 (WA) and s 8 of the Commercial Arbitration Act 2010 (NSW) (each, an “Act”), which both provide that:

“A court before which an action is brought in a matter which is the subject of an arbitration agreement must, if a party so requests not later than when submitting the party’s first statement on the substance of the dispute, refer the parties to arbitration unless if finds that the agreement is null and void, inoperative or incapable of being performed.”

Chief Judge in Equity Bergin (“Bergin CJ in Eq”) refused to stay the court proceedings in favour of arbitration, finding that the motion for preliminary discovery was not a “matter” for the purposes of the cited provisions. A claim that Spookfish’s employees breached their obligations of confidentiality would constitute a “matter”. However, an application for preliminary discovery was of a different kind, being “not a dispute as to the rights or obligations of the parties” but instead “a right independent of the Agreements…arising under the Uniform Civil Procedure Rules and any obligation to produce the documents arises from a judicial determination, having regard to whether the prerequisites in the Rule have been satisfied.” (At [72])

Her Honour also found that a tribunal’s power to order “discovery of documents” under s 17(3)(b) of each Act relates to discovery relevant to the issues between the parties in respect of any application for the quasi-injunctive relief set out in s 17(2) of the Act, and does not extend to ordering preliminary discovery. (At [76])

Further, the interim measure referred to in s 17(2)(d) of the preservation of “evidence that may be relevant and material to the resolution of the dispute” is also not a vehicle for preliminary discovery but “to secure evidence in respect of which a party to an already existing dispute of which the arbitrator is seized, may entertain fears of destruction or dissipation in the absence of such an interim measure.” (At [76])

Although nearmap concerned a domestic arbitration, its principles are likely also applicable to international arbitrations seated in Australia. Section 7(2) of the International Arbitration Act 1974 (Cth) requires a court to refer a “matter” to arbitration where a party has initiated court proceedings which are arbitrable and are subject to a valid arbitration agreement. In light of nearmap, Australian courts are unlikely to find that a preliminary discovery application is a “matter” which engages s 7(2).

The implication is that a prospective claimant to a dispute covered by an arbitration agreement should seek preliminary discovery under domestic court procedures instead of from the arbitral tribunal.

The prospective claimant may rely on rule 7.23 of the Federal Court Rules 2011 (Cth) or rule 5.3(1) of the UCPR. Under those provisions, a court may order preliminary discovery from a prospective defendant in possession of a document which may assist in determining if the applicant has a claim, provided the applicant has already undertaken reasonable inquiries which have not yielded sufficient information for it to decide whether to commence proceedings. The usual limitations arising from privilege and the implied undertaking as to the use of documents also apply.2)See Ben Kremer and Rebecca Davies, Preliminary discovery in the Federal Court: Order 15A of the Federal Court Rules, (2004) 24 Aust Bar Rev 235, 255-258. jQuery("#footnote_plugin_tooltip_9356_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9356_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

One interesting open question is whether parties can confer an arbitral tribunal with powers to order preliminary discovery, by expressly stating so in the arbitration agreement. Bergin CJ in Eq ruled that applications for preliminary discovery did not attract the protection of s 8(1) of the Act, not that such applications are not arbitrable. Considering parties’ flexibility to select the arbitral procedure under article 19(1) of the Model Law, it is theoretically conceivable that the parties could expressly confer the power to order preliminary discovery on the tribunal. In practice, however, recourse to domestic courts is likely to be more practical since it would allow prospective claimants to obtain preliminary discovery before an arbitral tribunal has been constituted.

As a quick comparison, English courts adopt a different position with respect to preliminary discovery (there known as “pre-action disclosure”). In Travelers Insurance Company v Countrywide Surveyors Ltd [2010] EWHC 2455 (TCC), the High Court held that it could not order pre-action disclosure under the Court’s procedures where the dispute is subject to a valid arbitration agreement between the parties.

Under s 33(2) of the Senior Courts Act 1981 (the “SCA”), the High Court may only grant an application for pre-action disclosure to “a person who appears to the High Court to be likely to be a party to subsequent proceedings in that court.” Justice Coulson held that the existence of the arbitration agreement meant that the applicant was not a likely party to subsequent proceedings in the High Court.3)At [17]-[21]. jQuery("#footnote_plugin_tooltip_9356_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9356_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, the Court did not have the requisite power and the application needed to be made to the arbitral tribunal. (At [30])

The difference between the positions in Australia and England is in part attributable to the differences in the procedural rules governing preliminary discovery/pre-action disclosure. Rule 5.3 of the UCPR allows preliminary discovery if “the applicant may be entitled to make a claim for relief from the court against a person”, whereas s 33(2) of the SCA is more restrictive in requiring that the applicant is likely to be a party to subsequent proceedings in that court”.

 

Practical considerations

Prospective claimants should also consider the following when determining whether to pursue an application for preliminary discovery in respect of arbitration.

First, a party who is seeking preliminary discovery is generally responsible for the costs of the discovery. For example, in the Australian Federal Court (see Sites N Stores Pty Ltd v Whirlpool.Net.Au Pty Ltd [2015] FCA 1474), the default position is that an applicant for preliminary discovery should pay the costs of the producing party unless the producing party has acted unreasonably. The costs of the discovery process can be significant and the potential strategic benefits of obtaining helpful documents should be weighed against costs and procedural economy considerations.

Second, it can often be difficult to determine whether a prospective respondent possesses documents which may assist so there is an element of risk involved. This, again, should be weighed against the potential benefit of locating documents which may found a viable claim.

Third, the scope of preliminary discovery is limited. In Australia, preliminary discovery cannot be used by a party to merely strengthen its position where it has already decided to commence legal proceedings, or ‘fish’ for information without believing that a genuine claim exists (see Airservices Australia v Transfield Pty Ltd [1999] FCA 886 at [5]).

References   [ + ]

1. ↑ Article 3(3)(b). 2. ↑ See Ben Kremer and Rebecca Davies, Preliminary discovery in the Federal Court: Order 15A of the Federal Court Rules, (2004) 24 Aust Bar Rev 235, 255-258. 3. ↑ At [17]-[21]. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Hold on to Your Seats, Again! Another Step to Validation in Enka v Chubb Russia?

Tue, 2020-05-05 08:30

In the recent ruling of 29 April 2020, the England and Wales Court of Appeal, departing from Sulamérica, has held the seat of arbitration as an implied choice of the law of the arbitration agreement in cases where parties expressly chose the law applicable to the main contract and the seat of arbitration under a different law.

 

Background

The appeal in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] EWCA Civ 574 (Enka), was filed against the decision of 20 December 2019 of the High Court not to grant anti-suit injunction against Chubb Russia, alleged to be in breach of a London arbitration clause by bringing court proceedings in Russia against Enka. The decision was based on the fact that all questions of the scope of the arbitration agreement and its applicability to the Moscow claim were more appropriately to be determined in the Russian proceedings.

The appeal was allowed, with a further order to be issued preventing Chubb Russia from exercising its Russian appeal rights to seek to overturn the decision of the Moscow court against it on the merits, that was issued pending the hearing of the appeal.

 

Court of Appeal decision

The Court of Appeal decided that the English court, as the court of the seat of arbitration (the curial law), is the appropriate court to grant anti-suit injunctions, as this reflects parties’ choice when selecting the seat of arbitration.

Having decided on this point, the Court turned to the submission in the alternative by Chubb Russia, that the Court should decide what the proper law of the arbitration agreement is and having determined it to be Russian law, defer to the Moscow court as a matter of discretion in relation to the grant of discretionary relief. The Court disagreed with Chubb Russia, as once it was decided that the English court, as the court of the seat, has the power to determine whether an anti-suit injunction should be granted, the same court must determine whether the foreign proceedings are in breach of the arbitration agreement and, if so, whether relief should be granted. The Court established that the arbitration agreement is governed by the English law. Under English law there is a wider approach to what amounts to a dispute falling within an arbitration clause, hence the Moscow claim was brought and pursued by Chubb Russia in breach of the arbitration agreement.

 

Proper law of the arbitration agreement

Analyzing the established three stage test, the Court concluded that as a matter of principle, to determine the applicable law of the arbitration agreement where the seat is different than the law of the main contract:

  • the question can be answered at the first stage, if exceptionally there is an express choice of the law of the arbitration agreement. In addition, where there is an express choice of law in the main contract it may amount to an express choice of the law of the arbitration agreement, depending on the construction of the whole contract (Kabab-Ji );
  • in all other cases where there is an arbitration clause with a different curial law, and as a general rule, there is a strong presumption that the parties have impliedly chosen the curial law as the law of the arbitration agreement, subject to any powerful countervailing factors in the relationship between the parties or the circumstances of the case (e.g. if the arbitration agreement would be invalid under the law of the seat).

In doing so, LJ Popplewell relied (a) on the doctrine of separability (Kabab-Ji cases and those not recognizing separability aside) that should be applied also for the purpose of assessing the validity, existence and effectiveness of the arbitration agreement where parties included an arbitration clause with a different seat; (b) on the overlap between the scope of the curial law and that of the arbitration agreement law, as the curial court is empowered to determine aspects of the substantive rights of the parties under their arbitration agreement by reference to the curial law. The analysis was viewed as a matter of implied choice at stage two rather than by application of the closest and most real connection test at stage three.

 

Comment

The analysis of the first stage – the express choice – confirmed the recent decision in Kabab-Ji, discussed previously on the blog, where the court decided that the arbitration agreement is governed by English law of the main contract, because articles 1 and 15 provide for an express choice of English law to govern the arbitration agreement, while emphasizing that governing law clauses do not necessarily cover the arbitration agreement but that one did because of the correct construction of the terms of articles 1 and 15 of the contract taken together (Kabab-Ji, at [62], in essence “This Agreement” clauses).

The court in Kabab-Ji relied also on Arsanovia, where the main contracts were governed by Indian law with London-seated arbitration clause. In this case, the court endorsed the arguments of the claimants that this is an implied choice of law, but noted that a case for an express choice might have been available as “[w]hen the parties expressly chose that “This Agreement” should be governed by and construed in accordance with the laws of India, they might be thought to have meant that Indian law should govern and determine the construction of all the clauses in the agreement which they signed including the arbitration agreement. Express terms do not stipulate only what is absolutely and unambiguously explicit, and it seems to me strongly arguable that that is the ordinary and natural meaning of the parties’ express words.” (at [22]).

With regard to the second stage – the implied choice – admitting from the outset that the line between the search for the implied intention of the parties and the search of the system of law with which the contract has its closest and most real connections is a fine one, which has been frequently blurred in the English jurisprudence (at [70]), the Court of Appeal departed from Sulamérica in that it analysed the choice for the seat as an implied choice of the law of the arbitration agreement.

The approach of the English courts seems to have moved back and forth in the last decades on this point:

  • an initial approach was that where parties have made an express choice of law of the main contract the arbitration agreement will normally be governed by it: e.g. Sonatrach Petroleum Corporation (BVI) v Ferrell International Ltd [2001] EWHC 481 (Comm) (4 October 2001) (at [32]), with no separate inquiry at the second and the third stage, as a choice was implied by reference to the body of law with which the arbitration agreement has its closest and most real connection; Svenska Petroleum Exploration AB V Lithuania [2005] EWHC 2437 (Comm) (at [76]);
  • a second approach was that there is an implied choice for the law of the seat (XL Insurance Limited v Owens Corning [2001], C v D, [2007] EWCA Civ 1282 (at [22-26]), Abuja International Hotels Ltd v Meridien SAS [2012] EWHC 87 (Comm) (at [20-24], although in C v D and in Abuja an implied choice was derived from the analysis of the closest and most real connection, with no separate inquiry at the second and third stage;
  • Sulamérica was the first to separately undertake the three stage analysis and decided that since there is no express or implied choice, at the third stage the arbitration agreement has the closest and most real connection to the seat; at the second stage, the court established that as a principle, there is an implied choice of law governing the arbitration agreement for the law governing the main contract, absent other factors (such as choosing another country as the seat and for reason of avoiding unenforceability of the arbitration agreement, as the court found in Sulamérica, citing also XL for the later reason), the seat alone not being sufficient to rebut the presumption (at [26]); Arsanovia followed suit (at [21]);
  • in Enka, the approach of the implied choice is in favour of the seat, at the second stage.

The reliance of the Court of appeal in Enka on XL and C v D to conclude that the general rule should be that the law of the arbitration agreement is the curial law as a matter of implied choice might be far-fetched, as those cases concerned an arbitration agreement with a specific reference to the provisions of the Arbitration Act. The court in XL had analysed whether such reference meant that English law would govern “not merely the arbitral procedure in the narrowest sense, but also the jurisdiction of the arbitral tribunal and the formal validity of the arbitration agreement”, and concluded that the latter is true. This case specific difference was also considered by the lower court in C v D (as cited in Enka at [75]).

What is also arguable is that the court relied on the separability doctrine to justify its conclusions; by doing so it departed from Sulamérica where it was specifically held that “[t]he concept of separability itself, however, simply reflects the parties’ presumed intention that their agreed procedure for resolving disputes should remain effective in circumstances that would render the substantive contract ineffective. Its purpose is to give legal effect to that intention, not to insulate the arbitration agreement from the substantive contract for all purposes”; by doing so the court extended unwarrantedly the applicability of the separability doctrine to determine the law applicable to the arbitration agreement, instead of using it just as a starting point to undertake the analysis of the proper law of the arbitration agreement separate from the same analysis with the main contract.

Moreover, the court placed too much weight to the commercial sense of businessman that would not be expected to choose two different systems of law to apply to their arbitration package (at [99]). However, as the arbitration package involves complicated legal discussions onto the legal implications of the different applicable systems of laws, and it is unlikely that all such intricacies are explained for these midnight clauses, the traditional and opposing view, that businessman should not be taken to have intended that different systems of law should apply to their relationship might be more realistic.

It appears that the same arguments can and have been used to sustain either of above approaches, and the case law with the English courts is far from being settled. As Professor Lew anticipated, Sulamérica was not the final word on this issue in English law,1)Julian Lew, Sulamérica and Arsanovia: English Law Governing Arbitration Agreement, in 12 Jurisdictional Choices in Times of Trouble at 142 (Bachir Georges Affaki & Horacio Alberto Grigera Naón eds., 2015). jQuery("#footnote_plugin_tooltip_7300_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7300_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and so far the main guidance seems to be that the circumstances of each case will be decisive.

One might also look at the what it appears to be an inconsistent practice of the English courts as an implicit application of the validation principle, as several of the decisions above approached the analysis in an attempt to avoid the arbitration agreement being ineffective (Sulamérica, XL, also Hamlyn & Co v Tlisker Distillery [1984], in Enka at [71]). This is actually indicated in Enka, as the judge admits his conclusions “may yield to specific contrary factors thrown up by the circumstances of individual cases, for example if the arbitration agreement would be invalid under the law of the seat” (at [104]).

References   [ + ]

1. ↑ Julian Lew, Sulamérica and Arsanovia: English Law Governing Arbitration Agreement, in 12 Jurisdictional Choices in Times of Trouble at 142 (Bachir Georges Affaki & Horacio Alberto Grigera Naón eds., 2015). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Hague Rules on Business and Human Rights Arbitration: Noteworthy or Not Worthy for Victims of Human Rights Violations?

Tue, 2020-05-05 03:00

In a recent post, we were told to ‘Roll Out the Red Carpet’ for the Hague Rules on Business and Human Rights Arbitration (the “Rules”). Indeed, the Rules are a new development within the field to assist with disputes relating to human rights and their violations. Following a process of draft reports and public consultations, the final version of the Rules was launched in December 2019. The Business and Human Rights Arbitration Working Group (the “Working Group”) that developed the Rules was clear regarding the benefits that arbitration had to offer to cases involving human rights violations, particularly in jurisdictions where corruption is rife, national courts are flawed, and arbitration would help victims of abuse connected to business activities. The Working Group also identified that new rules needed to be formulated given that the current system of international arbitration was not adequate in accommodating human rights issues through aspects such as the lack of transparency and the lack of human rights arbitrator expertise.

The Rules provide a set of procedures for the arbitration of disputes connected to the impact of business on human rights, and are based on the Arbitration Rules of the United Nations Commission on International Trade Law (the “UNCITRAL Rules”). Like the UNCITRAL Rules, the remit of the Rules can apply to any dispute that parties to an arbitration agreement have agreed to settle by arbitration via the Rules and therefore there is no restriction on the kind of claimant, respondent or subject matter. The Rules, whilst uniform, allow parties to modify or opt out of certain provisions that may not be relevant to the needs of parties in a dispute. The Rules place consent at their foundation and do not address the enforcement of arbitral awards.

The Rules should certainly be commended for their objective of addressing human rights violations. But undoubtedly, there will be experts working in the field inclined to feel a little skeptical about them. At the moment, it is unlikely that the Rules will in fact even begin to deal with primary obstacles to remedies for human rights violations. The undemocratic, underequipped and politically driven legal systems in some contexts that prevent access to remedy, for one, holds an enormous challenge. It is also difficult to see how the Rules will function alongside notions such as forum non conveniens, with certain types of business models, and similarly with contractual principles such as statutes of limitation that often halt remedial processes. Given that the Rules are based on consent, it is equally difficult to answer the question of why companies will agree to arbitrate here and set aside the aforementioned notions, such as forum non conveniens. This is in light of the fact that we already see companies continuously arguing against jurisdiction or liability in host states and are not often very amenable to accommodating human rights issues beyond token gestures such as ex gratia payments. With a pinch of cynicism, I also foresee watered down arbitration agreements that cancel out possibilities for human rights remedies.

In addition, whilst international arbitration is often quite aptly focused on business to business disputes, in a landscape of human rights infringements, a business to business dispute resolution model becomes somewhat unsuitable and does not pay heed to the truth-seeking and reparative needs of victims. Whilst the Rules try to accommodate both business to business disputes and dispute resolution between companies and specific rights holders, the expectation as to the arena in which the Rules will mainly function seems to be on the former. This undermines the entire purported ethos of the Rules, as well as the fact that the specific rights holder issues do not seem to be clearly thought out. Even if companies consent to arbitrate, there is a presupposition that they will ensure any human rights dispute be adjudicated in their favour. Potential victims that are not working on the same highly resourced and connected playing field may agree to terms and conditions that do not encourage equality. International arbitration can be highly effective for corporate actors on an equal footing trying to resolve commercial disputes, but it is an entirely different situation to transplant this sort of mechanism to human rights dispute resolution without wholeheartedly tackling the big, practical questions.

More importantly, as Dautaj stated, litigation funding will be a significant issue to contend with. The Working Group noted that parties will need to be financially equipped to deal with issues of funding and costs, particularly since arbitration costs would in principle be paid by the losing party, unless otherwise agreed upon or otherwise apportioned by the tribunal, as per Article 53 of the Rules. Article 53 is a prime example of how the Rules completely misunderstand the complex nature of business and human rights disputes and the provisions require significant revisions. Cost barriers will prevent victims from bringing claims and the Rules’ approach to fee paying arrangements does not take into account the experience and capacities of human rights claimants. The Rules in fact amplify problems faced by human rights holders. Article 53 could deter genuine claimants, given that often they are unable to afford expensive legal counsel, as multinationals can. There is also no clarity on how Article 53 discretion will be applied by tribunals or any means in which this discretion can be contested by parties if needed.

Furthermore, there are no anti-retaliation protections contained in the Rules. Article 26 of the Rules on preliminary dismissal of claims that do not have legal or factual merit weigh in favour of companies. There is a need to incorporate clearer burdens of proof and delineated standards for the motions outlined in Article 26. Indeed, it is important to ensure that the Rules do not open the floodgates for spurious claims, but as it stands, the complete ambiguity of the Rules on this means that there could be a detrimental impact on genuine claimants as well. A mere acknowledgement that indeed there could be a disadvantaged party and that tribunals can take that into account during the evidentiary procedure is not sufficient and could potentially confuse the position of the human rights holder. Counterclaims can also be utilised spuriously to threaten human rights holders in bringing a claim, which has largely been unaddressed in the Rules. The lack of a basis in the Rules to prevent retaliation from companies could be detrimental to a human rights claim.

In their briefing note, the Columbia Centre for Sustainable Investment (CCSI) noted that the Rules – in draft form at the time – inadequately considered:

ways in which companies have used legal tools to fight claims and thus impede access to remedy [and] has failed to adequately consider how the Rules might be used to further facilitate companies’ efforts to undermine access to justice (…). Arbitration is a system of high-party autonomy and delegated state power which can create risks for weaker parties, such as rights-holder claimants, yet the Rules pay inadequate attention to mechanisms for avoiding or correcting the abuses that can arise when entities are on vastly unequal footing. The limited and general guidance the Rules give tribunals to address inequalities of arms provides little assurance that tribunals will be willing and able to remedy either systemic or case-specific inequalities.

Certainly, there is always the opinion that something is better than nothing. However, I argue that in order to fulfil the objective that the Working Group initially set out to achieve requires much more than what was eventually delivered in the final Rules. The Rules leave gaps and loopholes, which need to be urgently addressed if they are to be taken seriously as a viable option for human rights holders, regardless of the flexibility – like modification or opt out – that they provide to facilitate adoption. The Rules are unfortunately a missed opportunity, despite having a stellar group of individuals forming the composition of the Working Group. Given the short time taken to draft and finalise the Rules, it is questionable how much meaningful engagement with human rights holders and business and human rights experts was actually integrated into the process. In this sense, if we are to answer the question of this post’s title of Noteworthy or Not-worthy: as always it depends on the perspective one takes, but as far as human rights victims are concerned, most definitely the latter.

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Protectionist Amendments to Peru’s Arbitration Law Disguised as Transparency

Mon, 2020-05-04 04:00

On January 24, 2020, Peru enacted the Emergency Decree No. 020-2020 (the “Decree”), published in Peru’s Official Gazette, El Peruano.1)Emergency Decree Modifying Legislative Decree Nº 1071, Legislative Decree Norming Arbitration, Emergency Decree No. 20-2020 (Jan. 24, 2020) (Peru). jQuery("#footnote_plugin_tooltip_8205_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Decree amends Peru’s Legislative Decree No. 1071 (the “Arbitration Law”), in force since 2008,2)Legislative Decree Regulating Arbitration, Legislative Decree Nº 1071, (June 28, 2008) (Peru). jQuery("#footnote_plugin_tooltip_8205_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); to provide protections to any arbitration in which the Peruvian Government is involved.  The Decree’s changes are, in fact, protectionist measures to shield the government from certain arbitrations—such as ad-hoc—and are a problem for the arbitrators working on cases in which the state is a party.

As an arbitral jurisdiction Peru is sui generis.  Peru’s state procurement and contracting system obligates all controversies arising under a contract signed by the state to be submitted to arbitration.  No other jurisdiction in the world has a system like this.  This also means that Peru’s system requires two arbitration laws instead of just one.  A general law providing general principles and tailored for private arbitration and a special law in which the arbitration of government contracts is regulated.  The former is the Arbitration Law, cited above, and the latter is the Government Contracting Law (the “LCE”).3)Consolidated and Organized Text of the Government Contracting Law, Supreme Decree Nº 082-2019-EF (Mar. 13, 2019) (Peru). jQuery("#footnote_plugin_tooltip_8205_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  The former is of supplementary application to the latter.

The Decree amended the Arbitration Law and not the LCE, which by reasons we will discuss in this post is a legislative mistake which will create problems for all involved in the system.  In addition, the Decree is, overall, a protectionist, misplaced, poorly penned piece of legislation.

The problems begin very early on in the Decree.  The fourth recital recognizes the above described duplicity in the Peruvian system by stating that the Arbitration Law is “ideal for arbitration between private parties.”  Inexplicably, the recital states that the Arbitration Law is “not well suited” for arbitrations in which the state is a party; an obvious conclusion as the LCE governs those arbitrations.  The recitals then go on to declare the purpose of the amendments as measures to “assure transparency” and, consequently, prevent corruption.  However, the recitals also state that the measures are meant to prevent “situations which may affect the interests of the State and cause serious economic damages to the country” acknowledging its protectionist intent.

Some of the changes are justified and advance legitimate government interests.  However, these changes are misplaced, and do not assure transparency or prevent corruption.

Analyzing the Decree’s provisions shows that it modifies articles 7, 8, 21, 29, 51, 56, and 65 of the Arbitration Law and incorporates a new article 50-A.  For purposes of this post we will focus on articles 7, 8, 21, and 29, and in the Complementary Provisions which impact these or other articles.

Article 7 refers to the distinction between ad hoc and institutional arbitration and clarifies that ad hoc is the default process in case the parties failed to choose an institutional arbitration.  The Decree changes this principle and bans ad-hoc arbitration in cases in which the state is a party.  The only exception are cases with an amount in controversy below 10 Tax Units or approximately US$13,000.  This excludes most cases filed against the state.

While the Arbitration Law is of supplementary application to the LCE, which limits ad-hoc arbitration, the LCE did not limit it to the extent the Decree has.  In fact, ad-hoc arbitration now may be subject to two limitations, instead of just one.  Under the LCE, ad-hoc arbitration is subject to the reference value of the contract (max US$1,5Mio); under the Decree, the limit will also depend on the amount in dispute (max US$13K).  Therefore, it becomes riskier to undertake an ad-hoc arbitration because a judge may vacate the award based on either of these limits.  Further, arbitrators will have serious problems when deciding whether to apply the LCE (special law—mandatory) or the Arbitration Law (general—supplementary) when they find contradictions between them; e.g. limitation periods to file for arbitration and diverging provisions on parties right to refile arbitration claims.

Another concern is the possible limited access to institutional arbitration.  While institutional arbitration is perfectly fine and the Arbitration Centers of the Lima Chamber of Commerce, AMCHAM Peru, or the Universidad Católica provide excellent rules and administration, the implicit intent of the state is to create its own arbitral institution.  Hidden in the First Complementary and Final Provision of the Decree is a mandate to the Justice Ministry to create the National Registry of Arbitrators and Arbitration Centers-RENACE (acronym in Spanish).  This replaces the already existing National Registry of Arbitrators-RNA-OSCE (acronym in Spanish).  We anticipate that the government will mandate that all domestic investor-state arbitrations be conducted by arbitrators registered in RENACE.  RENACE and the existing State’s Contracting Supervisory Body-OSCE (acronym in Spanish) will become the only institution able to manage government arbitrations.  Bear in mind that the requirements to register as an arbitrator in RENACE are so steep that very few professionals will ever qualify; thus, RENACE will be a closed “club” of state approved arbitrators.

The Decree also changes Article 8, addressing judicial processes in aid of arbitration.  These changes now require that a judge imposing provisional measures, such as an attachment or injunction, obtain security for such remedy; such was not the case prior to this amendment.  The security must be financial, e.g. bond, letter of credit, or similar, filed with the judge before issuing the measure.  While such requirement is not unreasonable, there is no alternative to a financial security and limits are needed to assure that the security is not abused.  The government has created a strong shield against provisional measures as the contractor will have to have enough credit ability to obtain a facility for a provisional measure.  Also, the government may try to collect on the security even if the provisional measure did not create any quantifiable damage.  Moreover, these changes create internal ambiguities within the Decree.  Specifically, the paragraph added states that “the amount of the security is established by […] the arbitral tribunal to whom the measure is requested.”  This contradicts the preceding paragraph which provides that provisional measures are issued by judges; it does not mention arbitrators.  Articles 47 or 48 of the Arbitration Law would have been better places for the requirements of measures issued by arbitrators.  Regardless of who should issue the measure, which will create confusion and delay, the amount of the security could be as high as the claimed amount; it is customary for judges to link the security to the claim, rather than to a possible impact of the measure.

Following is Article 21.  This refers to certain individuals’ capacity to act as arbitrators.  The original text of the Arbitration Law excluded government officials.  The Decree further limits this to any individual who may have, directly or indirectly, an interest in the outcome of the dispute.  Specifically, the Decree excludes all those who “previously acted in the specific case sub judice, either as an attorney for any of the parties, as an expert; or anyone who has personal, labor, economic, or financial interests which may conflict with the office of arbitrator, whether as lawyer, expert, and/or professional in other subject.”

This is an attempt to eliminate the risk of bias or conflict of interest from arbitration panels.  The effort will prove futile.  As Professor Khaneman concluded in his studies of heuristics, biases are always present in decision making.4)DANIEL KHANEMAN, THINKING, FAST AND SLOW (2011). jQuery("#footnote_plugin_tooltip_8205_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Those biases are based on deeply engrained, frequently unrecognized, factors.  Stearns-Johnsen recognized that “your arbitrator … is biased.  Litigators seek an unbiased panel when what they should really do is to understand that no panel … will ever be without bias.  Everyone has biases … explicit and implicit … product of our culture, our surroundings, our innate preferences.”5)Joan Stearns Johnsen, Why Your Arbitrator is Biased, ABA Practice Points, https://www.americanbar.org/groups/litigation/committees/alternative-dispute-resolution/practice/2015/why-your-arbitrator-is-biased/. jQuery("#footnote_plugin_tooltip_8205_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  This, however, does not have to be an impediment for arbitral decision-making.  Doak Bishop calls this the intuition that arbitrators have developed “over years of experience.”6)Doak Bishop, Lunch Presentation:  The Quality of Arbitral Decision-Making and Justification, 6 World Arbitration & Mediation Review 801, 811 (2012). jQuery("#footnote_plugin_tooltip_8205_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8205_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Instead, conflicts of interest are and should always be addressed through disclosures.  The very conflicts the government wants to use to disqualify arbitrators under the Decree, should be disclosed during the arbitrator selection process.  It should be during the vetting that those conflicts are addressed; and may be waived by the parties.  It would have been better to implement mandatory disclosures, with a structure like the IBA Guidelines on Conflicts of Interest in International Arbitration.  Such guidelines provide for a tried-and-true system and reliable instruction for addressing conflict of interest, instead of a general and ambiguous disqualification rule.

Finally, the Second Complementary and Final Provision of the Decree is concerning.  Such provision stipulates that the drafting of an arbitration clause is a multi-department process.  The drafting responsibility rests on the contracting government unit and in the attorney general’s office.  This multi-layered process will interfere with contract negotiation and delay investment.

In conclusion, Peru’s government did not successfully amend the Arbitral Law.  The Decree’s changes are either (i) a failed attempt at protectionism; (ii) misplaced, as these should have been included in separate legislation, such as LCE; or (iii) wholly unnecessary.  The Decree’s only accomplishment is to create ambiguities and ultimately jeopardize the effectiveness’ of a system that has worked successfully for over 10 years.

References   [ + ]

1. ↑ Emergency Decree Modifying Legislative Decree Nº 1071, Legislative Decree Norming Arbitration, Emergency Decree No. 20-2020 (Jan. 24, 2020) (Peru). 2. ↑ Legislative Decree Regulating Arbitration, Legislative Decree Nº 1071, (June 28, 2008) (Peru). 3. ↑ Consolidated and Organized Text of the Government Contracting Law, Supreme Decree Nº 082-2019-EF (Mar. 13, 2019) (Peru). 4. ↑ DANIEL KHANEMAN, THINKING, FAST AND SLOW (2011). 5. ↑ Joan Stearns Johnsen, Why Your Arbitrator is Biased, ABA Practice Points, https://www.americanbar.org/groups/litigation/committees/alternative-dispute-resolution/practice/2015/why-your-arbitrator-is-biased/. 6. ↑ Doak Bishop, Lunch Presentation:  The Quality of Arbitral Decision-Making and Justification, 6 World Arbitration & Mediation Review 801, 811 (2012). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Interviews of Our Editors: “What Does Kluwer Arbitration Blog Mean to You?”

Sun, 2020-05-03 04:00

In January 2009, Professor Roger Alford published the first post on the Kluwer Arbitration Blog (the Blog), launching what is now considered an indispensable tool for arbitration practitioners and academics alike. Today, the Blog offers daily perspectives on the latest developments in international arbitration, reflecting our “unique” and “fascinating” international arbitration community.

Our 31 editors, who include the General Editor and Editor, four Associate Editors and 25 Assistant Editors, work behind the scenes with the authors of the posts that are published on the Blog, develop strategies for a diverse and timely coverage of the hot topics in international arbitration, work around the clock to ensure the live coverage of the main arbitration conferences, collaborate with the affiliates and permanent contributors of the Blog and, from time to time, expose arbitration as a quite entertaining and enjoyable field of practice.

This series of the Interviews of our Editors was kindly suggested by one of the long-standing permanent contributors of the Blog as a way of showing readers the “talented bunch there is behind the scenes”. We kick-off the series with four Editors: Esmé Shirlow (Associate Editor, Investment Arbitration), Fabian Bonke (Assistant Editor for Europe), Zahra Rose Khawaja (Assistant Editor for the MENA Region), and Arie C. Eernisse (Assistant Editor for East and Central Asia).

 

Esmé Shirlow (Associate Editor, Investment Arbitration): While my work with the Blog has evolved over the years, it has consistently provided me with an important means for keeping in touch with arbitration developments and practitioners from around the world. I joined the Blog back in 2015, as a regional Assistant Editor for Australia and New Zealand. At the time, I was living in England, so the role provided me with an excellent means of keeping in touch with arbitration-related developments in my home region. It also helped me to keep in touch with key practitioners, academics, and officials from that region (as well as Australians and New Zealanders abroad), many of whom were regular contributors of posts to the Blog. A few years ago, my regional responsibilities expanded to incorporate developments in Pacific Island States. With this new regional focus, I gained greater familiarity with the important arbitration work occurring in the Pacific, and established contacts with a range of contributors working on topics associated with that region. Most recently, I have moved to a new position as Associate Editor covering investment arbitration. This focus reflects my professional activities and – now that I have moved back to Australia – also provides many of the same benefits as my initial role with the Blog: the chance to stay up-to-date with arbitration developments outside of my physical geographic region, and to keep in touch with the many practitioners and scholars working on these issues in both Australia and overseas.

Working with the Blog as it has developed over the years has greatly enriched my own work and experiences. One of the things I value most is the chance to work closely with authors contributing posts to the Blog on a diverse range of topics. I enjoy the editing process, because it gives me an opportunity to work with each author to assist them to achieve their vision for their post, including the chance to work with authors who I might otherwise never have had the opportunity to engage with. I also enjoy working on our more recent initiatives to collate series of posts on selected topics. This provides a fantastic opportunity to engage closely with significant arbitration developments, and to work with new and established authors to draw out different perspectives on common themes.

Another key benefit I have derived from working with the Blog is the chance to collaborate with an exceptional editorial team. The team has expanded over the years, reflecting the growth in the Blog’s readership and the number of posts we now publish. I have worked closely with so many motivated and talented editors from across the world – many of whom I correspond with on a weekly and even daily basis. This has taught me a lot about the possibilities for productive online collaboration (something even more important now that I am back in far-away Australia!), and the true power of a group of people working collegiately and constructively together in pursuit of a common vision. So, what the Blog means to me has evolved over the last five years. What has remained constant is the opportunities it has provided, including the chance to work with a global network of editors and contributors to stay abreast of, and publish thought-provoking posts on, the fascinating and ever‑changing field of arbitration.

 

Fabian Bonke (Assistant Editor for Europe): When I was interviewed for the editorial position at the Blog, it was quite unclear to me what to expect. Although I had contributed to the Blog before, I found it difficult to imagine how it would be to step over the other side and take over the editor’s work myself. Since then 2.5 years have passed, and I can still say with full conviction that taking this “side job” has been absolutely the right decision.

The most valuable experience during my time with the Blog is definitely the close work with the fantastic editorial team. The team is very diverse with people from all different geographical, educational and professional backgrounds. What we share, of course, is a particular focus and interest in international arbitration matters. What I find astonishing is the level of motivation that everyone in the team has regarding their work at the Blog, despite it being an extra activity and considering how busy everyone engaged in this project is with his or her regular job. Exchanging views and finding solutions in such a great team and environment is definitely one of the most interesting and enriching parts of the position and the Blog.

But of course, editors not only work with other editors but, first of all, with the Blog’s many contributors. What I particularly enjoy about working with contributors is the rewarding experience of being able to help enrich posts through constructive dialogue. I am always impressed by the novel ideas that the contributors bring in and the passion they feel for their particular topic or standpoint that they want to convey. It is thus often relatively easy for us as editors to offer advice on how to further develop the authors’ particular approach or topic.

What I also enjoy about being an editor is that it allows me to follow a broad range of arbitration topics and to remain up-to-date on current developments. This particularly holds true as I have a strong focus on disputes arising from the energy & construction sector but as part of my editor’s work I review contributions covering a broad range of topics outside of these areas as well. Thus, I can follow commercial arbitration topics from other sectors, e.g. corporate, telecommunication or competition, and deepen my knowledge on various regional developments in Europe.

To conclude, I really enjoy my editor’s work, it gives me a fantastic opportunity to establish contact with many people who are deeply engaged and passionate about arbitration. The intense exchange with them about new ideas and the feedback from the contributors definitely pay-off for the workload that comes with this position. It is great to see how the Blog has evolved over the last years, including a broader coverage of topics and regions and more “live” coverage of arbitration events. I look forward to what is to come for the Blog and am very pleased to be a part of the great team behind it.

 

Zahra Rose Khawaja (Assistant Editor for the MENA Region): I joined the Blog editorial team in August 2018, just three months ahead of my relocation from London to the United Arab Emirates (UAE). For me, the timing coincided perfectly. At the time, I was embarking on a professional transition from my role as a private practice disputes lawyer in London to another international firm in Dubai, where I am practicing today.

During the first few months of my transition to the UAE, being a part of the Blog team meant that I was able to discover the Middle East and North Africa (MENA) arbitration world not only through my new practice location, but also through the eyes of our authors across the wider region. Through my role as one of the editors for the region, I was able to discover, absorb and participate in key arbitration trends happening on the ground across MENA from the day I landed in my new home.

For me, the Blog is a means of being able to showcase to the wider arbitration community the genuine, exciting and ground breaking developments taking place across the MENA region. This region is going through a formative stage in its development as a globally renowned, active and international-standard hub for arbitration. My role as one of the MENA editors presents an exciting opportunity to provide coverage to the Blog readers across the globe, and highlight the key contributions to international arbitration practice coming out of the MENA region.

Along with my fellow MENA editorial team members, I am committed to providing a voice to authors and arbitral institutions who are at the forefront of developments that are shaping how arbitration is practiced on the ground, on a day-to-day basis, across the region. As part of the Blog’s editorial team, I am privileged to have a platform to shape how events are covered and stories are told.

From my experience both in practice and having covered the region as part of the Blog’s editorial team over the past 18 months, I can vouch for the fact that the MENA region is a truly energizing place to be an arbitration user or practitioner. Arbitration is changing access to justice across the region, and I am proud of the fact that the Blog is able to shine a spotlight on the latest trends and developments emerging from the region, which otherwise might go unnoticed by the global community.

 

Arie C. Eernisse (Assistant Editor for East and Central Asia): Based in Seoul since 2014, I find it vital to follow Asian arbitration developments and build professional relationships with other Asia-based arbitration practitioners. When I saw the announcement last summer welcoming applications for the role of Assistant Editor for East and Central Asia, I immediately jumped at the opportunity, sensing that (1) it would enable me – or, rather, force me – to develop a deeper understanding of the main arbitration issues facing different Asian jurisdictions and (2) it would allow me to establish meaningful connections with arbitration practitioners in those jurisdictions. Now, less than a year later, I am happy to report that the job has already exceeded my expectations in both regards.

In terms of developing a deeper understanding of Asian jurisdictions, each editing assignment has provided me with a welcome opportunity to take a closer look at a particular jurisdiction and its arbitration experience. The Central and East Asian region for which our editorial team is responsible consists of 16 countries and territories, and so far I have had the pleasure of working on articles about jurisdictions I was not as familiar with, such as Armenia, Georgia and Uzbekistan. (I’m eager to add more to the list, so feel free to reach out to me!) In order to make any necessary substantive contributions and discharge my responsibilities effectively when working with a contributor, I first investigate the legal framework for arbitration in the contributor’s jurisdiction and then consider how to accentuate the novelty and importance of the author’s perspective on the legal issues he or she addresses. This often involves investigating the prevailing practices or legal standards in other jurisdictions from a comparative perspective. These steps are all taken to ensure that each article meets the Blog’s high standards for quality, originality and substantive depth, but at the same time I am fortunate to be a chief beneficiary of the learning that is a by-product of the editorial process.

In terms of establishing meaningful connections, I am grateful that my editorial role has allowed me to engage intellectually with exceptional practitioner-scholars in various Asian jurisdictions and with my astute and dedicated editorial colleagues. I am delighted to share in the process of helping a contributor create a novel perspective on a noteworthy issue. My hope is that the very act of sharing in this process with the contributor will provide the foundation for a meaningful professional relationship going forward, with opportunities for future collaboration (and, if I ever venture their way, perhaps an introduction to the local culture!).

The benefits of being involved as an editor of the Blog are manifold, but I also think the Blog can be just as meaningful for its readers. The Blog is supposed to be a vehicle for connecting people with a common interest in international arbitration and enhancing their professional lives through scholarly exchange. Let’s not be shy about maximizing its potential for those purposes by increasing the exchange of ideas stimulated by articles appearing in the Blog.

 

This interview is part of Kluwer Arbitration Blog’s “Interviews of Our Editors” series. 

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New York Convention Now in Force in the Republic of Seychelles

Sun, 2020-05-03 03:00

On 3 February 2020, the Republic of Seychelles became the 162nd Contracting State of the New York Convention (already followed by Palau as number 163, reported here). The New York Convention thus comes into force for the Seychelles today (Article XII(2) New York Convention). The Cabinet and the National Assembly had approved the accession on 28 November 2019 and on 10 December 2019, respectively. On 23 January 2020, the International Affairs Committee of the National Assembly of Seychelles had resolved to seek the President’s authority to present the accession instruments to the United Nations.

Today’s event brings to an end a journey that has taken the small island republic in the Western Indian Ocean more than forty years. Time to take stock and look to the future.

 

The Relevant Provisions of Seychelles Law

Perhaps Chief Justice of Seychelles Mathilda Twomey described the mixed common law & civil law legal system of the Seychelles best when she chose a patchwork rug as the cover picture of her book. For the recognition and enforcement of foreign arbitral awards, the coming into force of the 1977 Commercial Code of Seychelles Act inserted a new Article 227(2) into the 1920 Seychelles Code of Civil Procedure, which states that “[a]rbitral awards under the New York Convention, as provided under articles 146 and 148 of the Commercial Code of Seychelles, shall be enforceable in accordance with the provisions of Book 1, Title X of the said Code.”

Article 146 of the Commercial Code of Seychelles reads:

“On the basis of reciprocity, the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958, and the arbitral award within the meaning of the said Convention shall be binding. Such Convention shall apply to the recognition and enforcement of arbitral awards made in the territory of a State other than Seychelles and arising out of differences between persons, whether physical or legal. It shall also apply to arbitral awards not considered as domestic awards in Seychelles.”

Article 148 of the Commercial Code of Seychelles reads:

“Arbitral awards under the said Convention shall be recognised as binding and shall be enforced in accordance with the rules of procedure in force in Seychelles.  The conditions or fees or charges on the recognition or enforcement of arbitral awards to which the said Convention applies shall not be more onerous than those required for the recognition or enforcement of domestic arbitral awards.”

These three provisions marked the beginning of the forty-year journey as they laid the foundation for a controversy surrounding the New York Convention’s applicability, manifested in three Seychelles court decisions.

 

The Decision in Omisa Oil Management v Seychelles Petroleum Company Ltd

In the Omisa decision of 23 November 2001, the Supreme Court of Seychelles refused to recognize and enforce a Swiss arbitral award. In doing so, the court found that there was no reciprocity between the Seychelles and Switzerland for the purpose of Article 146 of the Commercial Code. In the words of Juddoo J:

“Reciprocity … would necessitate that both municipal legislations would be under a mutual legal obligation with regard to each other and bound to the same extent or degree. The … municipal law of Seychelles does not bind Switzerland to any degree or extent. The obligation of Switzerland under the Convention is only towards a State party to the said Convention and even then only to the extent that each state concerned has bound itself to apply the Convention.”

The court also rejected an argument that even in the absence of reciprocity, the recognition and enforcement of a foreign arbitral award should be possible in the Seychelles based on Articles 146(2) and 148 of the Commercial Code. The court took the view that these provisions could not be read separately from Article 146(1) of the Commercial Code and that “[t]he condition of ‘reciprocity’ is a pre-requisite which allows the award made in a foreign country to be made binding on the recipient state…”.

It is submitted here that the court was wrong in concluding that the obligation of Switzerland under the New York Convention is only towards any other Contracting State. While Switzerland had initially made a reciprocity declaration (on p. 477) in accordance with Article I(3) of the New York Convention, it withdrew (End Note 24) that declaration on 23 April 1993. At the time when the Seychelles court delivered the Omisa decision, the New York Convention, from a Swiss perspective, consequently applied to any arbitral awards made in the territory of a state other than Switzerland, pursuant to Article I(1) of the New York Convention. Additionally, the Seychelles court could have considered Article 194 of the Swiss Law on Private International Law, which declares the New York Convention applicable without any reciprocity reservation. Consequently, the correct conclusion would have been that Switzerland had bound itself to apply the New York Convention to arbitral awards made in the Seychelles.

Finally, it is worth mentioning that the decision in Omisa triggered several critical notes, potentially in the Seychelles itself (on p. 4) and definitely in New Zealand (on p. 953 et seq.), Austria, and, with a somewhat alternative argumentation, Russia.

 

The Decision in Vijay Construction (Proprietary) Ltd v Eastern European Engineering Ltd

Sixteen years later, the Seychelles Court of Appeal confirmed the findings in Omisa in the Vijay decision of 25 November 2017 when it refused to recognize and enforce an ICC arbitral award made in Paris.

In that decision, the court reasoned that when the United Kingdom acceded to the New York Convention on 24 September 1975, the Seychelles had been a British colony. According to an agreement between the governments of the United Kingdom and the Seychelles, the Seychelles, on 29 June 1976 (its day of independence), had succeeded to all obligations and responsibilities arising from the New York Convention. When the Commercial Code came into force on 13 January 1977, the New York Convention was in force in the Seychelles.

The court rejected an argument that Articles 146 to 150 of the Commercial Code were passed with a view that the Seychelles would in the near future ratify the New York Convention (at para. 36). It is submitted here that this conclusion is somewhat at odds with a statement made by Professor A.G. Chloros of King’s College London, the drafter of the Commercial Code, that “[i]t is also important that Seychelles should adhere to the New York Convention at the earliest opportunity.”1)A.G. Chloros, Codification in a Mixed Jurisdiction, Amsterdam/New York/Oxford 1977, p. 162. jQuery("#footnote_plugin_tooltip_6892_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6892_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The court then clarified that the New York Convention stopped applying to the Seychelles based on a 1979 note to the British Government announcing that several international treaties would no longer apply.

This was followed by an explanation (para. 99) that “reciprocity” in Article 146 of the Commercial Code “…can only have one meaning”, namely a reference to a reciprocity declaration made pursuant to Article I(3) of the New York Convention. On the significance of Article 146 of the Commercial Code where the New York Convention was not in force, the court held (para. 101) that “…in 1979, the NY Convention ceased to have its domestic application, though the text of the Article 146 and others remained part of our domestic law. This article needs to have life breathed in into in [sic!] order to waken it from its slumber.”

Such awakening, the court concluded, could only be achieved by the President and the National Assembly, while the court could only interpret the existing laws. The court finally recommended that “…the concerned authorities should move to ensure that necessary steps are taken to fill up the void for the benefit of the nation.” (para. 109)

 

The Decision in European Engineering Ltd v SJ (Seychelles) Ltd

To cut a long story short, the European Engineering decision of 29 July 2019 of the Supreme Court of Seychelles confirmed Vijay, although one may reasonably assume that Twomey CJ (para. 15) was not too pleased with that outcome:

“The Court of Appeal’s decision … is unequivocal. Much as I might have reservations regarding the views of the Court of Appeal with respect to the interpretation of sections 227 of the Seychelles Code of Civil Procedure and sections 146-150 of the Commercial Code …, this Court is nevertheless bound by the decision.”

It is subject to discussion whether, before reaching this conclusion, Twomey CJ could have relied on Article 5 of the Civil Code of Seychelles, which provides that “[j]udicial decisions shall not be absolutely binding upon a Court but shall enjoy a high persuasive authority from which a Court shall only depart for good reason.”

 

Commentary

One may wonder whether there really is only one possible interpretation of “reciprocity” in Article 146 of the Commercial Code. Could that requirement be fulfilled whenever arbitral awards from the Seychelles may be recognized and enforced in another jurisdiction, based on any instrument or law other than the New York Convention and regardless of whether there is an obligation to do so? This may still be relevant for awards from any jurisdiction where the New York Convention is not yet in force, as the Seychelles made a reciprocity declaration pursuant to Article I(3) of the New York Convention. For the other 162 Contracting States, it is time to join the Seychelles in wishing good riddance to these discussions. The New York Convention is now in force, and Article 146 of the Commercial Code has awakened from its slumber.

References   [ + ]

1. ↑ A.G. Chloros, Codification in a Mixed Jurisdiction, Amsterdam/New York/Oxford 1977, p. 162. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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ICSID and UNCITRAL Publish the Anticipated Draft of the Code of Conduct for Adjudicators in Investor-State Dispute Settlement

Sat, 2020-05-02 04:00

On May 1, 2020, the Secretariats of ICSID and UNCITRAL released the first draft of the Code of Conduct for Adjudicators in Investor-State Dispute Settlement (ISDS). I had the privilege of working extensively on the drafting of the Code as a Scholar in Residence at ICSID, and I think this is an important development in the ISDS reform process.1)The views expressed herein are solely those of the author and do not represent the views of the ICSID or UNCITRAL Secretariats. jQuery("#footnote_plugin_tooltip_4764_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4764_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As many readers of this blog would know, UNCITRAL Working Group III (WGIII) has been working on an ISDS reform process for the past several years. After preparing some background work and collecting comments by Member States, the Secretariat of UNCITRAL was requested, together with the Secretariat of ICSID, to prepare a draft Code of Conduct for Adjudicators at WGIII’s thirty-eighth session in October 2019. The result of this common effort is now available on the websites of the two Secretariats.

The draft Code addresses many key ethical and contested issues identified by WGIII members, and more generally by the ISDS’s critics and provides policy makers with numerous choices on how to best regulate adjudicators’ behavior through a Code of Conduct. In this post, I briefly review the draft Code and highlight some of its most noteworthy provisions.

The proposed Code has 12 articles, and includes helpful commentaries for each article, explaining the rationale for each provision as well as the tensions and concerns that each provision addresses. Article 1 defines essential terms and Article 2 addresses the applicability of the Code. Article 3 provides an overview of adjudicators’ obligations, which are then expanded in Articles 4 to 9. Article 10 and 11 regulate pre-appointment interviews and fees. Finally, Article 12 addresses the fundamental issue of how to enforce the Code.

Many issues are notable.

First, the Code applies to all (and only) adjudicators. The term “adjudicators” purposefully encompasses a broad category of existing and possible future participants in ISDS adjudicatory processes, including arbitrators, ad hoc committee members, candidates to become adjudicators, appeal judges, and judges in permanent bodies. In this way, the Code can easily be applied regardless of the type of reform that might be adopted as a result of the WG III discussions. At the same time, the Code is drafted only with adjudicators in mind. The regulation of counsel, experts and other participants in ISDS proceedings is not part of this Code, as it requires different and more targeted provisions. The Code also requires adjudicators to ensure that their assistants are aware of and comply with the Code. Given some criticism concerning the role of arbitrator assistants, this is a welcome specification.

In Article 3, the draft Code includes a series of general duties, similar to those found in existing codes of conduct, such as those of CETA and CPTPP. Above all, adjudicators must be at all times independent and impartial (as specifically defined in Article 4) and avoid direct or indirect conflicts of interests. Other duties include the duties of integrity, fairness, competence, diligence, civility and efficiency.

The Code requires, at Article 5, extensive adjudicator disclosure as a key policy tool to ensure the avoidance of conflicts of interest and ensure that parties know as much as possible prior to an adjudicator’s appointment. In terms of disclosure, adjudicators must be pro-active and must make a reasonable effort to become aware of interests, relationships or matters that can create a conflict that could be perceived as affecting their independence and impartiality. Adjudicators also have a continuous duty of disclosure and should opt in favor of disclosure in case of doubt. Yet disclosures that would be trivial are not required.

The provision is drafted so as to give several choices to policy-makers on how extensive disclosure obligations should be in the final version of the Code. For example, disclosure could be limited (or not) to activities that occurred during a specified number of prior years. Similarly, disclosure requirements could be extended to include relationships with subsidiaries, parent companies and agencies related to the parties, as well as any third party that has a direct or indirect financial interest in the outcome of the case. Importantly, Article 5 could also require the disclosure of the adjudicator’s participation in ISDS and other international proceedings or related domestic arbitrations. This is very important because international cases may have overlapping components in terms of both issues and participants. A full disclosure, which includes work as counsel, adjudicator, expert or other function in other international matters, would allow a full assessment of any possible conflict of interest of any adjudicator by the parties so that they can be fully satisfied with their choice, or, alternatively, raise their concerns and decide to challenge the adjudicator. The provision would also give direction and important guidance to adjudicators on what should be disclosed.

In requiring extensive disclosure, Article 5 also addresses two important issues that have generated much debate in ISDS: repeat appointments and issue conflict. Repeat appointments raise the concern that an adjudicator who is repeatedly appointed by the same counsel, client, party or ‘side’ may develop a dependence or affinity with the nominating party, or become biased in its favor. As bias may be unconscious, the concern is difficult to address. Additionally, repeat appointments include not only adjudicators and parties, but can also include experts, mediators, conciliators and any other role that may create financial dependence or may involve the same set of facts. The prevalence of repeat appointments is also seen by some commentators as a barrier to entrance for new or more diverse adjudicators.

Repeat appointments raise complex policy matters. Rather than banning repeat appointments altogether, the Code requires extensive disclosure of past and present appointments. Enhanced disclosure would allow parties to assess fully the relationship between adjudicators and each party and actor involved in the proceeding. Because draft Article 5 is flexible, other significant relationships may be added if desired by policy makers. Additionally, draft Article 8 regulates repeat appointments from the perspective of ensuring the availability of adjudicators.

Issue conflict is another central issue which is equally complex to regulate. Concerns over issue conflict may arise if an adjudicator has taken a position on a legal matter relevant to the case, for example in a publication or a speech. At the same time, adjudicators are also expected to be experts. Writing and making public presentations or otherwise participating in events usually demonstrate expertise. The concern over issue conflict is that the position taken may demonstrate bias or prejudgment of certain issues so that an adjudicator might not address the issues at stake in the proceedings with an open mind. The duty of disclosure proposed in Article 5 will give parties specific knowledge and will therefore enhance parties’ opportunities to learn about the adjudicator’s work comprehensively. If a party believes after disclosure that an adjudicator may have an issue conflict, it can decide to raise a challenge.

A further significant issue addressed by the draft code is double hatting, which has attracted significant criticism. Double hatting refers to the practice of an adjudicator to simultaneously act as (and thus wear the hats of) counsel, expert, adjudicator or in other roles in other ISDS or other international proceedings. Double hatting is not a technical term, and in fact Article 6 carries the title “Limit on Multiple Roles.” As a policy question, regulating double hatting is complex and is also in tension with other priorities. For example, a strict ban on double hatting would adversely affect diversity of adjudicators, as newly nominated adjudicators would often be unable to forego other sources of income after their first nomination and until they become established. A time-phased or number-of-total cases approach might provide more flexibility. Article 6 is formulated to give policy makers a range of options from a complete ban on practice and possibly other roles (such as expert or agent) to requiring disclosure of any work on other cases. The provision could also include a time element for disclosure. The draft also provides a range of options to define what kinds of matters may lead to a double hatting (for example those involving the same parties, facts, or treaty). Given the interest in this issue, the provision will surely be debated among delegates at UNCITRAL. Finding the right balance between ethical priorities, concerns over unconscious bias and appearance of bias, interest in enhancing diversity, and freedom of the parties to select an adjudicator will require in-depth discussion.

A final fundamental issue included in the draft Code is enforcement. Enforcement is key to the success of the Code. Article 12 starts by highlighting the importance of voluntary compliance. It then underlines that the applicable rules related to the removal or challenge of arbitrators, which are separate and different for each institution, continue to apply. The provision is then opened to further suggestions. Some Member States have suggested monetary sanctions, disciplinary measures and reputational sanctions. These sanctions, however, would be difficult to implement in the present system. This is another complex issue, which will depend also on how the Code is implemented. The creation of a permanent court, other new institutions, or the establishment of an advisory center might also affect available options.

At this stage, the Code is drafted in a flexible way and provides several policy options for discussion between Member States. It includes and addresses all the major issues identified as concerns by WGIII and other stakeholders. It will be for Member States now to agree on standards that they commonly find acceptable and would provide the necessary ethical standards to strengthen and support ISDS and meaningfully address its criticism.

 

References   [ + ]

1. ↑ The views expressed herein are solely those of the author and do not represent the views of the ICSID or UNCITRAL Secretariats. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Czech Supreme Court in Line with Prevailing International Practice: Arbitration Clause Contained in an Exchange of Simple Emails Found Valid

Sat, 2020-05-02 03:00

The 1958 New York Convention (“NY Convention” or “Convention”) was adopted in the era when probably the fastest form of communication in which an arbitration agreement could have been concluded was via telegrams. The Convention requires written form for an arbitration agreement (clause) to be valid, but the electronic communication of our times had not been foreseen in its text. The Czech Supreme Court (“Court”) approached this issue in a recent decision, where the arbitration clause was contained in an exchange of emails without a qualified electronic signature (for the definition see, e.g., eIDAS Regulation). The issue before the Court was not an easy one, as in its case-law regarding “domestic” matters the Court interpreted the writing requirement under the Czech Civil Code as requiring a qualified electronic signature (see, e.g., this decision). The Court had to decide, whether this interpretation applies also to the Convention.

 

The Writing Requirement in the Convention

The Convention (Art. II/2) defines writing requirement as follows:

The term “agreement in writing” shall include an arbitral clause in a contract or an arbitration agreement, signed by the parties or contained in an exchange of letters or telegrams.

The UNCITRAL Working Group on Arbitration express the purpose of the writing requirement in the following words (at p. 6):

by requiring either a signature or an exchange of documents, the form requirement ensures that the parties’ assent to arbitration is expressly recorded.

Thus, the writing requirement under the Convention should primarily serve an evidentiary and information purpose. This is confirmed by the UNCITRAL Recommendation of 2006:

[A]rticle II, paragraph 2, of the Convention […] be applied recognizing that the circumstances described therein are not exhaustive.

There was just one reported decision from the pre-Recommendation era that denied email communication as a written form,1)Halogaland Court of Appeal, 16 August 1999, cited here, at 7 n. 20. jQuery("#footnote_plugin_tooltip_3789_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3789_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); while other courts seemed to be less formalistic (see this document, at 14, notes 52-53). This is true even more for post-Recommendation practice, where, it seems, the only reported “outlier” is a Brazilian case of 2007 denying recognition to an unsigned arbitration agreement that had been exchanged via telexes.

 

Facts of the Case

As noted above, the decision handed down by the Czech Supreme Court on May 16, 2019, is the first reported Czech decision on this issue. The dispute arose out of the contract for work (“smlouva o dílo” in Czech, modelled after the Austrian “Werkvertrag”) between a Czech company (the claimant) and a Spanish company (the defendant). The exact subject matter of the contract is unclear, but it was undisputed that there had been an exchange of the draft contract between the parties via emails. The contract contained an arbitration clause, which read as follows: “[A]ll disputes, which may arise and cannot be settled amicably, will be submitted to a court of arbitration and settled according to European principles laid down for this field.” The arbitration clause was obviously very poorly drafted and it would require an ardent effort to figure out which court of arbitration and under which “European principles” should the arbitration be conducted. The claimant tried to avoid this clause by bringing a claim before the Czech courts.

Both the first instance court and the appellate court dismissed the action in favour of arbitration, holding that the clause is valid under the Czech law on arbitration (Act No. 216/1994 Coll., on arbitration proceedings and on enforcement of arbitration awards) and the Geneva Convention of 1961 (the “Geneva Convention”). The appellate court noted that the fact that electronic communication is not explicitly mentioned in the Geneva Convention does not mean that it is excluded, but only that it was not a usual means of communication at the time of drafting the convention.

 

The Supreme Court’s Opinion

The claimant filed an extraordinary appeal (“dovolání” in Czech) to the Supreme Court, relying on the above-mentioned domestic case-law, requiring for the written form of emails that the qualified electronic signature is attached.

However, the Court distinguished the issue in question from the case-law relied upon by the claimant, stating that this is a cross-border question, so far unsettled in its case-law. The Court then went on to determine, which law is applicable to this question. It refused the application of the Czech-Spanish treaty of 1987, as it contains only a conflict-of-law rule for the validity of arbitral agreements at the enforcement stage. Then it shifted its attention to the relationship between the Geneva Convention and the NY Convention. The Court concluded that the NY Convention takes priority, as it is lex posterior between the Czech Republic and Spain (Spain ratified first the Geneva Convention in 1975 and in 1977 the NY Convention) and is also more “efficient” for the resolution of the case, given its higher number of signatory states and more case-law interpreting its text. Nevertheless, given the similarity of both texts, the Court would have probably reached the same conclusion on the issue of form, no matter which of the conventions it had interpreted.

The Court had then arrived at the conclusion that the list of forms contained in the Convention was not exhaustive. It endorsed the 2006 Recommendation and it also referred to two decisions of foreign courts that were of the same view. The first one was the Indian Supreme Court case Great Offshore Ltd. v. Iranian Offshore Engineering. It should be noted that this decision is concerned with the exchange of faxes rather than emails, but, admittedly, the rationale is the same. The second case was “Piraeus Single_Member First-Instance Court No. 2150/2017” case, which the Court denoted as a “lower US court decision.” However, the name of the court does not resemble any US court and Piraeus is a port city in Greece – as it turns out, the citation does indeed relate to a Greek court (admiralty division) decision on the issue. Mistaking a Greek decision for a US one is an unfortunate oversight at a supreme court level, but it has in principle no bearing on the rationale of the Court’s reasoning. As described above, there are quite a few foreign courts’ decisions endorsing the logic of the 2006 Recommendation and the Court just followed the suit. The Court found also support in its decision of December 17, 2013, stating that the written form under Article 13 of the CISG includes emails, even though this communication was not mentioned in that article (that decision was reached by the same senate of the Court).

However, the Court did not stop there, as it still faced the essential question of whether it suffices for the form to be preserved in a way so that it is only a simple (plain) email. Fortunately, the Court has proven to be less formalistic when it comes to the international arena. It emphasized that the Convention permits an exchange of telegrams, which also do not contain any (qualified) signatures. Secondly, it referred to the court decisions from other contracting states which held that no signatures are necessary when it comes to the “exchange” of documents under Art. II para 2 of the Convention.2)The Court cited the Compagnie decision and the NYC Guide, at 56-57. jQuery("#footnote_plugin_tooltip_3789_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3789_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court also cited, in support, the E-Commerce Directive of 2000 (its Art. 17), which requires that the (EU Member States) national “legislation does not hamper the use of out-of-court schemes, available under national law, for dispute settlement, including appropriate electronic means.”  The Court, at the very end of the decision, recalled also its judgment on another international treaty, Convention on the Contract for the International Carriage of Goods by Road. In that decision, the Court stated that a “written claim” under Art. 32 para 2 of the CMR includes also email communication without a qualified electronic signature – the Court arrived at that conclusion after a thorough comparative analysis of several sources and foreign courts’ decisions (including the Supreme Courts of Austria, Germany and Netherlands).

 

Conclusion

In essence, the Court joined many of its foreign counterparts, presenting itself as being interpretation friendly to the reality of the modern international trade. From the Czech perspective, it is a step in the right direction that the Court sought an autonomous interpretation of the Convention and that it looked towards the case law of other countries. Thus, the Court deviated from its formalistic domestic approach and extended further support for international commercial arbitration in the Czech Republic. The Court’s Senate No. 23 fortunately often looks at comparative arguments and sources and is quite arbitration-friendly. To illustrate, it authored in the past an opinion under which it is possible to submit a wholly domestic commercial case to an international arbitration.

References   [ + ]

1. ↑ Halogaland Court of Appeal, 16 August 1999, cited here, at 7 n. 20. 2. ↑ The Court cited the Compagnie decision and the NYC Guide, at 56-57. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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