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Generating Needed Information about Arbitrators, One Arbitration at a Time

Sat, 2018-09-15 00:28

Catherine A. Rogers and José María de la Jara

One of the most critical moments in any international arbitration is the appointment of arbitrators. As Rusty Park has explained, “just as ‘location, location, location’ comprise the three key elements in sustainable real estate value, so it has been observed that ‘arbitrator, arbitrator, arbitrator’ endure as the most critical factor in the integrity of any arbitration.”

 

Despite the vital importance of selecting the right arbitrator, there is a shocking paucity of information on the most relevant issues about arbitrators’ decisional history and their case management skills and predilections.

 

The disclosure of such information is generally treated as confidential and proprietary. Even now in 2018, it is generally assumed that the only way parties can obtain information about arbitrator decision-making is through confidential, off-the-record, person-to-person exchanges by their lawyers. Put more simply, arbitrator selection relies on 19th Century technology.

 

This method produces several negative consequences. First, the lack of information about arbitrators distorts the market for international arbitrators and makes it more difficult for diverse arbitrators to establish their reputations and, consequently, increase their likelihood of appointments. Particularly as we see some of the greatest case growth in regions like Latin America, Africa and the Middle East/North Africa, there is a clarion call for more arbitrators from these regions.

 

Second, lack of information about arbitrators undermines the predictability and efficacy of arbitrator appointments for the parties. No other aspect of corporate decision-making relies on such a collection of informal impressions and industry gossip instead of concrete data, research, and analysis. Why make an exception in such a critical context as the appointment of the person who will decide the dispute?

 

These shortcomings in arbitrator selection are often treated as inevitable and inescapable because it is thought that the arbitration system is private and arbitral awards are generally confidential.  In other words, the assumption in international arbitration has been that you could have either information about arbitrators or confidentiality, but not both.

 

Arbitrator Intelligence (AI) has hacked this seeming impasse. Through our AI Questionnaire (AIQ), we are using more modern technology to collect information about arbitrators while maintaining confidentiality of arbitral proceedings and outcomes.  The AIQ collects key information about arbitrations, but does not retrieve information that would reveal the identity of the parties. We also ensure the anonymity of the contributor of the AIQ, but we verify the authenticity and experience of contributors through a separate registration process.  Data analytics based on this information will soon be available in our forthcoming Arbitrator Intelligence Reports, to be distributed by Kluwer.

 

While it remains to be seen what this information hack will mean to international arbitration, there are many reasons to believe it will produce important changes.

 

First, information alone can be an important, market-based tool against corruption.  In other contexts, certainly information and transparency has been demonstrated as an effective means of both deterring corruption and increasing the possibility that corrupt practices will be exposed. For example, Brunetti and Weder1) Brunetti, Aymo & Weder, Beatrice. “A free press is bad news for corruption,” Journal of Public Economics, Elsevier, vol. 87(7-8), 2003, pages 1801-1824. jQuery("#footnote_plugin_tooltip_8525_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8525_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); investigated the relationship between freedom of press and corruption in 68 countries. Based on their research, they predict that if Nigeria had the same level of freedom of information as Norway, its level of corruption would drop precipitously.

 

Second, information can break the diversity paradox.  Most arbitration practitioners say they are supportive of increasing diversity among arbitrators, but do not themselves appoint diverse arbitrators.  One important reason is that they do not have sufficient information about newer and more diverse arbitrators.  As a Bryan Cave Leighton Paisner survey demonstrated, 92% of respondents wanted more information about newer and more diverse arbitrators.

 

Third, information will make arbitrator selection for parties and arbitral institutions more efficacious and the market for arbitrators more functional. More information would necessarily allow parties to make more informed choices as among established arbitrators, and open up opportunities for young arbitrators, more women and people from regions outside North America and Europe.

 

In these respects, Peru represents a particularly important example. To create a functional alternative to the often-corrupt Peruvian courts, a (relatively) new Peruvian law requires that all disputes arising under State contracts be submitted to arbitration.2) Article 45.1, Legislative Decree N° 1341 amending the Law N° 30225 of state contracts: “Disputes arising between the parties regarding the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of the contract are resolved, through conciliation or institutional arbitration, according to the agreement of the parties. The regulation defines the exceptional cases for recourse to Ad Hoc arbitration. Disputes over the nullity of the contract can only be submitted to arbitration”. jQuery("#footnote_plugin_tooltip_8525_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8525_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  Another recent Peruvian law expressly permits the appointment of foreign arbitrators in domestic arbitration.3) Article 1, Legislative Decree N° 1231 amending article 20 of the Legislative Decree N° 1071 regulating arbitration: “The natural person who is in full exercise of their civil rights may be an arbitrator, provided that they have no incompatibility to act as an arbitrator and have not received a final criminal conviction for an intentional crime. Unless otherwise agreed by the parties, the nationality of a person will not be an obstacle to acting as arbitrator”. jQuery("#footnote_plugin_tooltip_8525_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8525_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Together, these reforms are important innovations based on the promise that a well-functioning arbitration market could provide a much-needed form of reliable dispute resolution.  These reforms have also, not surprisingly, led to a virtual explosion in the number of arbitrations.4) Contraloría General de la República. “El Arbitraje en las Contrataciones Públicas durante el periodo 2003 – 2013”, page 123: “In relation to the average annual growth rate of the arbitration awards, we have that for the period 2003-2008 this was 3%; while for the period 2009-2013 it was 25%”. jQuery("#footnote_plugin_tooltip_8525_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8525_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

In light of its regional importance, AI, in collaboration with the Bullard Falla Ezcurra+ law firm and the Lima Chamber of Commerce Arbitration Center, organized a “Flash Campaign” in July to collect AIQs on Peruvian arbitrators. The campaign involved recruiting mostly young practitioners interested in doing something concrete to promote diversity and reduce corruption.

 

In the brief two weeks of the Campaign, Arbitrator Intelligence received over 30 AIQs, 28 of which were seated in Lima, Peru. Because most AIQs involved 3-person tribunals, responses provided information about 60 instances of arbitrator conduct and decision-making in different sectors (construction, energy, insurance, among others). These AIQ responses included arbitrations administered by different institutions (Lima´s Chamber of Commerce, AMCHAM, Ad-hoc, CIAC, among others).

 

The AIQs asks a range of questions, from dates and dollar amounts, to arbitrators’ interpretive methodology, their responses to requests for documents or interim relief, and the quality of questions during hearings. The AIQs do NOT ask for the names of the parties or the law firms, or the identity of the person completing the AIQ. In this way, through the Flash Campaign, we collected a lot of information about arbitrators, but maintained the confidentiality of the arbitrations.

 

The Flash Campaign also demonstrated the critical importance of engaging young arbitration practitioners. Over 23 young Peruvian practitioners participated in the Flash Campaign, inspired both by the potential to do their part to increase diversity and reduce corruption. They were also incentivized by some tantalizing prizes. Sandro Espinoza won 1st place and a plane ticket to the United States for Penn State International Arbitration Day, which will focus on Latin America.  Meanwhile, Mayra Bryce and Carla de los Santos tied for 2nd Place, and were awarded signed copies of Gary Born’s treatise, International Arbitration: Law and Practice and Catherine Rogers’ Ethics in International Arbitration.

 

AI is taking this information gathered from the Peru Flash Campaign to develop a AI Reports, which will analyze the information collected about an arbitrator.  As with the AIQ, in the process of developing the prototype AI Report, we will be seeking input from selected experts as well as the general public.

 

In the meantime, you can also get directly involved in efforts to hack the information gap. Arbitrator Intelligence, together with the Bullard law firm, will soon be seeking to replicate the success of the Peru Flash Campaign in various regions.

 

Starting with Latin America, AI is in the process of recruiting AI Ambassadors for on Brazil, Colombia, Argentina, Chile, Mexico, Costa Rica, Guatemala, Panama, Ecuador and Peru. These AI Ambassadors will reaching out to lawyers, law firms, arbitration centers, young international arbitration groups, and parties to participate in the new AIQ Campaign in Latin America. In comparison to the Peru Flash Campaign, in the new LatAm AIQ Campaign, the number of participants will be bigger, the time longer, the prizes better, and the number of AIQs collected much higher.

 

Stay tuned, because we will soon have a call for Ambassadors in the MENA region.

 

AIQ responses collected during these AIQ Campaigns will help shine a bright light on arbitrations in these regions, on the institutions that administer them, and the arbitrators who decide them, all while maintaining the confidentiality of those same arbitrations.

 

If you are in Latin America, you can apply now to be an AI Ambassador, and a call for Ambassadors in MENA will be coming soon.

 

If you are not in these regions, you can still help us bridge the information gap in international arbitration. Just take a few minutes to fill out an AIQ at the end of your next arbitration!

 

The authors would like to thank Rodrigo Vega and Thalia Villegas, interns at Bullard Falla Ezcurra +, for their assistance. Their enthusiasm and feedback were critical for the preparation of this article.

References   [ + ]

1. ↑ Brunetti, Aymo & Weder, Beatrice. “A free press is bad news for corruption,” Journal of Public Economics, Elsevier, vol. 87(7-8), 2003, pages 1801-1824. 2. ↑ Article 45.1, Legislative Decree N° 1341 amending the Law N° 30225 of state contracts: “Disputes arising between the parties regarding the execution, interpretation, resolution, non-existence, ineffectiveness or invalidity of the contract are resolved, through conciliation or institutional arbitration, according to the agreement of the parties. The regulation defines the exceptional cases for recourse to Ad Hoc arbitration. Disputes over the nullity of the contract can only be submitted to arbitration”. 3. ↑ Article 1, Legislative Decree N° 1231 amending article 20 of the Legislative Decree N° 1071 regulating arbitration: “The natural person who is in full exercise of their civil rights may be an arbitrator, provided that they have no incompatibility to act as an arbitrator and have not received a final criminal conviction for an intentional crime. Unless otherwise agreed by the parties, the nationality of a person will not be an obstacle to acting as arbitrator”. 4. ↑ Contraloría General de la República. “El Arbitraje en las Contrataciones Públicas durante el periodo 2003 – 2013”, page 123: “In relation to the average annual growth rate of the arbitration awards, we have that for the period 2003-2008 this was 3%; while for the period 2009-2013 it was 25%”. 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: International Arbitration and the Rule of Law
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Slovak Republic v. Achmea: A Disproportionate Judgment?

Fri, 2018-09-14 02:38

John P Gaffney

Introduction

The judgment of the Court of Justice of the European Union (CJEU) in Case C-284/16, Slovak Republic v. Achmea B.V. (Achmea) has attracted much comment in many fora, including the Kluwer Arbitration Blog (See e.g., articles authored by Florian Stefan, Clement Fouchard and Marc Krestin, and Vivek Kapoor). This is not surprising. The CJEU held that the arbitration clause contained in Article 8 of the 1991 Netherlands-Slovakia BIT (BIT) is incompatible with EU law, a holding that has significant consequences for intra-EU investment arbitration.

Criticism of the Achmea judgment may have been dismissed by some as the griping of a self-interested international arbitral community (See e.g., Peter Nikitin, “The CJEU’s Achmea Judgment: Getting Through the Five Stages of Grief”, (2018)), but in this article I question whether it constitutes a violation of EU law, on the basis that it violates the principle of proportionality set forth in the Treaty on European Union, and whether its validity may thus be called into question by EU Member State courts.

The Principle of Proportionality and the Conferral of Competence and under EU Law

Article 1 of Protocol (No 2) to the Treaty on the Functioning of the European Union (TFEU)) on the application of the principles of subsidiarity and proportionality provides:

“Each institution shall ensure constant respect for the principles of subsidiarity and proportionality, as laid down in Article 5 of the Treaty on European Union.”

Articles 5(1) and 5(2) of the Treaty on European Union (TEU) provide:

“1. The limits of Union competences are governed by the principle of conferral. The use of Union competences is governed by the principles of subsidiarity and proportionality.

2. Under the principle of conferral, the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.”

While Article 5(4) of the TEU provides:

“4. Under the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.”

The EU’s Summaries of EU legislation explains that “…the principle of proportionality regulates the exercise of powers by the [EU]. It seeks to set actions taken by EU institutions within specified bounds…the action of the EU must be limited to what is necessary to achieve the objectives of the Treaties. In other words, the content and form of the action must be in keeping with the aim pursued.”

Thus, the principle of proportionality ought to regulate the exercise of judicial powers by the CJEU.

Applying the Principle of Proportionality to the Achmea Judgment

 If the CJEU is required to “ensure constant respect” for the principle of proportionality in the performance of its judicial functions, the question arises whether its judgment in Achmea could be considered to have violated that principle.

The CJEU held that a arbitral tribunal established under Article 8 of the BIT is not part of the judicial system of the EU and since it is provided for by an agreement concluded by Member States (and not by the EU) it is such as to call into question not only the principle of mutual trust between the Member States but also the preservation of the particular nature of the law established by the Treaties ensured by the preliminary ruling mechanism provided for in Article 267 TFEU. In the CJEU’s view, it is not therefore compatible with the principle of sincere cooperation, thus having an adverse effect on the autonomy of EU law (CJEU judgment).

The CJEU judgment sharply contrasts with the carefully reasoned Opinion of Advocate General Wathelet, in which he proposed that the BIT’s arbitration clause is compatible with the preliminary ruling mechanism (and neither constituted discrimination on grounds of nationality nor undermine either the allocation of powers fixed by the Treaties or the autonomy of the EU legal system) (Opinion of Advocate General Wathelet).

In the context of this article, the AG’s observations on the alleged systemic risk of intra-EU BITs to the uniformity and effectiveness of EU law are notable:

“44. I would add that the systemic risk which, according to the Commission, intra-EU BITs represent to the uniformity and effectiveness of EU law is greatly exaggerated. UNCTAD’s statistics show that out of 62 intra-EU arbitral proceedings which, over a period of several decades, have been closed, the investors have been successful in only 10 cases, representing 16.1% of those 62 cases, a rate significantly below the 26.9% of ‘victories’ for investors at the global level.

45. The arbitral tribunals have to a large extent allowed the Commission to intervene in arbitrations and to my knowledge in none of those 10 cases was the arbitral tribunal required to review the validity of acts of the Union or the compatibility of acts of the Member States with EU law. In their written observations, several Member States and the Commission have mentioned only a single example, namely the arbitration Ioan Micula and Others v Romania (ICSID Case No ARB/05/20), which resulted in an arbitral award that was allegedly incompatible with EU law. Even though that example is in my view not relevant in the present case, the fact that there is only a single example reinforces my opinion that the fear expressed by certain Member States and the Commission of a systemic risk created by intra-EU BITs is greatly exaggerated.” (Footnotes omitted)

Advocate General Wathelet arguably would appear to have been mindful that the CJEU’s judgement ought not to “exceed what is necessary to achieve the objectives of the Treaties”. In other words, the CJEU’s judgment ought to be that necessary for achieving the desired objectives and proportionate to any adverse consequences. He demonstrated, among other things, how arbitral tribunals established under Article 8 of the BIT could be considered as part of the judicial system of the EU – an outcome that was arguably the least invasive of the freedom of action of both EU Member States and intra-EU investors, as well as providing for appropriate judicial dialogue – but one that the CJEU ignored.

Could the Achmea judgment thus be considered disproportionate in circumstances where:

  • the alleged systemic risk posed by intra-EU investment arbitration to the uniformity and effectiveness of EU law appears to be very low,
  • Advocate General Wathelet demonstrated an effective and reasonable alternative to the CJEU’s holding that arbitration under such BITs has an adverse effect on the autonomy of EU law, and
  • it has dramatically damaging consequences for intra-EU investment arbitration?

Potential Consequences for Intra-EU Arbitration if the Achmea Judgment is Disproportionate

The CJEU judgment cannot be set aside, since it is not subject to judicial review by a higher court. However, it might be ignored.

It is possible that a Member State court – faced with a challenge to an intra-EU investment arbitration award – could decline to give effect to the Achmea judgment where it held that the CJEU exceeded the competence conferred on it by the EU Treaties in the exercise of its judicial functions in that case.

As noted, earlier, Article 5(2) of the TEU provides:

“…the Union shall act only within the limits of the competences conferred upon it by the Member States in the Treaties to attain the objectives set out therein. Competences not conferred upon the Union in the Treaties remain with the Member States.”

In other words, it is possible that a Member State court could hold that the Achmea judgment was ultra vires the competence(s) conferred on it by the Member States. The chances of that occurring, however, would appear to be low.  As one commentator has observed:

“Declaring an act to be ultra vires always implies a defect in the act. It would also imply a reproach to the European level and especially to the ECJ. Moreover, the reproach of an ultra vires-act would also concern the validity and/or application of European law in all other Member States, as an act cannot be ultra vires only in the bipolar relationship between one Member State and the EU. This is hence a frontal attack on (European) judge-made European law.”1) F. Mayer, “The European Constitution and the Courts Adjudicating European constitutional law in a multilevel system”, Jean Monnet Working Paper 9/03. jQuery("#footnote_plugin_tooltip_3165_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3165_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Nonetheless, in a decision of 5 July 1967, the German Constitutional Tribunal (BVerfG):

“emphasised a central role for the “act of assent“ to the founding treaties…Later commentators likened this central role to that of a bridge between EC law and national law, in that – in the German view – the act of assent functions as the decisive ‘order to give legal effect’ (Rechtsanwendungsbefehl) to European law. […] The BVerfG hinted, though, at constitutional limitations on the transfer of public authority rights (Übertragung von Hoheitsrechten) to the EC in the context of the German constitution’s guarantee of fundamental rights.” (Ibid.)

And in a judgment concerning an alleged discriminatory pension scheme in the Czech Republic, the Czech Constitutional Court (CCC) held that in its judgment in Case C-399/09 Landtová the CJEU acted ultra vires and subsequently gave Czech national law precedence over EU law, albeit in a heavily criticized judgment.2)See, e.g., Jan Komarek: Playing With Matches: The Czech Constitutional Court’s Ultra Vires Revolution. jQuery("#footnote_plugin_tooltip_3165_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3165_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is notable that in its judgment, the CCC referred to the BVerfG’s earlier judgment to support its ruling.

Conclusion

Hence, there remains the possibility – admittedly remote – of a Member State court finding that the CJEU acted ultra vires in violating the principle of proportionality in its Achmea judgment and thus giving precedence to national law in the enforcement of intra-EU arbitral awards over the CJEU’s judgment. Given the stakes, and with so many extant intra-EU investment arbitrations in play, one cannot rule out the possibility of this scenario presenting itself sooner rather than later.

 

 

References   [ + ]

1. ↑ F. Mayer, “The European Constitution and the Courts Adjudicating European constitutional law in a multilevel system”, Jean Monnet Working Paper 9/03. 2. ↑ See, e.g., Jan Komarek: Playing With Matches: The Czech Constitutional Court’s Ultra Vires Revolution. 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: International Arbitration and the Rule of Law
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Cooperation and Facilitation Investment Agreements in Brazil: The Path for Host State Development

Thu, 2018-09-13 00:09

Natali Cinelli Moreira

Brazil has recently executed two new Cooperation and Facilitation Investment Agreements (“CFIAs”) with the Federal Democratic Republic of Ethiopia on April 11, 2018; and with the Republic of Suriname on May 2, 2018. These are, respectively, the 7th and the 8th CFIAs that Brazil has executed since 2015 (the former ones were executed with Chile, Colombia, Malawi, Mexico, Angola and Mozambique). Following this same protection model, Brazil has also entered into two treaties with investment provisions: the Economic and Trade Expansion Agreement with Peru and the Intra-Mercosur Investment Facilitation Protocol. So far, the CFIA executed with Angola is the only one in force.
 
CFIAs are the model investment agreement proposed by Brazil to regulate the relationship between foreign investors and host countries. Focusing on cooperation and facilitation of investment flows, the CFIAs do not resemble traditional bilateral investment treaties (“BITs”). CFIAs regulate direct investment flows from the investor of a party into the territory of the other party; however, differently from BITs, they seek a greater balance between investment protection and host state’s development agenda. To accomplish it, CFIAs bring new wording to old traditional clauses inserted into BITs (such as National Treatment, Most-favored-nation Treatment, and Expropriation), introduce new safeguard clauses to regulate investments and investors’ behavior (as corporate social responsibility clauses and provisions to protect the environment, labor affairs and public health), as well as rely on a dispute resolution mechanism far from investor-state arbitration model widely included in BITs. The CFIAs executed with Ethiopia and Suriname have followed this same path.
 
When addressing National Treatment and Most-favored-nation Treatment, the referred CFIAs expressly state that “treatment accorded in like circumstances” shall be interpreted according to the totality of circumstances, including – and, therefore, excepting – whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public welfare objectives (articles 5.2 and 6.3 of the Ethiopian CFIA; articles 5.4 and 6.4 of the Surinamese CFIA). As to Expropriation, both CFIAs also explicitly acknowledge that only direct expropriation – where an investment is nationalized or otherwise directly expropriated through formal transfer of title or ownership rights – is under protection, excluding the well-known creeping expropriation so dreaded by host countries when adopting public policies to protect the environment, public health and other areas of public concern (article 7.5 of both Ethiopian CFIA and Surinamese CFIA).
 
Besides this new face to old clauses, CFIAs also contain dispositions which historically have been alien to investment treaties. Both Ethiopian and Surinamese CFIAs include articles on corporate social responsibility (article 14 and 15, respectively), stating that investors and their investment shall strive to achieve the highest possible level of contribution to the sustainable development of the host state and the local community, by means of a high degree of socially responsible practices on a voluntary basis. This approach is in line with modern investment agreements, which have included more socially responsible clauses – as can be noted, for example, from the investment chapter included in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership; although this trend is recent, it has gained considerable relevance in the last years. The CFIAs also include articles which overtly acknowledge that host county is free to adopt, maintain and enforce any measure deemed appropriate to ensure the foreign investment is carried out according to national labor, environmental and health legislation (article 16 of the Ethiopian CFIA; article 17 of the Surinamese CFIA).
 
The aforementioned clauses evidence that the CFIAs executed with Ethiopia and Suriname follow the previous ones negotiated by Brazil within the last three years, consolidating a new model to regulate foreign investment. Investor protection is still a major concern in this Brazilian model; creating and maintaining favorable conditions for investments is an express objective included in the preamble, and several clauses intended to protecting investments are also part of the agreements (such as Compensation for Losses, Transparency, Transfers, among others). However, it comes accompanied by provisions intended to protect and, indeed, to promote the host country’s development agenda.
 
This is even more evident when the dispute resolution mechanism is taken into account. The agreements executed with Ethiopia and Suriname address foreign investment-related claims as previous CFIAs: there is an initial dispute prevention phase, and, if no agreement is reached, the aggrieved party may initiate a state-to-state arbitration. Both choices may be seen as positive steps towards host state’s development.
 
A high emphasis is placed in the amicable settlement of disputes. Two institutional arrangements created in the context of CFIAs – the Joint Committee and the Focal Point (or, Ombudsman) – are intended to address any issues or differences concerning investments in order to avoid litigation (articles 17 and 18 of the Ethiopian CFIA; articles 18 and 19 of the Surinamese CFIA). In case the dispute is not avoided, a settlement phase is initiated. The parties shall engage into negotiation proceedings and, by the end of a 60-day deadline, the Joint Committee shall issue a report with its recommendation; the parties, then, may decide whether to adopt it or not (article 23 of the Ethiopian CFIA; article 24 of the Surinamese CFIA). If no agreement is reached and the parties decide not to follow the Joint Committee’s report, then arbitration state-to-state may be initiated (article 24 of the Ethiopian CFIA; article 25 of the Surinamese CFIA).
 
The settlement approach, followed by this type of arbitration, may be seen as favorable to host state protection. No litigation is initiated unless several steps are taken in order to avoid the dispute itself. Both parties are invited to discuss their arguments and reach a settlement, while a preliminary report on the case, with the conclusions of the Joint Committee on their claims, is issued and made available. The fact both parties may discuss their arguments and even be provided with a first analysis of the case may avoid a lengthy and costly litigation, leading to an amicable settlement.
 
Even if this is not the case, and parties decide to proceed with litigation, it will not constitute an investor-state arbitration; this system has long been criticized as biased towards the investor’s protection, with little regard to host states’ interests. State-to-state arbitration, as proposed in the CFIAs, may be an alternative to reach a greater balance between investor and host state. The aggrieved investor shall persuade its home state that a damage was caused to the investment, so it may initiate an arbitration against the host state. It would be expected that only robust claims would proceed under this situation, avoiding adventurous litigators.
 
Brazil seems to be promoting the model agreement it has launched a few years ago, which is focused in finding a greater balance between investment protection and the development agenda of the host state. From new wording to old clauses, to the inclusion of provisions which were alien to traditional investment agreements, including new dispute resolution mechanisms, the fact is that CFIAs have come to provide a new meaning to the relationship between foreign direct investment and host state development. Nonetheless, we still have to wait whether these agreements will result in concrete facts.

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New Signs of Good Prospects for International Arbitration in Argentina?

Tue, 2018-09-11 16:30

Noiana Marigo, María Julia Milesi and Ezequiel Vetulli

On 4 July 2018, the Argentine National Congress passed a new arbitration act modernizing the framework for the conduct of international commercial arbitrations in Argentina (the Arbitration Act or the Act), based on the UNCITRAL Model Law and its 2006 amendments (the Model Law). The development comes in response to calls from the arbitral community in Argentina, which have been ongoing for some time, to rehaul the country’s arbitration legislation, particularly following problematic amendments introduced in 2015. The approval of the new Act mirroring the Model Law represents a solid step towards enhancing the status of international arbitration in Argentina.

The Model Law is considered to embody the most widely accepted and highly regarded rules of arbitration practice and principles; its adoption by 80 countries attests to its reputation. Even countries not officially listed as “Model Law” jurisdictions follow its main principles, thereby further ensuring the uniformity and predictability of arbitral practice worldwide.

In November 2016, the Argentine Ministry of Justice presented to Congress a draft bill on international arbitration (the Bill) prepared by a working group composed of lawyers, arbitrators, academics, and public authorities (including the Treasury Attorney General’s Office). The Bill had its genesis in a project to enhance the judicial system so as to achieve quicker, more independent, and more secure resolution of disputes. The Bill acknowledged the importance of arbitration as a flexible, fast and reliable dispute resolution method. In September 2017, the Senate approved the Bill, and on 4 July 2018 it was finally passed into law by the House of Representatives. Once promulgated by the executive power, the Act will enter into full force and effect. The legislative decision to foster international arbitration forms part of a broader policy to reform Argentina’s political and economic framework, aimed at improving legal certainty as to attract foreign investors, in line with the recent policies of President Macri. The promotion of international arbitration as a means of dispute resolution can also be seen in other recent legislation, including the Public-Private Partnership Act, which expressly refers to international arbitration as a means of resolving disputes involving state parties.

The previous arbitration framework in Argentina

Historically, arbitration in Argentina has been regulated by the procedural codes of each jurisdiction, i.e. each province or the federal territory. While each code dealt with the procedural aspects of arbitration in a different way, there were no substantial differences between them. The Argentine courts applied the provisions of these procedural codes to both domestic and international arbitrations, as the rules provided no distinction between the two.

In 2015 Argentina introduced a new Civil and Commercial Code, which included a specific chapter on domestic arbitration. This Code, which applied in all provinces and federal territories, recognized the Model Law as one of its main sources (along with the French arbitration law and the Quebec Civil Code). Its enactment meant great improvements in the arbitration framework in Argentina, as it incorporated the principles of separability and kompetenz-kompetenz (articles 1653 and 1654), which were not previously formally codified, and that of favor arbitrandum for the interpretation of arbitration agreements (article 1656).

The provisions on arbitration contained in the procedural codes of each province, however, also remained in force. The Civil and Commercial Code did not clarify the scope of its application either, so both instruments governed domestic and international arbitration in Argentina.

The new Arbitration Act has sought to clarify this issue, specifying that it, exclusively, will govern international commercial arbitration (along with the relevant international treaties). The Act thus consolidates all relevant domestic rules for international commercial arbitration into a single instrument. The Act further provides that an arbitration will be “international” if: (i) at the time of the conclusion of the arbitration agreement the parties had their places of business in different states, or (ii) their places of business are different from either the seat of the arbitration, any place where substantial obligations are to be performed, or the place of the closest connection to the dispute. The procedural codes and the Civil and Commercial Code will continue to apply, but only to domestic arbitrations. As a consequence, the realms of international and domestic arbitration will now have different regulatory instruments.

The new rules for international commercial arbitration pursuant to the Act

Unlike other countries that have adopted the Model Law whilst making significant alterations to its text, Argentina has decided to adopt the model text almost in its entirety with few modifications. As such, Argentina’s new Arbitration Act offers cutting edge solutions with regard to some issues, but takes a more conservative approach regarding other novel practices.

In the definition of “arbitration agreement,” for instance, the Arbitration Act adopts option I of article 7 of the Model Law, which contains the requirement that an arbitration agreement shall be in writing. Congress indicated in the Act that the circumstances mentioned in article II(2) of the New York Convention under which an arbitration agreement is deemed to be “in writing” (arbitration clause, or arbitration agreement signed by the parties or contained in an exchange of letters or telegrams), shall be interpreted as non-exhaustive, as recommended in 2006 by UNCITRAL. However, the Act takes a conservative approach by declining to adopt the possibility that an arbitration agreement may be considered to be in writing “whether or not the arbitration agreement or contract has been concluded orally, by conduct, or by other means” (article 7.3 of the Model Law).

The Arbitration Act also excludes the qualification of arbitration as “international” when the parties expressly agree that the subject matter of the arbitration agreement relates to more than one country (article 1.3.c Model Law).

Another deviation from the text of the Model Law relates to the law applicable to the merits where the parties are silent on the issue. Instead of taking the Model Law approach, which provides that the arbitral tribunal shall apply the law determined by the conflict-of-laws rules, the Arbitration Act creates a shortcut by stating that the tribunal shall simply apply the “rules of law” that it considers appropriate.

In turn, a few elements have been added to the original text of the Model Law, as follows:

  1. In the definition of the term “commercial,” instead of including footnote 2 of the Model Law (which recommends a wide interpretation of such term), article 6 of the Arbitration Act states that the term “commercial” refers to any contractual or non-contractual relationship predominantly governed by Argentinian private law. Article 6 also explains that the interpretation should be wide and, in case of doubt as to the nature of a relationship, there should be a presumption in favour of its commercial nature. While this provision may have been intended to foster arbitration, it probably went too far, as it may now encompass situations that are governed by private law but can hardly be considered “commercial” in nature.
  2. In the constitution of the arbitral tribunal, the Act states that an arbitration agreement whereby either party is granted an advantage over the other in the appointment of arbitrators shall be null and void. This provision is unusual, and represents a departure from the Model Law, which provides that any advantage in the appointment of arbitrators is governed by a general rule on equal treatment of the parties (see, for example, article 18 of the Model Law).
  3. While the Model Law provides general rules for challenging arbitrators, article 28 of the Act includes additional (non-exhaustive) grounds for challenge. It refers, for example, to the participation of an arbitrator (or members of his/her law firm or equivalent organization) in another arbitration (or judicial procedure) as: (i) counsel of one of the parties, regardless of the subject matter of the dispute, or (ii) counsel of a third party in a case with the same subject matter, and provides that either situation will constitute grounds for challenge, irrespective of any evidence to the contrary about the arbitrator’s independence and impartiality. This provision might therefore pave the way for frivolous challenges and generate delays.

The rules governing domestic arbitration pursuant to the existing instruments

Although Argentina’s new Arbitration Act establishes a new framework for international commercial arbitration, it leaves the existing procedural codes and the Civil and Commercial Code to govern domestic arbitration. The procedural codes are quite outdated, and, as noted above, the chapter on arbitration contained in the Civil and Commercial Code contains several technical flaws. For instance, one of the most problematic provisions relates to the challenge of awards (the last paragraph of article 1656). This provision (i) establishes an annulment recourse without indicating the applicable grounds, and also (ii) refers to a non-waivable “judicial challenge” against any final award “contrary to the legal system”, virtually creating a system of appeal for arbitral awards.

In an effort to address these issues, Congress is in the process of analyzing a draft bill which proposes several amendments to the Civil and Commercial Code, including on the vital issues of arbitrability and challenges to arbitral awards.

On arbitrability, the bill proposes to eliminate the Code’s limitation on the arbitrability of disputes involving public policy (article 1649). It also proposes to replace the Code’s blacklist of non-arbitrable matters with a general rule confirming the arbitrability of all disputes involving freely transferable rights (article 1651).

With regard to challenges of arbitral awards, the bill proposes to remove the last paragraph of article 1656 providing for the judicial challenge of awards “contrary to the legal system” mentioned above and an existing ground to challenge interim measures on the basis that they violate constitutional rights or are “unreasonable” (article 1655).

Such changes will hopefully provide the much-needed certainty required to achieve consistency of the arbitration framework at the domestic level as well.

Conclusions

In sum, Argentina’s decision to pass the new Arbitration Act is a positive step towards the promotion of the country as an arbitration-friendly jurisdiction. The Act now establishes a clear distinction between the rules applicable to domestic versus international arbitration, and a modern body of rules for the latter. There remain some aspects that could be improved in the legal framework applicable to domestic arbitration, but the reforms proposed in the current bill being considered by Congress appear promising in this regard.

The ultimate success of the Arbitration Act will be measured by its application in the domestic courts. It remains to be seen whether the Argentine courts will respect the new dividing line between the instruments governing international and domestic arbitration and apply the provisions of the Act to the exclusion of the old procedural codes. While many courts have been contributing to the creation of a solid body of pro-arbitration case law even prior to the introduction of the new Act, a limited few still show some reservations towards its use.

By passing its new Act, Argentina follows in the legislative footsteps of several of its Latin American neighbours. In the last decades, almost all countries in the region have modernized their arbitration legislation. Like Argentina, most of them have followed the Model Law, with some also incorporating the 2006 amendments. Most of them, like Argentina, have also consolidated their international arbitration laws into  a single standalone act, with the exception of Mexico, where arbitration is still governed by the commercial code. Uruguay, for instance, passed its new and long awaited arbitration legislation on 3 July 2018 (almost simultaneously with Argentina), replacing its old procedural code-based rules with a new framework based on the 1985 Model Law with some 2006 amendments. In view of these developments, the future of arbitration in Argentina and in Latin America seems bright.

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Madrid High Court of Justice and the Setting Aside of Arbitral Awards

Tue, 2018-09-11 01:00

Alessandro Spinillo

Part I

In a judgment dated 5 April 2018 (Case nº 6/2017), the Madrid High Court of Justice (“TSJM”), the competent court to hear applications to set aside an award when the seat of the arbitration is Madrid, set aside an arbitration award on public policy grounds after finding that the tribunal “[…] unjustifiably omitted to assess evidence that was relevant for the resolution of the case”.

In recent years, Spain has experienced an impressive increase of arbitration cases. The TSJM has handled an unusual number of applications to set aside arbitration awards based on a wide array of grounds and has granted a significant part of these applications. Many in the Spanish and international arbitration community have raised concerns that the TSJM is too easily prone to review the merits of awards. Statistics show a rather high rate of successful applications for setting aside (26.6 %) (here). The matter, however, seems too nuanced and complex to sum up, and definitive conclusions cannot be hastily made on the sole basis of statistics.

This post is divided into two parts. The first part will discuss the facts of the above case, the arbitration proceedings and the TSJM’s judgment dated 5 April 2018. Thereafter, the second part will illustrate some thoughts and views about the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

The facts of the case and the arbitration

The case involved a turnkey contract for a wind farm project between owner, Engasa Eólica (“Engasa”), and contractor, Vestas Eólica (“Vestas”). The core issue in dispute was whether or not the parties agreed upon a valid and enforceable limitation of liability provision with respect to the civil construction works required for the project.

Some years after the wind farm had become operational, Engasa claimed that Vestas was responsible for certain defective construction works under the turnkey contract. Engasa took the matter to arbitration and sought that Vestas be ordered to repair the defective construction works (specific performance) or, alternatively, to pay damages. Vestas denied the claim by invoking the limitation of liability provision. Vestas maintained that the parties concluded a valid limitation of liability provision by way of an exchange of emails between them during the negotiations leading to the signature of the turnkey contract. Engasa disagreed and argued that it never consented to any such limitation of liability.

The tribunal concurred with Vestas. In taking the decision, the tribunal relied on the contents of that set of emails as well as corroborating witness testimony. It was satisfied that the parties only signed the turnkey contract to meet a requirement of the financing banks. The tribunal assumed that the banks were not prepared to finance the project unless Vestas (given its good track record in the energy renewable sector) accepted to act as contractor under a standard turnkey contract −also referred to as an Engineering, Procurement and Construction (EPC) contract.

Regardless of the turnkey contract the parties had signed, the tribunal found that their mutual intention was, in fact, that Engasa would select and pay another engineering company, Isolux, for the whole of the project’s civil construction works whilst Vestas would supply, start up, and maintain the turbines and related equipment. In other words, from a common law contract terminology perspective, it could be said that the tribunal found that the consideration stated in the turnkey contract did not reflect the true intention of the parties and therefore did not bind them.

The tribunal was satisfied that Engasa, in that set of emails, agreed to waive any claim against Vestas that would be outside the said scope of supplies, start up and maintenance undertakings. It would have made little commercial sense for Vestas to accept to remain liable for Isolux’s potential non-performance or negligence under the circumstances. The tribunal also considered that Engasa decided to pay Isolux directly for the advance of the construction works.

The tribunal concluded that Vestas and Engasa had agreed upon a valid and enforceable limitation of liability provision that excluded Vestas’ liability for the defective construction works carried out by Isolux.

 

Dissenting arbitrator

The tribunal was composed of three arbitrators, and one of them issued a dissenting opinion holding that Vestas and Engasa entered into nothing but a true standard turnkey contract, and therefore Vestas, as contractor, was globally liable for all the construction works and supplies related to the project. According to the dissenting arbitrator, Vestas could have claimed recovery from subcontractors for the faulty performance of the latter, including, of course, from Isolux.

The dissenting arbitrator relied on an additional set of emails submitted to the tribunal that the majority did not consider at all. It appears, however, that the dissenting arbitrator did not give any weight to the circumstance that Engasa selected and paid Isolux directly for the whole of the project’s civil construction works, a circumstance which would be incompatible with the predicate that Vestas and Engasa had entered into a standard turnkey contract.

 

Engasa approached the TSJM to set aside the award

Engasa moved to the TSMJ seeking that the award be set aside on public policy grounds under Article 41 (1) (f) of the Spanish Arbitration Law (SAL). The grounds for setting aside in the SAL are exhaustive, reflecting the UNCITRAL Model Law standards. Engasa put forward, inter alia, the argument that the majority voting “[…] irrationally assessed the evidence and the applicable law […]”. It contended that the flawed assessment of the evidence by the tribunal led to an “irrational outcome in the award”.

The TSJM used the public policy argument as a door to open a review of the merits of the award and finally set it aside. The TSJM effectively undertook a de novo review of the issues in dispute and held that the arbitral tribunal “unjustifiably omitted to assess evidence that was relevant for the resolution of the case”.

The TSJM underscored that the dissenting arbitrator relied upon another set of emails and documents submitted to the tribunal that the majority vote did not consider at all in the award and held “[…] those means of evidence […] relied upon by the dissident opinion required a proper analysis, even if it were to explain why they did not undermine the arguments put forward by the two arbitrators of the majority. The absolute silence about those means of evidence, without any explanation or justification, causes an appearance of arbitrariness in the arbitral tribunal […]”. The TSJM cited one of its own precedents in support of its conclusions: “[…] under certain circumstances, the assessment of the evidence −as put forward in the reasonings− may infringe due process and therefore infringe public policy” [ROJ:STSJ M 11066/2017-ECLI:ES:TSJM:2017:11066].

 

Assessment

The TSJM’s reasoning and conclusions are unfortunate and depart from mainstream arbitration rules and practice.

Article 25 SAL (based on Article 19 Model Law) provides that evidential questions of admissibility, relevance and materiality are clearly within the sole sphere of the arbitral tribunal. The assessment of evidence is a matter for the tribunal, not for the court.

The arbitral tribunal’s duty is to decide the issues put before it, and to provide reasons in the award. This duty does not require the tribunal to refer to all the evidence submitted. The TSJM cannot determine −as it did in this case− what evidence is relevant for the case, unduly interfering with the tribunal’s decision on the merits.

It appears that the members of the arbitral tribunal simply disagreed on the merits of the dispute and the set of documents they relied upon to support their respective findings. The dissenting opinion, as one may observe from the TSJM’s ruling, does not at all suggest any appearance of arbitrariness or procedural unfairness or unequal treatment to the parties throughout the proceedings, let alone any impropriety during the tribunal’s deliberations leading to the final award. The dissenting opinion, therefore, cannot form the basis for challenging the award.

One cannot appreciate any infringement to public policy as provided for in Article 41 (1) (f) SAL as to justify the TSJM’s decision for vacating the award. The TSJM’s decision is final and subject to no appeal or recourse in accordance with Article 42 (2) SAL.

By accepting arbitration, the parties undertake to carry out the award without delay and waive the right to an appeal on the merits, meaning the award was only subject to a very narrow scope of judicial review. If anything, the TSJM’s ruling is likely to encourage attempts to mount appeals on the merits disguised under Article 41 (1) (f) challenges.

Having discussed the TSJM’s reasonings in setting aside the award made in the Engasa vs. Vestas arbitration, Part II, as noted earlier, will raise some thoughts and views on the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

Part II

In Part I, the TSJM’s reasoning in setting aside the award made in the Engasa vs. Vestas arbitration was discussed in detail.Now the discussions will focus on the particular stage of development of arbitration in Spain and the TSJM’s trend to review the merits of awards.

 

An unprecedented growth of arbitration in Spain  

The SAL, modelled on the UNICTRAL Model Law, was passed in 2003 and amended in 2011. The new law triggered an unprecedented growth in the number of arbitrations with a seat in Spain (here). Madrid and Barcelona (and likely in that order) are by far the most frequently chosen venues for arbitration in Spain. There has been a significant volume of new entrants at all levels of an emerging (and profitable) niche of the legal market (here). The new entrants naturally have different levels of arbitration expertise. In addition, only in 2011 was the TSJM vested with the authority to hear applications to set aside awards after a major reassignment of judicial functions related to arbitration brought about by said amendment to the SAL. Previously that authority resided in the first instance civil courts of Madrid. According to the preamble of the 2011 amendment, the legislator conferred jurisdiction on the TSJM (and the respective High Court in each Autonomous Community of Spain), to hear applications to set aside, for the sake of “uniformity”.

As discussed, the TSJM granted a rather high number of applications to set aside awards, but actually many of them resulted from lethally-flawed arbitration proceedings with manifest breaches of due process (here here here), lack of transparency (actual or perceived) and conflict of interests of local arbitral institutions (Case nº 120/2013 and here here), as well as dubious arbitrability of the subject matter of the dispute (here).

In other cases, the TSJM vacated pro-bank awards, resulting from disputes related to the sale of complex financial products to consumers, for infringements of Spanish and EU economic public policy (Cases nº 20/2014 and 59/2014). Although these decisions raised controversy, the TSJM ultimately followed the principle laid down by the ECJ in the well-known Ecco Swiss case. Arbitration cannot be used to circumvent mandatory rules of public policy.

The TSJM, however, sometimes confuses its role by handling applications to set aside arbitration awards as if they were appeals on the merits. In those cases, in effect, the TSJM appears to function as an appeal court reviewing a first-instance court judgment. The TSJM is a collegiate court composed of three judges, one of whom issued a dissident vote with a strong warning in this respect (Case nº 59/2014):

“[…] it is necessary to define the powers of this Chamber when entertaining an action for annulment of an arbitral award so as not to confuse them with those of a Court of Appeal”.

For example, as discussed in Part I, the TSJM vacated the arbitral award made in Engesa vs. Vestas after reviewing de novo the issues discussed in the arbitration and concluding that the tribunal’s assessment of evidence involved an “appearance of arbitrariness in the arbitral tribunal”. After a thorough analysis of the TSJM’s judgment, one can only observe that the tribunal rendered a perfectly reasoned award based on documentary evidence (primarily a set of emails exchanged between the parties) which appeared to be corroborated by witness testimony. The TSJM had been unfair to hold that the tribunal acted with arbitrariness.

In another recent case, the TSJM was called upon to set aside an arbitration award made by an ICC tribunal on grounds of an alleged breach of due process (here). In this case, the tribunal refused to grant a party’s request for disclosure of documents that were in the possession of the other party. The tribunal had skillfully narrowed the issues in dispute and decided that the requested documents were not material to the resolution of the case. The tribunal’s decision disallowing disclosure was reasonable and predictable under ICC Rules and practice. The TSJM, however, gave no deference to it and reviewed de novo the issues discussed in the arbitration to finally conclude that the requested documents would not have changed the outcome of the arbitration. Although the award was not set aside, the standard of review used by the TSJM was again intrusive. There had been no violation of due process, let alone a manifest or egregious one.

In some advanced jurisdictions, for example, Hong Kong, the threshold to be met to set aside an award for want of due process is very high, requiring that “[…] the conduct of the Tribunal must be sufficiently serious to offend our most basic notions of morality and justice” (here).

One cannot definitively say that the TSJM has adopted an anti-arbitration stance although its tendency to use public policy arguments as a door to review the merits of awards may cause disruption to the development of Madrid as an emerging arbitration center.

A considerable number of Spanish multinational corporations −in sectors such as infrastructure, construction, telecommunications, finance, oil and energy− have become world leading players and gained leverage to include ICC (and others) arbitration clauses, providing for arbitration with seat in Madrid, into their international business transactions. There has been a proliferation of arbitration clauses of this sort. Parties from Latin America, Eastern Europe and North America are known to come to Spain to arbitrate their disputes with Spanish counterparts.

Madrid has a unique opportunity to start to build its own tradition of arbitration. To this end, however, it is crucial that the TSJM’s standard for reviewing awards be brought in line with international best practice. Arbitration users are understandably risk-averse and may not take too long to choose other safer seats for their arbitrations, within or outside of Spain.

 

 

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Interim Measures by Chilean Courts in Aid of Foreign Arbitration

Sun, 2018-09-09 16:13

Orlando Palominos and Catharina Müller

Throughout the years, Chilean courts and legislation have fostered a pro-arbitration and a pro-enforcement environment, favoring arbitration and recognizing the benefits that are generally attached to it. In such regard, the Civil Procedure Code, the Code on the Organization of Tribunals, the New York Convention on the Recognition and Enforcement of Arbitral Awards and Law No. 19,971 on International Commercial Arbitration (also known as “LACI”), encompass a clear commitment towards arbitration, particularly in connection with the finality of arbitral awards and the enforcement of foreign awards.

However, in light of recent judgments, this pro-arbitration bias seems to suffer when it comes to the request of interim measures, before national courts, in aid of foreign arbitrations. Indeed, some Chilean courts have refused to grant them in aid of an international arbitration seated in a country other than Chile and involving parties not domiciled in Chile. Is such approach consistent with Chilean law? It does not seem so.

I. Interim Measures by Chilean Courts: A Confusing Signal

Following the UNCITRAL Model Law on international arbitration, LACI meant a major improvement and modernization of Chilean legislation in this regard. As per interim measures, Article 9 LACI provides that “It shall not be deemed incompatible with the arbitration agreement for a party to request, before arbitration proceedings or during their process, from a court an interim measure nor for a court to grant such a measure.”

The provision does not distinguish on the seat of the arbitration nor the nationality or domicile of the parties thus, apparently, providing for full assistance from national courts on the issuance of interim measures, be it before or after the commencement of the arbitration. Is that so?

In GCZ Ingenieros S.A.C y Otra v. Latin America Power Perú S.A.C y Otras, a civil court of Santiago casts doubts on such a straight interpretation and rejected a request for interim relief in aid of a foreign arbitration. To do so, the court argued that Chilean law did not allow such a resolution because the arbitration proceeding was seated in another country and that the respondent parties were not domiciled in Chile. To support its reasoning, the court referred to Articles 1 and 107 et seq. of the Chilean Code on Organization of Tribunals and Articles 279 et seq. of the Chilean Civil Procedure Code that, purportedly, would provide for a territorial scope of Chilean law on arbitration.

However, such arguments and provisions are not convincing and pose a contradiction with the wording of Article 9 LACI, its legislative history and its purpose.

First, since the wording of Article 9 does not distinguish between arbitrations based in Chile or abroad, the interpreter or the court cannot make such a distinction in order to restrict the scope of the rule. Moreover, Article 1.2 LACI recognizes that Article 9 LACI is applicable if the seat of the arbitration is located outside the Chilean territory.1)BLACKABY, Nigel/PARTASIDES QC, Constantine/REDFERN, Alan/HUNTER, Martin (2015): Redfern and Hunter on International Arbitration, Student Version (Oxford, Oxford University Press, Sixth Edition), p. 429, para. 7.24. jQuery("#footnote_plugin_tooltip_7640_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7640_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, article 9 LACI is a clear exception to the principle of territoriality.

Furthermore, LACI was enacted to fill a legal vacuum and provide a special and autonomous set of rules, procedurally and substantially, for the international commercial arbitration.2) Message of the President of the Republic of Chile in History of the Law No. 19,971, Library of the National Congress, 2004, p. 7. jQuery("#footnote_plugin_tooltip_7640_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7640_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, it is improper to resort to general rules (such as the Civil Procedure Code and the Code on Organization of Tribunals) to reject interim measures in aid of foreign arbitral proceedings. Such rules remain applicable to local arbitration proceedings due to the dualistic nature of the Chilean arbitration system: on the one hand, domestic arbitration governed by general rules and, on the other hand, international commercial arbitration governed by LACI.

This approach is consistent with the adoption of the UNCITRAL Model Law and its aim at creating legal certainty, avoid the risk of the local law and to follow the general international consensus in this field. In this regard, the commentary and explanatory note by UNCITRAL on this Model Law confirms that interim measures by local courts do not depend on the place of arbitration.

Moreover, the judgement may present an additional risk if read along with certain decisions of Chilean courts in connection with interim measures granted abroad. In particular, the criterion of Chilean higher courts, as shown in Western Technology Servis Internacional Inc. v. Caucho Industriales S.A., is to reject the exequatur of interim measures granted abroad regarding assets located in Chile. Such approach, and the uniform decisions of Chilean courts in connection with the exclusive application of Chilean law over assets located in Chile, may leave claimants without proper legal protection and, on the other hand, may convey a message to defendants that Chile offers a sort of “safe haven” regarding the request and enforcement of interim measures. This would be an even bigger issue before the constitution of the arbitral tribunal or in the case of measures affecting a third party.

Another civil court also rejected an interim relief request in Hyundai Engineering & Construction v. Construtora OAS S.A. but on the basis of a very limited reasoning: “the seat in which the request was filed”. Fortunately, the judgment was overruled by the Court of Appeals of Santiago but it did not provide reasons to reach such decision.

II. Foreign Decisions May Shed Some Lights on the Subject

The issue is not new and it has already been addressed by foreign courts that, in general, have favored interim measures in aid of foreign arbitration proceedings under certain circumstances.

In such regard, although the United States’ Federal Arbitration Act does not contain a specific provision on the subject matter, the mere fact that the arbitration is seated abroad was not considered a determinative argument for rejecting an interim measure in its aid by a New York court. Indeed, in Sojitz Corp. v. Prithvi Info. Solutions Ltd., and based on Section 7502(c) of the Civil Practice Law and Rules (as amended on 2005), the court affirmed a decision that granted an interim measure on the basis that the arbitration award would otherwise be rendered ineffectual and that the account seized was a debt owed by a New York domiciliary.

Quite similar to the United States is the situation in the United Kingdom. In such regard, Section 44 (5) of the United Kingdom’s Arbitration Act authorizes interim relief by national courts if the arbitral tribunal is not able to grant them effectively. Pursuant to Section 2 (3), in the case of a foreign arbitration, the national court is allowed to reject interim measures provided that approving them is “inappropriate” considering the foreign seat. Accordingly, local courts have ruled that there must be some kind of connection to the territory of the UK, thus rejecting cases in which there was only a tenuous link to the UK (Econet Wireless Services Ltd v. Vee Networks Ltd [2006] EWHC 1568 (Comm); Company 1 v. Company 2 [2017] EWHC 2319 (QB)).

III. Promoting an International Approach from Chilean Courts towards Interim Measures

As detailed above, the denial of court-ordered interim measures in aid of a foreign arbitration by some Chilean courts, based on the location of the arbitration seat and the defendants’ domicile is inconsistent with the wording, legislative history and purpose of Article 9 LACI. Moreover, such an approach is counterintuitive considering the UNCITRAL Model Law and the international consensus and decisions on the subject.

Accordingly, Chilean courts should develop a proper balance between the autonomy of the arbitral tribunal, the supportive interference of national courts and the need to foster the effectiveness of the arbitral award.

An approach based on the existence of a sufficient connection with Chile would be consistent with LACI, the international consensus and the Chilean court’s cautiousness. Bearing that in mind, and considering that in the Chilean case mentioned above the operation of the respondents which the claimants aimed to inhibit took place in Chile and that a substantial part of the respondents’ obligations was connected with companies whose shares and assets were situated in Chile, it would have been possible to conclude the existence of “sufficient connection”, thus granting the requested

References   [ + ]

1. ↑ BLACKABY, Nigel/PARTASIDES QC, Constantine/REDFERN, Alan/HUNTER, Martin (2015): Redfern and Hunter on International Arbitration, Student Version (Oxford, Oxford University Press, Sixth Edition), p. 429, para. 7.24. 2. ↑ Message of the President of the Republic of Chile in History of the Law No. 19,971, Library of the National Congress, 2004, p. 7. 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: International Arbitration and the Rule of Law
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First Lusophones’ Arbitration Meeting: Note and Invitation Translating Cultures and Promoting Arbitration

Sun, 2018-09-09 01:02

Eduardo Silva da Silva, Yves Derains and Ana Gerdau de Borja Mercereau

Fernando Pessoa and Machado de Assis.  What do these names have in common other than the fact that they are celebrated Portuguese-speaking writers?  Far away situated because of geography, history, and culture, these two writers have left an important legacy that has brought closer different cultures through their literary work.  In addition to being writers, Pessoa and Machado have also worked as translators.  And, in the translation of a poem, they have met at last.  The poem translated by them is the Portuguese version of a well-known text by Edgar Allan Poe, an American writer, originally published in 1845, entitled The Raven.1) The poem The Raven is one of the most well-known works of Edgar Allan Poe.  The English text has its own musicality and uses many figures of speech, which make translation a real challenge.  The translations of the Brazilian writer Machado and of the Portuguese writer Pessoa have been examined by the Brazilian writer Carlos Heitor Cony, “As traduções de o Corvo”, Jornal Folha de São Paulo, Editoria de Opinião (20 April 1997). jQuery("#footnote_plugin_tooltip_8428_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8428_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This literary encounter of Pessoa and Machado perhaps could illustrate or translate the First Lusophones’ Arbitration Meeting that took place during the Paris Arbitration Week (PAW) in April 2018.

The Portuguese-speaking world, whether it is Portuguese, Brazilian, Angolan or Mozambican, has been inspired by the Roman-Germanic legal tradition.2) See DAVID, René. Os grandes sistemas do Direito contemporâneos (Martins Fontes 2002). jQuery("#footnote_plugin_tooltip_8428_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8428_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  This legal tradition – as rightly puts Professor Miguel Reale – has courageously travelled across the seas.3) REALE, Miguel. Fontes e modelos do Direito (Saraiva 1994). jQuery("#footnote_plugin_tooltip_8428_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8428_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });  As far as arbitration is concerned, the relations between Portuguese-speaking countries relate to economic realities.  Despite the different realities of these countries, they shared the same need for arbitration as a means to strengthen their internal market and to engage in foreseeable international commercial transactions.  If in contemporary Portugal international arbitration has also grown in light of the European tradition, in Brazil arbitration was needed as a better-suited solution for commercial disputes.  In turn, Mozambique and Angola as African commercial hubs with an important oil & gas sector have also used international arbitration as a tool to translate different legal systems.

In light of the above perspective, Mr. Yves Derains, who has become fluent in Portuguese on his own merits, opened the First Lusophones’ Arbitration Meeting welcoming the Portuguese-speaking guests at his Paris-based firm on the occasion of the enriching activities promoted by the International Chamber of Commerce (ICC) and by other entities supporting the PAW.  In his opening speech, Mr. Derains presented the three topics for discussion at the meeting to incite the encounter and the debate among participants, including exchanges between the different countries then represented.

The first panel discussed the topic “Institutional Initiatives Aiming at Increasing Publicity and Transparency in Arbitration”, animated by the moderator Mr. Fernando Mantilla-Serrano, Partner of Latham & Watkins, Paris.  Ms. Ana Serra e Moura, Deputy Secretary-General of the ICC International Arbitration Court, presented the topic, with comments by Mr. Felipe Moraes, Secretary-General of Câmara de Mediação e Arbitragem Empresarial do Brasil (CAMARB).  Their presentations considered (a) publicity and transparency in relation to players (constitution of the arbitral tribunal and disclosure obligations of arbitrators), (b) publicity in relation to the proceedings (in relation to amici curiae and to the reasons of the arbitral institution’s decisions), and (c) publicity of awards, including their publication and later enforcement proceedings.

Among other matters, Ms. Ana Serra e Moura from the ICC reported its experience in proceedings with Brazilian, Portuguese and African parties, relevant statistics, and the progress made towards greater transparency with the adoption of measures set forth in the Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration, available on the ICC website.

In turn, Mr. Felipe Moraes from the CAMARB reported on its increasing experience with State entities and on its efforts to promote greater transparency.  He mentioned recent updates in Brazilian law on publicity in arbitration involving State entities, and the experience of CAMARB in this respect.   He also talked about the new CAMARB Arbitration Rules (2017) with provisions on publicity and transparency in cases involving State entities, distinguishing between public and private law State entities.  Articles 12.2 and 12.5 of these Rules state that the CAMARB Secretariat will publish on its website information about CAMARB arbitrations concerning State entities of public law, including the date of the request for arbitration, the names of the parties, and the award.  Pursuant to Article 12.3, the CAMARB will not provide additional information about these arbitrations to third parties, information which may otherwise be provided by the parties themselves according to the law.  Further, Article 12.4 provides that the arbitration hearing will not be opened to the public, unless the parties agree otherwise.

Moreover, Mr. Felipe Moraes mentioned the new legal provisions on transparency in arbitrations involving corporate and capital markets issues, such as the 2017 amendment to Instruction No. 358 of the Brazilian Securities and Exchange Commission (Commissão de Valores Mobiliários or “CVM”) requiring publicly traded companies’ disclosure of the institution of arbitration proceedings that may affect a company’s economic and financial situation.  Finally, he commented on CVM’s recent decisions in this regard.

The second panel discussed the topic “Arbitration with the State and State Entities in Brazil and in Portugal”.  The moderator Dr. Ana Gerdau de Borja Mercereau presented the speakers Mr. Renato Stephan Grion, Partner of the law firm Pinheiro Neto Advogados from São Paulo, and Mr. Filipe Vaz Pinto, Partner of MLGTS from Lisbon.  The arbitration experience with the State and State entities in Portugal and in Brazil is challenging with new developments shared by the speakers and the participants.

Among other matters, Mr. Filipe Vaz Pinto discussed the Portuguese reform of 2018, in light of the adoption of Decree-Law No. 111-B/2017, which, among other provisions, introduced changes to Article 476 of the Code of Public Contracts (on alternative dispute resolution).  The changes came about at a time when the Judiciary in Portugal is facing increasing difficulties to deal effectively with the case load brought before State Administrative Courts, while at the same time arbitration involving State entities is facing growing public criticism, even if sometimes based on wrong perceptions, not actual facts.  This is perhaps what justifies the unease feeling that this reform “gave with one hand what it took away with the other”: while the new rules purport to expand the use of arbitration in disputes involving the State or State entities, including disputes concerning public tenders, they also establish a non-waivable right of appeal in respect of all disputes with an amount exceeding € 500,000.  It remains to be seen how these rules will play out in practice and be perceived by investors.

In turn, Mr. Renato Stephan Grion discussed Brazilian initiatives like the new provisions on arbitration with State entities under the Brazilian Arbitration Law (Law 9,307/1996, Article 1, § 1, and Article 2, § 3, modified by Law No. 13,129/2015), the Federal Decree 8,465/2015 (on port sector arbitration), and the Decree of the State of Rio de Janeiro 46,245/2018  (on arbitration with State entities of the State of Rio de Janeiro).  He also referred to the survey “Arbitration in Regulated Infrastructure Sectors” published in 2017 by the FGV/CERI and The Word Bank, which shows that several Brazilian agencies such as ANP (National Petroleum Agency or Agência Nacional do Petróleo), ANTT (National Land Transport Agency or Agência Nacional dos Transportes Terrestres), ANAC (National Civil Aviation Agency or Agência Nacional de Aviação Civil) and ANATEL (National Telecommunications Agency or Agência Nacional de Telecomunicações) have concluded arbitration agreements.  In relation to the ANP, Mr. Renato Grion referred to Proceedings No. 139,519/RJ (Conflito de Competência), in which the Superior Court of Justice (Superior Tribunal de Justiça or “STJ”), in 2017, referred the ANP to ICC arbitration proceedings instituted by the mixed capital company Petrobras based on an arbitration clause under an oil & gas concession contract concluded with the ANP.  Later, he discussed the implications of the new publicity provision under Article 2, § 3, of Law 9,307/1996, noting that several Brazilian institutions have adjusted their arbitration rules in light of this.

Finally, the third panel considered the topic “Arbitration in the Oil & Gas Sector in Angola and Mozambique”, moderated by Prof. Dr. Eduardo Silva da Silva, Partner of S&R Dispute Resolution Office, from Brazil.  The speakers were Ms. Sofia Martins, Partner of the law firm Miranda Advogados, from Lisbon, and Ms. Filipa Cansado Carvalho, of Counsel of the law firm PLMJ, also from Lisbon.  They discussed the legal and regulatory framework of the oil & gas sector in these countries, the type of disputes and ways to tackle political, economic and social questions related to arbitration in Angola and Mozambique.

Ms. Sofia Martins described in detail the structure of oil & gas operations in both Angola and Mozambique, focusing in particular on the structure of Production Sharing  Agreements, on the standard dispute resolution provisions as well as on mandatory arbitration-related provisions in the laws of both countries.

In turn, Ms. Filipa Cansado Carvalho highlighted some difficulties that might arise within or in connection with arbitration proceedings seated in Angola or Mozambique and shared some war stories. Among other issues, Ms. Cansado Carvalho explained why it is fundamental to involve Portuguese-speaking lawyers at the negotiation stage as well as when a dispute arises.  She also spoke of recent legislation enacted in Angola seeking to prevent non-members of the Angolan Bar Association to act in arbitrations seated in Angola, describing how this has been applied in practice so far and comparing this to the current situation in Mozambique.  Ms. Cansado Carvalho concluded on a positive note stating that, although arbitration and, in particular, oil & gas arbitration involving Angola or Mozambique is not without challenges, with knowledge of what these difficulties are and of how these jurisdictions work it is generally possible to manage them.

The debate about the above-mentioned topics has been enriching and promoted the interaction between the Portuguese-speaking practitioners.  Among the participants were Ms. Ana Paula Montans (Arbitrator, London), Dr. Clávio Valença (Partner, Valença Galíndez, São Paulo), Dr. Daniel de Andrade Levy (Of Counsel, Enyo Law, London), Prof. Dr. Diego Fernández Arroyo (Sciences Po, Paris), Dr. Gustavo Scheffer da Silveira (Counsel, ICC, São Paulo), Prof. Dr. Judith Martins-Costa (Partner, Judith Martins-Costa Advogados, Porto Alegre), Ms. Luiza Saldanha Pena Costa (Associate, Betto Seraglini, Paris), Prof. Dr. Mariana França Gouveia (Partner, PLMJ/Universidade Nova de Lisboa, Lisbon), Dr. Matthieu de Boisséson (Arbitrator, Matthieu de Boisséson, London and Hong Kong), Mr. Miguel de Almada (Partner, MLGTS, Lisbon), Prof. Dr. Nadia de Araujo (Partner, Nadia de Araujo Advogados/PUC-Rio, Rio de Janeiro), Mr. Ricardo Ranzolin (Partner, Silveiro Advogados, Porto Alegre), and Ms. Sofia Ribeiro Mendes (Arbitrator, Lisbon).

As arbitration practitioners and Portuguese speakers, we practice arbitration according to the tones and nuances of our cultures.  Like Fernando Pessoa and Machado de Assis, we live in our own political, economic and social environment.  Acknowledging that arbitration could be designated “lusophone” depends on an increasing effort towards contributing, interacting and understanding: this is our role as “translators” of different legal cultures in arbitration.

We met, in this first edition, in Paris, the city of lights, a place of meaningful encounters.  Just like Pessoa and Machado, we too have become translators.  We have reciprocally translated our own particularities and multiple potentialities.  And this experience like the literary encounter of Pessoa and Machado can inspire and produce new lusophone perspectives in arbitration.  Portugal as an international destination and Brazil as a developing country clearly present opportunities and potentialities. Angola and Mozambique although needing economic and legal infrastructure present important resources for the international trade.  These countries present a whole world to explore and to translate.  May Camões’ language, which brought together in a poem Machado and Pessoa, be used as a tool for this task.  In 2019, we shall continue this fruitful exercise in the Second Edition of the Lusophones’ Arbitration Meeting.

References   [ + ]

1. ↑ The poem The Raven is one of the most well-known works of Edgar Allan Poe.  The English text has its own musicality and uses many figures of speech, which make translation a real challenge.  The translations of the Brazilian writer Machado and of the Portuguese writer Pessoa have been examined by the Brazilian writer Carlos Heitor Cony, “As traduções de o Corvo”, Jornal Folha de São Paulo, Editoria de Opinião (20 April 1997). 2. ↑ See DAVID, René. Os grandes sistemas do Direito contemporâneos (Martins Fontes 2002). 3. ↑ REALE, Miguel. Fontes e modelos do Direito (Saraiva 1994). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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Cleansing the (Un)clean: The Ongoing Saga of the Clean Hands Doctrine

Sat, 2018-09-08 04:00

William Kirtley and Thomas Davis

The arbitral tribunal in Glencore Finance (Bermuda) Limited v. Bolivia has recently hinted at its intent to address an old question: What is the doctrine of “clean hands” in investment arbitration?

On 31 January 2018, an arbitral tribunal composed of Professor Ricardo Ramírez Hernández, Professor John Gotanda and Professor Philippe Sands issued a Procedural Order No. 2 on the issue of bifurcation. While the order itself is uncontroversial, the tribunal notes that the standard and scope of clean hands will have to be examined thoroughly. Therefore, the tribunal will have an opportunity to clarify a problem that has frustrated former tribunals and led to divergent decisions.

Bolivia had objected to Glencore’s claims, arguing that the privatization of the assets underlying the investment in question had been illegal under Bolivian law, the acquisition of mining and leasing assets were contrary to the Bolivian Constitution and the circumstances surrounding the privatization of the assets were contrary to transparency and good faith. Based on this, Bolivia claimed that under the “clean hands” principle, the foreign investor could not present claims tainted by illegality which the foreign investor was aware of when it received the assets in question. The Claimant maintained that the investment was made lawfully through a public tender process.

In its Order, which rejected bifurcation, the tribunal referenced Churchill Mining to agree that the clean hands doctrine had found “expression” internationally, but that its “status and exact contours” remain uncertain (para. 46). The tribunal acknowledged its doubts that a “mere assertion of unlawful conduct” would raise the objection above the required threshold (para. 47), but indicated that it would not only have to accept the clean hands principle, but also to lay out its contours. The tribunal also indicated that it would need to look at the merits to address this objection.

There remains significant disagreement about the status of the clean hands doctrine under international law.

Proponents argue that the doctrine exists as a general principle, pointing to international tribunals and a significant number of national legal decisions (e.g., P. Dumberry, “State of Confusion: The Doctrine of “Clean Hands” In Investment Arbitration after the Yukos Award“, 17 Journal of World Investments and Trade (2016), pp. 229-259). Past tribunals have relied on similar good faith principles, international public policy and the duty to honor local laws (e.g., Inceysa Vallisoletana, S.L. v. Republic of El Salvador, ICSID Case No. ARB/03/26, Award (2 August 2006), para. 244 (‘[N]o legal system based on rational grounds allows the party that committed a chain of clearly illegal acts to benefit from them.’). According to Dumberry, the legality requirement is itself a manifestation of the clean hands doctrine.

However, to become a general principle of law, a principle must have “a certain level of recognition and consensus” (Yukos Universal Limited (Isle of Man) v. The Russian Federation, UNCITRAL, PCA Case No. AA 227, Final Award (18 July 2014), para. 1359.). The ILC Articles on State Responsibility and Diplomatic Protection do not contain any reference to the doctrine of unclean hands. As the Yukos tribunal noted – which itself included a member who had previously dissented in an ICJ case based on a finding of unclean hands (para. 1361) – there is not a single majority decision by an international tribunal which has applied the clean hands doctrine to an investor-State dispute to conclude that it operated as a bar to claims as a principle of international law (para. 1362).

In Fraport II, for instance, the principle did not operate to exclude the investor’s claim, since the relevant treaty contained a legality requirement clause (para. 328). In another case, Al-Warraq v. Indonesia, the tribunal’s finding that claimant’s conduct fell within the scope of the application of the clean hands doctrine and therefore could not benefit from the protection afforded by the OIC Agreement was made, but in obiter dictum (para. 647). Given the lack of relevant case law, it is difficult to determine the doctrine’s status, let alone the standard to be applied.

A 2013 case provides a potential solution. The tribunal in Niko Resources v. Bangladesh (“Niko”) addressed clean hands separately from contentions of bad faith and international public policy (para. 476). It also sidestepped determining the status of unclean hands as a general principle of law by focusing on its content. It found that, at the principle’s core, some form of reciprocity was required, i.e., a nexus between the relief forming the objection and past actions which may be characterized as unclean hands (para. 483). In doing so, it relied on three elements referenced by Judge Hudson’s opinion in Guyana v. Suriname (para. 481):

  1. the breach must concern a continuing violation;
  2. the remedy sought must be ‘protection against the continuance of that violation in the future’, not damages for past violations and
  3. there must be a relationship of reciprocity between the obligations considered

In Niko, as the violation was not continuing, the remedy did not concern protection against a past violation and there was no relationship between the relief being sought and the acts in the past characterized as involving unclean hands, the respondents’ objection based on acts of corruption were dismissed (paras. 483, 485).

The tribunal in Glencore might apply this narrow standard, which would avoid the contentious task of outlining the standard and scope of unclean hands as a general principle of law, while addressing genuine concerns of illegality. This would also allow the tribunal to avoid making a distinction between admissibility and jurisdiction, should Bolivia fail to corroborate its objection.

While some treaties expressly cover only those investments that are made in accordance with host State law, the question of whether there is a general principle of international law which requires “clean hands” is unsettled, at best. In the authors’ opinion, the most that can be said is that rather than forcing the parties to guess at the appropriate standard to apply in cases where the clean hands doctrine is invoked, it is important for the arbitrators in Glencore to provide the parties guidance as early as possible, so that the parties can adapt themselves to those standards, strengthening due process while minimizing tilting at windmills.

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Practical Tips for Handling Construction Claims and Disputes: Managing Documentary Evidence

Thu, 2018-09-06 16:37

Tanya Landon and Azal Khan

This is one of the five construction arbitration posts, providing the technical discussion from the SCAI, CAM, TILPA conference in Geneva and Mexico City.  The authors include: Ms Almudena Otero De La Vega (on State enterprises) Ms Tanya Landon & Ms Azal Khan (on evidence), Dr Manuel Arrollo (on multiple procedures), Mr Serge Y. Bodart (on dispute boards and PPPs) and Dr Jorge Huerta-Goldman (on prevention to arbitration & state disputes).

Construction projects typically involve complex technical issues and several parties working together over long periods of time.  This results in complex facts, legal issues and most importantly, voluminous documentation.  Contemporaneous documents are the backbone of any construction case because they provide the most accurate and credible evidence to support a party’s claims and defences.  For this reason, the proper management of documentary evidence in construction cases is crucial to the success of a party’s case.  Managing the documentary evidence is an ongoing process and should start from the very outset of the arbitration – in fact, even before the dispute arises – and continue until the end of the case.

Typical Documents in Construction Arbitration

Documentary evidence can come in many shapes and sizes: written documents, photographs, drawings and maps, in both physical and electronic media.  While each construction dispute is unique and generates its own set of facts and corresponding documentation, the categories of documents typically seen in construction cases include:

  • pre-contractual documents, including draft specifications and drawings, tender documents, and pre-contractual correspondence between the parties;
  • contractual documents, including contracts, annexes and appendices, and final specifications and drawings;
  • original and amended time schedules (particularly important in cases with delay claims);
  • post-contractual correspondence between the parties, including notices dealing with day-to-day technical issues and/or legal notices;
  • correspondence and other day-to-day records, including minutes of meetings, site logs and progress reports; and
  • quantum documents, including invoices, receipts, proof of payments and costs documentation.

Document Management Before the Arbitration Begins

The “Paper Trail”

Documents should be consistently managed throughout the life of a construction project and the corresponding dispute.  Starting the process early is essential because gathering the evidence from a voluminous and unorganized pool of documents only after the dispute arises can be a cumbersome, expensive and eminently frustrating process for all involved.  It can also create unnecessary delay in starting the arbitration or responding to a claim.

Parties involved in construction projects should therefore adopt internal policies and practices to ensure that a “paper trail” of all the essential aspects of the project is kept and organized in a way that will be useable later on.  Given that questions of contractual interpretation are staple issues in many construction disputes, parties should be mindful of recording their “intent” from the very beginning.  Parties should also maintain records of every meeting, negotiation and transaction, and follow-up on any oral conversations with e-mails and notes to file.  This becomes particularly important when signs of a dispute arise.  It is also critical to document any mitigation attempts, which can later serve as proof in discharging a party’s burden to mitigate.  Parties should consider engaging outside counsel early on, even before a dispute has formally arisen.  This assists with the preparation of legal notices and other documents which will help to shape the narrative of the future dispute.

Use of EDMS

Parties involved in significant construction disputes should consider investing in electronic document management software (“EDMS”) to facilitate the storing, sorting and analysis of voluminous documents.  While investing in EDMS can involve significant upfront purchase and training costs, for highly-complex, document-heavy construction disputes, it can be a gift that keeps on giving.  EDMS can help filter out irrelevant documents in the early stages of the dispute, and drastically reduce the pool of documents that need to be reviewed.  EDMS also allows parties to search and analyze documents based on chronology or theme, which can be very useful when it comes to crafting a compelling narrative and case theory that will help a party win its case.  Moreover, with the rapid rise of artificial intelligence tools and machine learning, parties and counsel involved in construction disputes would be wise to invest the time and energy now to become knowledgeable and comfortable with these new technologies which are likely to revolutionize the way documentary evidence is handled in international disputes tomorrow.

Early Review of Documents

As soon as the signs of a dispute arise, parties should conduct an early case assessment, which necessarily involves a comprehensive document review.  This can help a party separate out the documents that are most relevant, and identify those documents or categories of documents that it does not have, and which it will need to request from its counterpart or third parties once the arbitration begins.  Early document review can also help spot privileged and confidential documents that a party can withhold in the upcoming arbitration.  Again, engaging outside counsel to assist with the early review of documents as part of an early case assessment can pay off in spades later on in the dispute.

Document Management during the Arbitration

Document Production

As with other types of disputes, a party asserting a claim in a construction arbitration bears the burden of proof.  To discharge this burden of proof, a party relies primarily on contemporaneous documents to prove its case and disprove the case of the other party.  The document production phase of the arbitration plays a pivotal role in helping parties obtain the critical evidence they need to prove their claims.

When a party does not possess certain documents relevant to prove its claims, it may request the production of such documents from the opposing party during the document production phase.  Based on international best practice as embodied in the IBA Rules on the Taking of Evidence in Arbitration, document requests in arbitration should be narrowly tailored, described in sufficient detail, be shown to be relevant to the case and material to its outcome, and must not be in the possession, custody or control of the requesting party.  Since the arbitral tribunal may draw adverse inferences against a party which refuses to produce ordered documents, it is important for the parties to take the process seriously.  On the other hand, international arbitration tribunals typically look unfavorably on fishing expeditions, and parties and their counsel are thus expected to do the hard work necessary to identify relevant documents with specificity.  As discussed above, this is where an early document review with the help of EDMS can address these issues in advance and minimize the scope for any unpleasant surprises in the document production phase.

Presentation of Documentary Evidence

The golden rule in construction arbitration, which often involves not only voluminous but complex technical evidence, is to help the arbitral tribunal “cut through the noise” and present the most compelling evidence in the simplest manner possible.

Given that many construction disputes involve time-based or delay claims, a chronology-based presentation of events is often recommended.  A good chronology presented to the arbitral tribunal at the outset of the case can be a strong foundation on which to build the party’s narrative throughout the proceedings.  In complex and protracted disputes, an arbitral tribunal may request that the parties agree on the undisputed facts and prepare an agreed chronology.  While this can help the arbitral tribunal and the parties to narrow the scope of issues to be addressed, it can be an arduous task to get two opposing parties to agree on a chronology of facts.

Once the chronology is established, a party should also consider presenting its case and arguments – in the written pleadings, witness statements and expert reports – by particular claim or issue.  As various layers of evidence are submitted through the course of the proceedings, it is helpful to refresh the memory of the arbitral tribunal with regard to the status of the contentious issues, e.g., if an assertion or evidence has not been challenged or if a party has reversed its earlier stance on an issue.  For this purpose, “Scott Schedules” are a useful format to follow as they allow an arbitral tribunal to easily identify the status of a particular issue or claim.

Parties should also embrace the use of visual aids such as organizational charts, timelines, 3D or 4D programs, photographs, maps and diagrams to help simplify complex technical evidence for the arbitral tribunal.

Finally, in document-heavy construction disputes, parties and arbitral tribunals should seriously consider adopting systems to facilitate “paperless” arbitrations.  These are typically web-based electronic filing systems which allow all parties involved in the arbitration to upload and download the written submissions and exhibits, leading to more efficient management of documents during the proceedings and likely saving a significant number of trees!  In a paperless system, the evidence can be collated and numbered into agreed working files and core bundles which can then be used by all participants at the hearings, and help to avoid the frequent situation of dozens (if not hundreds) of binders being shipped to hearing centers, containing multiple copies of the same exhibits.  Parties are also frequently adopting technology to create e-briefs, which include hyperlinks to all the cited evidence.  Though these trends are encouraging, these systems only work if the parties, and most importantly the arbitral tribunal, are comfortable using technology in real-time at the hearing.

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Do Parties Need Recourse against Interim Awards?

Wed, 2018-09-05 20:00

Harsh Hari Haran

Introduction

The 2018 International Arbitration Survey: The Evolution of International Arbitration undertaken by the Queen Mary University and White and Case LLP found flexibility to be the third most valuable characteristic of international arbitration.

The flexibility inherent in the arbitral process allows tribunals to conduct the proceedings (ideally) in an expeditious manner. One common method used by tribunals is to delineate the issues in dispute and, where appropriate, determine some issues at an early stage of the proceedings by way of a “partial” or “interim” award.

Challenges to jurisdiction, questions of liability and applicable law are just some of such issues. In fact, a 2012 survey undertaken by the Queen Mary University and White and Case LLP found that partial or interim awards are issued in one third of arbitrations.

Given the potentially significant impact that an interim award can have on the arbitration proceedings, most jurisdictions provide parties with immediate recourse against an interim award. However, the Supreme Court of India in M/s Indian Farmers Fertilizer Co-operative Limited v M/s Bhadra Products (Civil Appeal No. 824 of 2018) (“Bhadra Products“) invites the Indian Parliament to disrupt this delicate balance.

The current state of play

The Indian Arbitration and Conciliation Act, 1996 (“the Arbitration Act“) is, in many ways, unique. One area where the Arbitration Act departs from the Model Law (and many other jurisdictions) is with respect to the remedies available to a party where a tribunal rules, as a preliminary question, that it has jurisdiction.

Article 16(3) of the 1985 UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”) provides a party with immediate recourse where the tribunal rules as a preliminary question that it has jurisdiction. By contrast, Section 16(5) of the Arbitration Act states that where a tribunal rejects a challenge to its jurisdiction, it shall continue with the arbitral proceedings and make an arbitral award and, pursuant to Section 16(6), a party aggrieved by such an award may make an application for setting aside such an award. In other words, under the Arbitration Act, where the tribunal rules as a preliminary question that it has jurisdiction the aggrieved party has no immediate recourse and must await the final award on merits.

There is some weight to the argument that the position taken by the Arbitration Act is far from satisfactory as it compels parties to incur unnecessary time and costs in potentially useless arbitration proceedings. But parties could take comfort in the fact that they could apply to set aside an interim award on any other issue. However, that too may soon change given the Supreme Court’s observations in Bhadra Products.

The Supreme Court’s decision

In arbitration proceedings between the appellant (respondent in the arbitration) and the respondent (claimant in the arbitration), the tribunal issued a “First Partial Award” rejecting the appellant’s objection that the respondent’s claims were time barred. The appellant applied to have the “First Partial Award” set aside. The trial court dismissed the petition on the ground that the tribunal’s decision did not constitute an interim award and therefore could not be set aside under Section 34 of the Arbitration Act. The appeal to the High Court was also dismissed which resulted in an appeal to the Supreme Court.

The respondent argued that the tribunal’s decision on limitation was a ruling with respect to its jurisdiction and, in accordance with Section 16(6) of the Arbitration Act, can only be challenged together with a final award.

Rejecting the argument the Supreme Court held that the term “jurisdiction” in Section 16 of the Arbitration Act has been used in the narrow sense and, similar to Section 30 of the English Arbitration Act, 1996, refers to (i) the existence of a valid arbitration agreement; (ii) whether the tribunal has been properly constituted; and (iii) whether the matters have been submitted to arbitration in accordance with the arbitration agreement.

Accordingly, the Supreme Court found that a determination on limitation is not a determination on the tribunal’s jurisdiction but a determination on the merits of the claim and therefore constituted an interim award which can be set aside under Section 34 of the Arbitration Act.

Fatal parting words?

By adopting a narrow definition of “jurisdiction“, the Supreme Court mitigated the potentially harmful consequences of Section 16(6) of the Arbitration Act as only a limited category of decisions would constitute a tribunal’s decision on its jurisdiction.

However, the Supreme Court’s judgment concludes with an invitation to the Parliament to consider amending Section 34 of the Act, such that all interim awards can only be challenged together with the final award. If accepted, this would severely reduce the attractiveness of arbitration in India.

Take the hypothetical situation where, in an arbitration arising from a construction contract, a contractor claims damages for wrongful termination of the contract and payment for work done and the employer counter-claims for costs incurred in engaging a replacement contractor. An interim award holding that the contract was validly terminated, would greatly reduce the scope of the damages hearing.

The Supreme Court’s invitation, if accepted, would require the contractor to first contest the entire arbitration and thereafter apply to have the interim award set aside together with the final award. If the contractor is successful in having the award set aside, it will then have to potentially re-commence arbitration in order for its claim for damages to be determined. This is clearly unsatisfactory and would greatly increase the time and costs incurred by the parties.

Where does the balance lie?

The Supreme Court’s invitation was motivated by a concern for the unnecessary delay and additional expense incurred by parties in dealing with “piecemeal challenges“. While it is true that parties’ incur time and costs in dealing with challenges to interim awards, the solution is not to remove all recourse to interim awards. Instead, the author suggests that the balance is struck when both tribunals and court exercise their discretion in an appropriate manner.

An arbitral tribunal should only determine an issue by way of an interim award if it will have a significant impact on the merits hearing. Courts, when faced with a challenge to an interim award, should be circumspect in granting a stay of the arbitration proceedings pending the determination of the challenge. Indian Courts may find guidance on this issue in the decision of the Singapore High Court in BLY v BLZ & Another [2017] 4 SLR 410, where the Singapore High Court, determining an application for a stay of the arbitration pending a challenge against the tribunal’s ruling on its jurisdiction, held:

  • The “default position” is that the arbitration will continue pending curial review;
  • The court’s discretion to stay the arbitration must be exercised judicially and with reference to all the circumstances of the case; and
  • In order to justify the exercise of its discretion, there must be “special circumstances” necessitating a stay of the arbitration proceedings, which can include the conduct of the other party in relation to the arbitral proceedings. However, costs incurred in potentially useless arbitration proceedings would not constitute special circumstances.

 

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Is Article 16(3) of the Model Law A ‘One-Shot Remedy’ for Non-Participating Respondents in International Arbitrations?

Tue, 2018-09-04 19:54

Darius Chan

YSIAC

It is not uncommon for practitioners acting for claimants in an arbitration to encounter a respondent who chooses to boycott the arbitral process.  In cases involving such ‘non-participating’ respondents, what are the rights and obligations of each party? Specifically, insofar as Model law jurisdictions are concerned, if a Tribunal decides on jurisdiction as a preliminary issue must the non-participating respondent apply under Article 16(3) of the Model Law to the curial court to review that decision, or otherwise lose the right to challenge any eventual award thereafter on jurisdictional grounds? Can the non-participating respondent surface at a later stage to set aside, or alternatively resist enforcement, of any eventual award based on jurisdictional grounds?

 

There are two Singapore High Court decisions which appear to have given differing guidance on this issue.

 

‘Participating Respondents’

 

Preliminarily, it would be helpful to remind ourselves of the position for ‘participating’ respondents.

 

Insofar as participating respondents are concerned, the Singapore High Court in Astro Nusantara International BV v PT Ayunda Prima Mitra [2013] 1 SLR 636 (Astro HC) had ruled that a party who does not seek curial review of a Tribunal’s decision under Article 16(3) of the Model Law cannot subsequently set aside or resist enforcement of any eventual award on the same jurisdictional objections.  In so deciding, the Singapore High Court was motivated by concerns of “minimis[ing] dilatory or obstructionist tactics so as to avoid unnecessary wastage of time and money”.

 

However, this was reversed on appeal.  The Singapore Court of Appeal in PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others [2014] 1 SLR 372 (Astro CA) opined that Article 16(3) is not a “one-shot” remedy.  A party who does not seek curial review of a Tribunal’s decision under Article 16(3) of the Model Law can subsequently resist enforcement of any eventual award on the same jurisdictional objections.  However, that party may be precluded from setting aside the award on the same jurisdictional objections.  The Court of Appeal opined in dicta (at [130]) as follows: ‘[the Court of Appeal] would be surprised if a party retained the right to bring an application to set aside a final award on the merits under [Article 34 of the Model Law] on a ground which they could have raised via other active remedies before the supervising court at an earlier stage when the arbitration process was still ongoing’.

 

We turn now to address two cases which have considered the rights of ‘non-participating respondents.

 

‘Non-participating Respondents’

 

(1) Astro Nusantara International BV v PT Ayunda Prima Mitra [2013] 1 SLR 636

 

The first case is the first instance decision of Astro HC by Belinda Ang J.

 

Ang J took the view that a non-participating respondent who does not seek curial review of a Tribunal’s decision under Article 16(3) can subsequently seek to set aside or resist enforcement of any eventual award on jurisdictional grounds.  A non-participating respondent could be a party who boycotts the arbitral process from the commencement of the arbitration, or a party who elects to leave the arbitral regime after the Tribunal renders an unfavourable decision on jurisdiction as a preliminary issue.  Put simply, on Ang J’s analysis, a non-participating respondent’s rights under Articles 34 and 36 of the Model Law are not fettered by the fact that the respondent had chosen not to participate in the arbitration.

 

Ang J opined (at [133]) that the counterparty ‘would have ample notice of this from the boycotting party’s absolute refusal to participate’.  Ang J ([133]) reasoned that “this possibility is hinted at” in the travaux préparatoires of the Model Law, namely The Analytical Commentary on Draft Text of a Model Law on International Commercial Arbitration (A/CN.9/264, 25 March 1985).  The travaux suggested that, a party who fails to raise a jurisdictional objection within the time limit under Article 16(2) of the Model Law (eg, ‘not later than the submission of the statement of defence’) would be precluded from raising jurisdictional objections whether to set aside or resist enforcement of an award (subject to certain limits such as public policy and arbitrability).  However, according to the travaux, the Model Law provisions on setting aside and resisting enforcement remains applicable to cases ‘where a party did not participate in the arbitration, at least not submit a statement or take part in hearings on the substance of the dispute’.

 

We turn next to contrast Ang J’s views against a recent decision by Quentin Loh J in Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2018] SGHC 78.

 

(2) Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2018] SGHC 78

 

In this case, Loh J, citing the Court of Appeal’s ruling in Astro CA, held that non-participating respondents who do not seek curial review of a Tribunal’s decision under Article 16(3) can subsequently seek to resist enforcement of any eventual award under jurisdictional grounds.  However, such non-participating respondents cannot seek to set aside any eventual award on jurisdictional grounds.

 

Loh J reasoned that where a tribunal has chosen ‘to decide jurisdiction as a preliminary issue, considerations of finality, certainty, practicality, cost, preventing dilatory tactics and settling the position at an early stage at the seat militate against allowing a [non-participating] respondent to reserve its objections to the last minute and indulge in tactics which result in immense delays and costs’. In Loh J’s view, it is an ‘abuse of process’ for ‘a [non-participating] party to wait till the opposing party goes through the whole arbitral process, obtains an award, only to be met by a setting aside application at the seat on the ground of a lack of jurisdiction’.

 

It is interesting to note that, even though concerns with dilatory, obstructionist tactics as well as time and costs had played central roles in both cases described above, the Judges appeared to reach differing conclusions on the rights of the non-participating respondent.  Four points can be made.

 

First, in reaching his conclusion, Loh J purported to adopt the Court of Appeal’s ruling in Astro CA described above.  However, it is not clear that the Court of Appeal in Astro had in mind the specific situation of a non-participating respondent.  Loh J did not specifically engage the views of the travaux cited by Ang J.

 

The travaux speaks of another situation where a party ought to be precluded from raising objections at the setting aside or enforcement stage: under Article 4 of the Model Law, a party is taken to have impliedly waived any objection to another party’s non-compliance with certain procedural requirements if that first party knew about the non-compliance, but proceeds with the arbitration without making a timely objection.  A corollary to the travaux is that any party that does not ‘proceed with the arbitration’ arguably has not waived its objection(s) to jurisdiction; in other words, it should be permitted to raise that objection in a future setting.

 

Second, taking a step back, assume an arbitral tribunal does not decide jurisdiction as a preliminary issue, but in a final merits award instead.  In that scenario, it appears to be currently accepted (and which finds support from the travaux cited above) that a non-participating respondent may seek to set aside and resist enforcement of any eventual award on jurisdictional grounds.  It is not intuitively obvious why the rights of the same non-participating respondent should automatically be diminished (by losing the right to set aside any eventual award on jurisdictional grounds) if the tribunal chooses instead to decide the issue of jurisdiction as a preliminary issue.  The practical implication of Loh J’s decision is that there may be tactical advantage for a claimant facing a non-participating respondent to press a tribunal to decide the issue of jurisdiction as a preliminary issue.  If the tribunal agrees, that places the respondent under pressure: if the respondent continues not to participate in the arbitration, it loses the right to seek a setting aside of any eventual award on jurisdictional grounds.

 

Third, insofar as Loh J’s decision was motivated by concerns of finality, certainty, time and costs, those same concerns arguably ought to lead to an outcome where, in addition to losing its rights to set aside any eventual award on jurisdictional grounds, a non-participating party should not be permitted to resist enforcement of any eventual award on jurisdictional grounds.  It is therefore not intuitive why concerns of abuse of process, finality, and certainty should justify barring the non-participating respondent from setting aside the award, but not preclude the same respondent from resisting enforcement of the same award.  This observation has led some commentators to question the correctness of Astro CA, and led to calls that the Singapore legislature should consider the stance adopted by section 73(2) of the English Arbitration Act by precluding a party, who could have but did not object to the tribunal’s ruling on its jurisdiction, from raising those objections in a future setting.  According to these commentators, this is justifiable on the policy bases of preventing an abuse of process, good faith and efficiency.

 

However, such arguments by commentators are not without problems.

 

First, in Astro CA the Court of Appeal had signaled (at [117]) that the architecture of Art 16(3) is not certainty-centric; concerns of certainty, time and cost efficiency are not paramount objectives.  In fact, English Arbitration Act itself in section 72 preserves the rights of persons who take no part in arbitral proceedings, including the right to challenge any ultimate award on jurisdictional grounds.  The Model Law is therefore not alone in giving similar rights to a non-participating party.  In court proceedings in common law jurisdictions, a non-participating defendant is, generally speaking, not precluded from applying to set aside a judgment obtained in default of appearance simply because the defendant was non-participating.

 

Furthermore, these arguments are premised on the assumption that a non-participating party is an abuser of process out to obstruct a process that it had earlier signed up for.  Whilst that may be often the case, that assumption may not always be true.  Arguably, the claimant needs to go through the process, any way, to obtain an award.   Second, in many cases, the non-participating respondent would already have made known to the claimant and the tribunal its views as to the tribunal’s lack of jurisdiction.  In that sense, the non-participating respondent cannot be said to be inducing the claimant to proceed on a false or misleading basis.  Finally, as the commentators themselves have recognized, the curial review mechanism under Article 16(3) is as much for the claimant as it is for the respondent, whereby the right to curial review is available to “any party”, not “party in whose favour the ruling is made”, and the power of the court is to “decide any matter”, not “set aside the ruling”.   The claimant itself arguably has the opportunity to avoid the risk of wasting time and resources; the claimant itself can go to the court to obtain a declaration that the tribunal’s preliminary ruling on jurisdiction is valid.  This forces the non-participating respondent to decide whether to appear before the court to fight the declaration sought.  Commentators have argued that such a “self-help” mechanism for claimants may be limited in scope because a declaration from the Singapore court may not be easily enforceable in other jurisdictions.  But enforcement of the declaration itself is not the point: the court ruling will bind the tribunal, and it is likely foreign enforcement courts will at least consider the court ruling when considering whether to enforce any eventual award.

 

Finally, coming back to the fundamental issue, how should courts apply Article 16(3) to different types of respondents?  Given the silence from the text of the Model Law (see [110] and [131] of Astro CA), this is a difficult issue worthy of a separate discussion.  Preliminarily, it is suggested one would have to consider distinctions between:

 

(a) a fully participating respondent, who continues to participate in the arbitration after receiving an unfavourable award on jurisdiction decided as a preliminary issue;

(b) a partially participating respondent, who boycotts the arbitral process after receiving an unfavourable award on jurisdiction decided as a preliminary issue; and

(c) a fully non-participating respondent, who does not participate in the tribunal’s determination of jurisdiction as a preliminary issue.

 

For the first two categories, Astro CA has indicated an inclination towards precluding the respondent from raising jurisdictional objections at the setting aside stage.  If one had to support this position, one could formulate a waiver argument along the lines of Article 4 of the Model Law, namely, by electing to participate in the arbitration – whether fully or partially – without invoking a curial challenge under Article 16(3), that respondent has waived its rights to set aside any eventual award on jurisdictional grounds.  This would have a similar effect as section 73(2) of the English Arbitration Act.

 

For the third category, as a matter of principle, these respondents ought to be no worse off than a non-participating respondent in an arbitration where the tribunal decides the issue of jurisdiction alongside the merits.  Since it currently appears the latter has unfettered rights to set aside or resist enforcement of any eventual award on jurisdictional grounds, the third category of respondents should enjoy the same unfettered rights.  This would have a similar effect as section 72 of the English Arbitration Act.

 

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Negotiating Arbitration Provisions in the Derivatives Context: Perspectives

Mon, 2018-09-03 20:00

Stephen Trevis

Part I

 

Over recent years we have seen an uptick in requests to insert arbitration clauses in derivatives and other financial product documentation, and most particularly in the Asia Pacific region. Indeed, the International Swaps and Derivatives Association (ISDA), which is responsible for producing the most widely-used industry template of the master agreement, has shown a keen interest in this area and in 2013 ISDA provided guidance on the use of arbitration clauses, allowing for a number of institutions and seats around the world. An ISDA working group continues to track relevant legal developments and regularly publishes guidance.1)See e.g. Loukas A. Mistelis (Queen Mary University of London), Are Banks Changing? The New Big Industry for International Arbitration? Kluwer Arbitration Blog, October 2, 2013 jQuery("#footnote_plugin_tooltip_6977_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6977_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

There are many reasons for the growing interest in this form of dispute resolution, broadly falling into two categories:

  • reasons that are jurisdictionally or regionally driven; and
  • those more relevant to the nature of the business being transacted.

In order to do some justice to these topics I have split this article into two, and in this first part I will focus more on cross border and jurisdictional considerations. In the second part I will discuss how the complexity and variety of arrangements between counterparties to these types of products can be drivers to choosing arbitration.

It is worth noting at this point how in-house teams responsible for negotiating these clauses are typically organized. After all, the final, executed version of the clause is of course derived at through a process of negotiation between the parties prior to execution of the documentation, and this will determine much of the course of any dispute that may arise. However, in-house legal teams typically split responsibility between negotiating these terms (and the transactional side of the businesses) on the one hand, and the dispute resolution side on the other. When a dispute occurs over this documentation therefore a certain degree of sympathy must be afforded to the litigation teams who are presented as a fait accompli with a contract they typically took no part in negotiating! I have somewhat unusual responsibilities as an in-house lawyer in that I see “both ends” of the documentation, as it were. My teams include those who deal with documentation negotiation and the transactional side, as well as dispute resolution specialists. It has been our experience that there are distinct areas which regularly come up for discussion. From this perspective I would like to summarise some of the more commonly-negotiated terms of arbitration clauses we are currently seeing across the Asia-Pacific region.

Negotiations have to start somewhere, and this is by using one or other of the party’s templates. A clear majority of the time the starting point is our (the bank’s) template, and so the points that come up for discussion are interesting in as far as they are driven largely by the client’s concerns. Our template is perhaps not untypical among international banks in nominating the London Court of International Arbitration, seat in London and under English law. The reasons for this starting point are, firstly, that we favour English law globally for our Markets documentation generally. Therefore to the extent that arbitration is considered appropriate, LCIA has historically been considered a natural choice. Much of the reasoning here is to do with the fact that London is a legal centre globally, with a legal profession and judiciary with long and deep experience in dealing with these types of transactions. I will discuss this in more detail in Part II of this discussion.

From our perspective bringing proceedings in a globally-recognised centre avoids many of the complications and uncertainties entailed in conducting the dispute resolution “onshore” or in the counterparty’s jurisdiction. 2)See e.g. Deyan Dragiev, Arbitration vs Litigation in Financial Agreements: A Policy Perspective, Kluwer Arbitration Blog, September 10, 2015 jQuery("#footnote_plugin_tooltip_6977_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6977_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It is also clearly of central concern from the perspective of obtaining a fair and equitable result, that the entire process is disinterested and clean. These concerns with local dispute resolution, including the court process and judiciary in many countries, operate broadly speaking on two levels:

  • Risk of interference by the local courts in the arbitration itself. The advantage of going down the arbitration route of a potentially quicker, more straight-forward process which is (broadly) not subject to appeal may well be nullified if the local courts actively involve themselves in the arbitration hearing, and allow the parties to appeal every stage;
  • Possible difficulties with onshore enforcement. One might point out at this stage that if there are concerns with enforcement in the counterparty’s jurisdiction, this should be the case regardless of whether the arbitration was conducted onshore or offshore. However in the cross border context there may well be assets located in multiple jurisdictions which may be of interest at the enforcement stage, and if so an arbitration award obtained in an internationally-recognised centre would be preferable from this perspective. Moreover it may be the case that an award obtained offshore will limit the scope for disruption of the enforcement process onshore.

At either of these two stages concerns may arise that the local court process is not free from bias or even corruption. Clearly, any suspicion along these lines has very serious implications for the integrity of the outcome.

This has one very clear effect on our template clause. We endeavour to insert a provision concerning the nationality of the arbitrators, in the context of a three-person panel. The stipulation is that each party shall elect one arbitrator who shall not have the same nationality as that party (and these two arbitrators then elect the Chair). The thinking behind this is to avoid any suggestion of bias on the part of any one of the arbitrators. However, this is regularly contested in the course of negotiations. The reasons for this resistance I believe are to do with ensuring (from the counterparty’s point of view) as wide a choice of qualified candidates as possible. This provision could be viewed as severely or unfairly restricting the pool of candidates for the panel.

Concerns with bias or corruption do not generally arise in the context of India, where the concern is more to do with undue interference from the local courts in the arbitration process and award. India-located counterparties very frequently take the position that they want the dispute resolution to take place onshore. So for example we may well see a request for International Chamber of Commerce with seat in Mumbai, or arbitration in Mumbai in accordance with the domestic provisions of the Arbitration and Conciliation Act. Historically there have been concerns over the extent to which the domestic courts would directly involve themselves in such arbitration should it come within these domestic provisions. This issue is well understood in India, however, and it will be very interesting to see what effect when implemented current proposed changes to the law will have on the extent to which domestic arbitration is insisted upon. We are watching the progress of the Arbitration and Conciliation Act (Amendment) Bill 2018 with interest! However, as things currently stand our compromise, which is normally accepted, is arbitration in Singapore; Singapore International Arbitration Centre (SIAC) rules, seat in Singapore. In other words concerns over domestic arbitration in India remain.

Governing law in the India context can be more complicated, with a wider range of possible outcomes. That said, in the majority of cases English law is still accepted regardless of the rules/seat outcome; so for example, English governing law with SIAC rules is not an uncommon end position. On Indian governing law, historically we have viewed such requests sympathetically. However, recently the advent of the recovery and resolution regime in the UK, with its requirements for contractual recognition of stays where the governing law is non-EEA, has complicated this issue, since the necessity of inserting such a provision is difficult to explain where the transactions contemplated are intended to take place entirely onshore (as is the case the majority of the time).

Lastly the nominated courts in relation to the arbitration itself, for such matters as injunctive or interim relief, are also a matter for regular negotiation. Where we are starting from the position of LCIA, we will normally just specify the English courts for such matters, although for applications or interventions taking place in India we would specify Mumbai courts to that extent. For India-based counterparties this is regularly resisted in favour of Mumbai courts exclusively or Singapore courts where SIAC has been agreed upon. As in the context of insisting upon offshore arbitration, the concern with the Mumbai courts here is one of undue interference and heavy-handed oversight, leading to delays and spiraling costs. Singapore courts for would also be a natural compromise for counterparties based in South East Asia, where SIAC is to be used.

In the context of counterparties located in the People’s Republic of China we favour arbitration for very different reasons to the India context. Here, the concern is more fundamentally to do with enforcement, given the lack of reciprocal enforcement treaties or other formal judicial recognition with the PRC. On the other hand, PRC is a signatory to the New York Convention (Convention of the Recognition and Enforcement of Foreign Arbitral Awards), and so in theory at least offshore arbitral awards should be enforceable onshore.

PRC-located counterparties are frequently willing to compromise on Hong Kong; so Hong Kong International Arbitration Centre, seat in Hong Kong and Hong Kong courts for purposes of applications or intervention, and this is frequently the end position.. This compromise normally comes with a request for Hong Kong as the governing law, and this is normally acceptable. Interestingly the doubtful position of waivers of sovereign immunity for state-owned entities before the Hong Kong courts makes the choice of arbitration all the more attractive in this context.

In our experience therefore the cross border nature of these relationships throws up many challenges which mitigate towards a choice of arbitration, and increasingly arbitration in the region. In the next part I will focus more on the business context as a driver of this choice, and how that informs negotiations over the details of that choice.

 

Part II

 

In Part I of this article I noted the trend in favour of arbitration as a dispute resolution mechanism across the AP region in the context of derivatives and other complex financial instruments, and discussed primarily the jurisdictional and region drivers for this trend. In this second part I will focus more on the nature of the business relationship as a further possible dynamic.

I mentioned that our starting point for negotiation normally includes a nomination of the London Court of International Arbitration (LCIA) and London as the seat. This may reflect something of a bias towards the “home” jurisdiction, but also has solid technical reasons behind it, given London’s position as a global legal centre with wide-ranging experience of derivatives and sophisticated financial products generally. It is important to choose a centre with deep experience and expertise among the judiciary AND a strong legal “hinterland” more generally among legal professionals and arbitrators. This issue of the availability and bench strength of both the legal profession and arbitrators who are qualified and experienced in considering these complex financial instruments is critical when negotiating the choice of arbitration centre.

So how does this play out in the Asia Pacific region, assuming parties are looking for a choice closer to home? Here the choices become very specific, at least from our perspective. The foremost choices are Singapore International Arbitration Centre (SIAC) and the Hong Kong International Arbitration Centre (HKIAC). 3)See e.g. Joe Liu (Hong Kong International Arbitration Centre), The Use of Arbitration for Derivative Contracts, Kluwer Arbitration Blog, March 31, 2015 jQuery("#footnote_plugin_tooltip_6977_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6977_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Both Singapore and Hong Kong have sophisticated legal professions and independent judiciaries, and are international financial centres. So, the pattern that typically emerges during negotiations is for parties located in South or South East Asia to be more sympathetic towards SIAC, with parties based in greater China more open to the choice of HKIAC. SIAC probably has the edge in terms of size as a centre (i.e. number of disputes it deals with), but otherwise the drivers for these tendencies are as much cultural or geographic as they are technical.

Japan is an interesting one in this context; it clearly has a very sophisticated legal system and judiciary, including in the context of financial instruments. However the use of arbitration for dispute resolution is still unusual. This may be for a couple of reasons; firstly that sophistication and efficiency of process in the judiciary compare favourably to arbitration, and yet (unlike say London) the subject matter of disputes does not typically involve complex cross border issues where challenges around enforcement (by way of one example) may come into play. It is my view therefore that arbitration has not really taken root in Tokyo as a financial centre in the same way largely because the judiciary already meets the demands of dispute resolution as they arise there.

Disputes over these products frequently centre on the issue of their complexity. This begs the question of the required level of sophistication the parties would need to have a full understanding of the risks involved. Accordingly, it is common for the non-financial institution to present itself as the victim in having been sold something by the financial institution it could not reasonably have been expected to understand. Does this mean the financial institution owed some sort of responsibility to the non-FI party, either simply to explain the risks better on entering into the transaction, or in more extreme cases a fiduciary duty of care to which liability is a natural consequence? Expertise and experience in these markets on the part of the arbitrators is therefore going to be key to unpicking such arguments.

Moreover these products are typically regulated activities, and therefore subject to complex laws and regulations in at least the counterparty’s jurisdiction and the financial institution’s home jurisdiction. Other laws such as currency controls may also be relevant. These regulations frequently come up as part of the dispute in an attempt to throw doubt on the legality and enforceability of the transactions. To choose just one example to illustrate the point of where legal and regulatory issues connect is the question, as a regulatory matter, of the appropriateness and suitability of the selling of such transactions to the non-financial institution. This is clearly an issue for the bank to answer, and connects closely to the question, as a legal matter, of how reasonable it is to treat such a non-bank party in this context as operating at arm’s length and capable of assessing the risks for itself.

The need for sophistication and a high level of understanding of the subject matter of the dispute applies not just to the parties’ lawyers and the arbitrators, but also to the courts of the legal system that may find themselves involved. The first requirement for the local courts in any jurisdiction where the arbitration is taking place is to allow the hearing to be conducted without undue interference. Hence the importance of clear legislation governing arbitration proceedings and clear and disinterested application of such rules by the judiciary. Secondly, during the conduct of the arbitration there may be legitimate need for recourse to the courts for such matters as injunctive or interim relief. Again in such cases, clear legislation and predictable application by the courts are key considerations. Again, SIAC and HKIAC compare favourably on both these point, and provide another reason for their frequent nomination during contract negotiations.

In the case of India, the risk is that any onshore process is susceptible to being dragged out for years on end through the courts (although there are reasons to believe the situation has been improving in recent years). There is little cause for concern over bias or corruption, and it is clear, at least in the higher courts, that sophistication and experience are also not worries. However there are persistent concerns that any onshore process may become embroiled in extremely lengthy appeals and counter-appeals. Of course when it comes to enforcement, onshore proceedings, at least to that extent, may well be unavoidable; much depends on the location of the parties’ assets. However, the argument goes that once an award has been obtained offshore, the scope for delaying tactics in the local courts is at least restricted.

The nature of the transactions or banking relationship may also have a bearing on the attractiveness of arbitration for the parties. One frequently-touted reason is the fact that it tends to take place behind closed doors, in contrast to court litigation which tends to be public. However this may be a double-edged sword. In the case of investment banking, especially following the financial crisis and many of the scandals which followed in its wake (such as LIBOR setting) it may well be the case that the financial institution is publicity-shy, even where it believes itself to be in the right and on solid legal ground. Even in these cases, in many parts of the world a newspaper story detailing a financial loss incurred by a corporate from “Main Street”, having purchased financial products from “Wall Street” may well be damaging from a reputational point of view regardless of the merits of the case. By contrast however in the private banking world many clients are equally if not more averse to publicity when it comes to their financial dealings, and so the incentive to use arbitration as the dispute resolution mechanism because of the avoidance of publicity may well lie on the client side.

So what are the trends at this point? Certainly Singapore is establishing itself more and more as not just a regional centre for arbitration, but globally too. The statutory backdrop, with its judicial support for arbitration and strong restraints on court interference in the process are one aspect of this. As more and more cases are held in Singapore, a virtuous circle starts to assert itself whereby more cases means an organic growth of expertise, a deeper bench of practitioners and a more familiar judicial backdrop, leading to more cases, so and on. It is safe to say that arbitration clauses will continue to be frequent points of negotiation in the context of derivatives for the foreseeable future. 4)See e.g. Maria Karampelia, Cross-border Disputes in the Financial Sector: A Trend towards Arbitration and the Release of the ISDA Arbitration Guide, Kluwer Arbitration Blog, October 24, 2013 jQuery("#footnote_plugin_tooltip_6977_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6977_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ See e.g. Loukas A. Mistelis (Queen Mary University of London), Are Banks Changing? The New Big Industry for International Arbitration? Kluwer Arbitration Blog, October 2, 2013 2. ↑ See e.g. Deyan Dragiev, Arbitration vs Litigation in Financial Agreements: A Policy Perspective, Kluwer Arbitration Blog, September 10, 2015 3. ↑ See e.g. Joe Liu (Hong Kong International Arbitration Centre), The Use of Arbitration for Derivative Contracts, Kluwer Arbitration Blog, March 31, 2015 4. ↑ See e.g. Maria Karampelia, Cross-border Disputes in the Financial Sector: A Trend towards Arbitration and the Release of the ISDA Arbitration Guide, Kluwer Arbitration Blog, October 24, 2013 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: International Arbitration and the Rule of Law
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A Data-Driven Exploration of Arbitration as a Settlement Tool: Does the Sample Reflect the Population?

Mon, 2018-09-03 02:18

Debi Slate, Bill Slate and Brian Canada

Introduction. In our previous blog post, we presented the results of an analysis demonstrating the potential effectiveness of arbitration as a mechanism for reaching settlement. Data from the Dispute Resolution Data (DRD) repository, representing more than 3,700 international commercial arbitration cases as of May 2018, showed that settlement or withdrawal is not only the most frequently observed outcome (occurring in approximately 56% of cases), but also that it is reached before any other significant step in the typical arbitration timeline (e.g., counter-claim, preliminary hearing, or hearing on the merits). In addition, it was observed that settlement is reached quickly, with the average time from claim to settlement being less than one year. This analysis provides compelling evidence to refute certain negative perceptions surrounding arbitration as a dispute resolution mechanism, such as its supposed lack of speed, and correspondingly, its putatively high cost.

Certainly, international commercial arbitration cases involve numerous variables that potentially affect case outcome; for example, a case involving intellectual property disputes in Asia is not necessarily going to follow the same pattern as a case involving commercial contracts in Europe. The ability to make confident, accurate inferences regarding the potential outcomes of arbitration will vary depending on the amount of data available for analysis after different filtering criteria have been applied. But taken as a whole, DRD’s repository of 3,700+ international commercial arbitration cases dating back to 2005 is a sample large enough to yield certain high-level statistical estimates that are likely to reflect, within a relatively low margin of error, the set of all international commercial arbitration cases from the same period. Here, we will use selected examples to explain, with appropriate simplicity, the statistical concepts of “margin of error” and “confidence level,” which may be unfamiliar to some readers. A fundamental grasp of these concepts will be integral to understanding our future blog posts that will explore the results of filtering the DRD dataset by specific criteria, such as case type, case region, and other variables.

A familiar example. Most people aren’t statisticians, but anyone who’s seen a scientific poll of presidential approval ratings is probably aware that there is a certain “margin of error” associated with the proportion of people with a favorable view of the president. For example, a recent poll of French president Emmanuel Macron’s performance estimated that 40% of registered French voters had a favorable opinion of Macron’s performance. These results were based on a survey of 1,963 French adults (aged 18+), with a margin of error of +/- 2.2 percentage points, computed at a 95% level of confidence.

A 2,000-voter sample might seem small, and while a larger sample would more accurately reflect the true proportion of voters holding a favorable view of Macron, pollsters are limited by time and other resources. Nevertheless, a sample size of 1,963 is enough to yield an estimate with a certain degree of confidence (95% confident, to be exact) that the true approval rating, reflecting the entire population of more than 40 million registered French voters, is within the +/- 2.2% margin of error—that is, the range of possible values starting at 2.2% below the 40% approval rating generated by the 1,963-voter sample and ending at 2.2% above the sample’s approval rating. We can therefore infer, with 95% confidence, that the overall population’s approval rating lies within the interval 37.8% to 42.2%.

So, what does “95% confidence” mean? It simply means that there is a 95% probability that the estimate (from the poll sample) is close to the true value (reflecting the entire population), while there is a 5% probability that this is not the case, To illustrate this, let’s say we were to simultaneously conduct a large number (say, 100,000) of presidential approval polls, each with a different, random sample of 1,963 voters. Of these polls, 95,000 (that is, 95%) should yield a +/- 2.2% margin of error containing the true proportion of the entire population of registered voters favoring the president’s performance. Each of the remaining 5,000 polls (5%) should also have a +/- 2.2% margin of error, but these intervals would not include the true proportion of French voters with a favorable view. (Practically speaking, this means that the 40% +/- 2.2% approval rating mentioned in the previous paragraph could very well be a poor reflection of the entire population, but there is only a 5% probability that this is the case.)

How accurate are DRD’s estimates? Many presidential polls have a binomial response variable, with only two possible responses, e.g., “favorable/unfavorable.” For the types of categorical data collected by DRD (and certainly for many political polls as well), the response variable is often multinomial, having several possible categorical responses. For example, we showed in our previous blog post that of 3,746 international commercial arbitration cases, 56% of those cases ended in settlement/withdrawal, 35% ended in an award judgment, 6% ended in administrative closure, and 1% were dismissed.

But how well do the statistics estimated from this 3,746-case sample reflect the parameters of the entire set of international commercial arbitration cases that occurred over the same period? That is, what is the margin of error—or what statisticians refer to as a “95% confidence interval”—for each of the various case outcomes above?

Strictly speaking, the fact that the above dataset involves multinomial response variables (specifically, more than two possible case outcomes) means that a method of analysis known as simultaneous confidence interval construction for multinomial proportions is necessary to ensure that the confidence intervals for each case outcome are likely (with, say, 95% confidence) to include the true percentage values for all case outcomes simultaneously, since the percentages of the case outcomes are interdependent.

The mathematics of such a multinomial analysis are too complex to detail here. However, to help readers understand the fundamentals of confidence interval construction, we can simplify the analysis by treating the problem as if the response variable were binomial, with only two possible outcomes: “Settled/Withdrawn” vs. “Not Settled/Withdrawn.” This should be acceptable if the question we’re asking is something like: “Of all international commercial arbitration cases that occurred since 2005, what proportion have reached settlement/withdrawal?” This way, we don’t need to know the proportions of cases that have yielded any outcome besides “settled/withdrawn.” (It’s not that the other case outcomes don’t matter—they simply aren’t part of the question we are asking.)

The formula that statisticians use to compute the 95% confidence interval (which we’ll refer to as the margin of error, or MOE) for a given proportion p of responses from a sample size of n is as follows:

The value 1.96 is a statistical factor that corresponds, in this case, to a 95% level of confidence. If you have ever heard of the expression “within 2 standard deviations of the mean,” the “2” in that context is simply 1.96 rounded up to the nearest whole number. For space considerations, a rigorous explanation of how the factor 1.96 is computed (and how this factor varies with different confidence levels) is omitted, but its use in the MOE computation is straightforward: from the DRD dataset, we know that p = 56% (or more precisely 56.4%, or 0.564) and n = 3,746. Plugging those values into the above equation yields:

The MOE associated with the proportion of international commercial arbitration cases ending in settlement/withdrawal (irrespective of case type, region, or other filtering criteria) is 0.016, or 1.6%. Therefore, we can say—with 95% confidence—that the true percentage of all international arbitration cases (since 2005) that have reached settlement/withdrawal is 56.4% +/- 1.6%, or somewhere in the range 54.8% to 58.0% (though still likely close to the central value, 56.4%).

Concluding remarks. This 1.6% margin of error is narrower than the 2.2% computed for the aforementioned survey of the French president’s favorability, largely because the sample size of the DRD dataset (3,746 arbitration cases as of May 2018) is nearly twice that of the 1,963-voter sample in the French presidential poll. The take-home message here is that larger sample sizes yield smaller margins of error (and, hypothetically, if your “sample” were the entire population, the margin of error would be zero!).

As a representative sample of international arbitration cases, the DRD dataset is large enough to help answer high-level questions with confidence of accuracy. However, as questions of the data become more specific, the applicable sample size may be smaller, and for the same 95% level of confidence, the margin of error may increase. We hope that this high-level discussion of how margins of error are computed will provide readers with an appropriate foundation for our future blog posts, where we will discuss the results of analyzing the DRD dataset after it has been filtered to focus on more specific criteria, such as certain case types, case regions, and other factors of interest (for example, cases reaching settlement only after a hearing has taken place).

 

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Construction Arbitration – A State-Owned Enterprise Perspective.

Sat, 2018-09-01 16:27

Almudena Otero de la Vega

This is one of a series construction arbitration posts, providing the technical discussion from the SCAI, CAM, TILPA conference in Geneva and Mexico City.  

Arbitration can be classified as follows:

a) Public arbitrations: when only states are involved.

b) Private arbitrations: when only private entities are involved.

c) Mixed arbitrations: when a state and a private entity are involved, for instance investor-state cases.

Taking into account this classification, the landscape of a public enterprise being involved in a private commercial arbitration raises several challenges. This post is aimed at analyzing such challenges and identifying certain problems that may eventually lead to potential disputes in major construction projects and that could be prevented at an earlier stage, taking into account the experience of the Mexican Federal Electricity Commission.

The Mexican Federal Electricity Commission and the Projects It Develops

The Mexican Federal Electricity Commission (CFE) is a productive state-owned company created in 1937 that generates, transmits, distributes and markets electricity in Mexico. It provides energy services to nearly 40.6 million clients in the domestic, agricultural, industrial and commercial sectors. Although the recent Mexican Energetic Reform (2013) has impacted the company to enhance its competitiveness in a free market arena, private investments in energy projects, as well as the introduction of arbitration clauses, are not new. In fact, the company has an overall experience of nearly twenty years participating in commercial arbitrations.

CFE invites private entities to participate in long-term investment infrastructure projects – such as combined-cycle power plants, transmission lines, dams or pipelines – through public tenders. Companies have the opportunity to learn about the project requirements and bid with attractive technical and economic offers. CFE selects the bidder with the best market conditions providing thus the first milestone of a long, frequently 25-year-long, contractual relationship.

Practical Aspects to Take Into Account in Construction Projects

When it comes to talking about the problems that arise in construction disputes, step one is generally to analyze the contract. In this way, for every obligation assigned to a party a potential breach of contract could be identified.

A model infrastructure contract, similar to the ones signed by CFE, would include public enterprise obligations concerning, for example, a) the legal condition and access to the site where the project is to be built, b) the issuance of certificates of acceptance, c) best efforts to cooperate with the other party during the project, d) timely payments according to a pre-defined schedule and e) the surveillance of the project.

On the other hand, the constructor’s obligations may include, for instance, a) the construction of the project in accordance with contractual specifications, b) the supply, transport and testing of any materials, c) the payment of taxes and tariffs on the materials needed, d) the obtainment of required permits or studies, e) recording of all the activities and f) compliance with national content requisites. 

Seen this way, a construction contract has mainly two parties: the public enterprise on one side and the constructor on the other. However, the public enterprise can hardly be seen as a single entity, and in order to comprehend the potential problems that can occur in a construction project, it is advisable to consider the complex relationships that take place within the public entity so as to fully understand the role it displays.

 

In an enterprise, such as CFE, lawyers and engineers work back to back. When different backgrounds intervene in drafting or supervising a contract, mutual understanding and complementation is important. Thus, it is advisable to raise awareness among engineers about legal issues and to instruct lawyers about technicalities. Maps, pictures or diagrams often help lawyers understand how the different components of an infrastructure project work together.

Sometimes the gargantuan size of the enterprise forces the setting up of various legal teams that act at different stages. For example, some lawyers may be in charge of the drafting of the contract and the bidding process; others may be assigned to the day-to-day activities of the project while a third group can be specialized in handling the disputes. This division is not inadequate per se, but will only work effectively with appropriate communication and if the different groups learn from each other’s experience.

If an enterprise of this sort was to ask me about the way in which this amalgamation process can be fulfilled at a practical level, I would recommend the following:

  • Train the contracting drafting team and the legal team monitoring the project in dispute resolution. Even if they will not be personally handling the disputes, it is important that the lawyers that face day-to-day problems and the ones that formulate the clauses be aware of the procedures that will have to be enacted if a claim of breach of contract is somehow raised.
  • Encourage the legal team in charge of monitoring the project to sustain criteria. If the legal response to any type of problem is the same for every constructor in any given case that will build up consistency that could easily be proven in an arbitration procedure.
  • When a problem emerges, try negotiating first. Creating a negotiating mind frame for the legal team as a whole helps to avoid employing valuable resources in disputes that could be more easily settled with a win-win solution.
  • Keep track of hypothetical questions posed by the lawyers that see the day-to-day issues. Most of those hypothetical questions might be, in fact, potential cases that could be prevented from turning into real disputes. By keeping a record of these types of questions the entity can be prepared to face problems and solve them within a reasonable time frame that would allow to widen the scope of possible solutions. If necessary, the consulted legal team can create guidelines for the other legal teams to follow and shed light towards the company’s policy.
  • Once the arbitration begins, it is advisable for the dispute resolution team to involve the legal team that monitored the project, since they are the ones that possess all relevant information and records about the pre-dispute environment and conduct of the parties.
  • Once the arbitration is over, dispute resolution lawyers should instruct the contract drafting team in order to improve clauses that have been object of dispute so as to prevent a future dispute involving an already identified and problematic contractual term.
  • Beware of the interconnection of the different dispute settlement mechanisms. Select a clause that clearly defines the boundaries between, for instance, negotiation, mediation, expert determination and arbitration, so that they do not overlap.

Afterthoughts for State-Owned Enterprises Involved In Commercial Arbitrations 

State-owned enterprises are generally circumscribed to a pre-defined set of rules and public servants are urged to meticulously comply with such defined sets. For this reason, the coexistence of transparency procedures with document production procedures has created a scenario in which the public entity has a single opportunity to request information from the other party, but the private entity, by means of national transparency procedures that require the government to disclose information to any anonymous request, can have several opportunities to gather information to build its case. This can be seen as a clear disadvantage to which state-owned enterprises are condemned when involved in a commercial arbitration that contemplates document production. Further research will have to be made within the arbitration community in order to determine whether this phenomenon is really an inequality of opportunities of the parties to present their case, and, if so, the possible solutions that can be found inside the international arbitration arena to compensate such imbalance.

Finally, beyond the technical, economic and social factors involved in a major infrastructure project, one of the key features to keep in mind on behalf of the state enterprise is that dispute resolution mechanisms, such as arbitration, are mechanisms that apply to whichever parties need them. It is tempting to think that arbitration was primarily envisaged to protect investors that engaged in long-term contracts with the state, but the truth is that arbitration is a flexible mechanism that aids whoever invokes it. The last recommendation I would give to people working or advising such enterprises is to not fear using dispute settlement mechanisms. Waiting to be sued and then handling a dispute as respondent, when there is in fact a strong case against the other party, is quite difficult to attain. For example, (i) if the state-company believes the other party is in a breach of contract and charges liquidated damages and (ii) the other party sues in arbitration the recovery of the money; being as a respondent explaining the reason why money was charged in the first place without directly having activated the arbitration procedure leaves the company in a contradictory situation. Therefore, if you believe that the other party is in a contractual default but they do not agree with that interpretation, use arbitration to solve that issue and let your trained and experienced legal teams act in conjunction and win your case.

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First Emergency Arbitrator Proceeding in Mainland China: Reflections on How to conduct an EA Proceeding from Procedural and Substantive Perspectives

Fri, 2018-08-31 20:45

Wei Sun

Last year, I was appointed by Beijing Arbitration Commission (“BAC”) as the emergency arbitrator in an emergency arbitrator proceeding (“EA proceeding”), the first EA proceeding ever requested by the claimant in mainland China. Since the entire arbitration procedure has recently been concluded, I am delighted to share some of my thoughts on how to conduct an EA proceeding in an arbitration procedure.

I. Case Background

The dispute arose out of an investment agreement between the two applicants which were companies registered in Hong Kong, and the first respondent which was a company registered outside China and the second respondent who was an individual.

II. Reflections on Procedural Issues

  1. Application for EA Proceeding (Applicability)

As a threshold issue, the applicability of an EA proceeding is pre-screened and determined by arbitration institutions. The institution will conduct a preliminary review on the existence of an arbitration agreement, whether the parties have opted out of the EA proceeding, and whether the parties have opted for other pre-arbitral procedures (in the case of multi-tiered dispute resolution clauses).

According to Article 63(1) of the Beijing Arbitration Commission Arbitration Rules (“Rules”), after the acceptance of a case by the BAC and before the constitution of the arbitral tribunal, any party that wishes to apply for interim measures may submit a written application to the BAC for the appointment of an emergency arbitrator in accordance with the applicable law. BAC shall decide whether or not to approve such application.

Article 63(2) of the Rules provides that where the BAC approves the appointment of an emergency arbitrator, it shall appoint an emergency arbitrator from the Panel of Arbitrators within 2 days after the parties concerned pay the corresponding fees in accordance with the Schedule set out in Annex 3 to these Rules, and shall notify the parties of such appointment.

The two applicants in this case submitted the Request for EA proceeding on September 6. Having gone through the materials, BAC decided to approve the application and appointed me as the emergency arbitrator on Day 1.

  1. Case Management: How to conduct the EA Proceeding in an Effective Manner

Most of the arbitration rules of international arbitration institutions leave large discretion to emergency arbitrators as to the way to run EA proceedings. Article 63(4) of the Rules also prescribes that an emergency arbitrator shall consider the application for interim measures in such manner as he or she deems appropriate, and shall ensure that the parties have a reasonable opportunity to present their cases.

It took altogether 11 days (Day 1 to Day 11) from the transmission of the case files to me until I rendered the EA decision. On the same day (Day 1) of the appointment, I issued the First Procedural Order, setting the manner and procedural timetable of the EA proceeding. In the First Procedural Order, (i) I required the respondents to submit the written statement of defense through email prior to 6 pm on Day 5; (ii) the hearing shall be held at 9 am on Day 6 by way of teleconference; (iii) I gave both parties a “second chance” that if any party wished to submit further statements (such as post-hearing brief) after the hearing, it should do so through email prior to 6 pm on Day 10; (iv) I summarized a “List of Issues” and suggested both parties to submit their statements or opinions based on the List.

Both parties cooperated and followed the procedural timetable. After the hearing on Day 6, the applicant submitted its post hearing brief on Day 8 and the respondent on Day 10. I rendered the EA decision on Day 11. The milestones of the EA proceeding of this case are shown in the below figure:

There are three techniques I used in this EA proceeding to improve efficiency. Firstly, I allowed both parties to submit statements and other documents through email in electronic form, which reduced the time for document transmission. Secondly, by providing the “List of Issues” beforehand, both parties were able to stay on track and focus their arguments on key concerns of this case, which saved me great time and effort to render the decision. Thirdly, considering that the parties and I were at different places, I decided to conduct the hearing by teleconference. During the hearing, both parties were able to fully present their arguments. In order to ensure that both parties have a reasonable opportunity to present their cases, I reiterated at the end of the hearing that each party had a “second chance” to submit further statements after the teleconference pursuant to the timetable set in the First Procedural Order.

It is also important to closely cooperate with the secretary in the EA proceeding. In this case, the secretary of BAC provided effective and strong support which helped to run the proceeding in a more efficient way.

III. Reflections on Substantive Considerations

Since the Rules also leave large discretion to emergency arbitrators as to the substantive criteria in making the decision, I highlighted the following matters after taking into consideration of the general practice in international commercial arbitration and arbitration rules from various arbitration institutions such as ICC, SCC, ACICA and HKIAC: (i) whether the request of arbitration had a reasonable possibility to succeed on the merits; (ii) whether the situation was of imminent urgency that it would cause irreparable damages to the applicants if interim measures were not granted, and such damages would obviously exceed the damages suffered by the respondents if those interim measures were granted; (iii) whether the interim measures requested by the applicant were reasonable and suitable for enforcement.

  1. Likelihood of Success

The applicants shall establish prima facie that there is a reasonable possibility to succeed on the merits. After giving the respondents opportunity to argue whether there was factual and legal basis for the requests raised by the applicants and evaluating the evidence and arguments presented, I concluded that the applicants had demonstrated a reasonable possibility to succeed on the merits.

  1. Urgency of the case

The applicants stated that the respondents were transferring assets in bad faith and should promptly be stopped. I decided that transferring assets to third parties may cause irreparable damages to the applicants that exceeded the damages suffered by the respondents if interim measures were granted, particularly when the applicants in this case had already provided security with the amount equal to that under the interim measures.

  1. Reasonableness of interim measures

In general, an applicant in an EA proceeding would request for the following types of interim measures: the applicant may require the respondent (i) to disclose the information of assets; (ii) to maintain the status quo and be restrained from disposing assets; (iii) to cooperate with the enforcement of interim measures and not to commence any lawsuit or similar procedure to deter the enforcement; and (iv) not to instruct, encourage or suggest others to conduct the restricted behaviors.

In considering the reasonableness of the interim measures, it is my opinion that (i) disclosure of general assets can hardly be considered as “urgent” and the applicant should not be able to take advantage of the EA decision to acquire asset information of the respondent for later use; (ii) maintenance of status quo is a common and reasonable interim measure, but should be limited to the assets specifically listed by the applicant; (iii) restriction on the respondent to bring any legal actions is a severe violation to the basic procedural right of the respondent, and the duty of cooperation is neither necessary nor appropriate to be treated as an interim measure; (iv) for the purpose of enforcing the EA decision, it is reasonable to require the respondent not to instruct, encourage or suggest others to conduct the restricted behaviors.

In this case, I rendered the EA decision partially granting the interim measures requested by the applicants that the respondents were restrained from disposing the assets specifically listed by the applicants and shall not instruct, encourage or suggest others to conduct the restricted behaviors. The decision was enforced in Hong Kong High Court.

 IV. Conclusion

EA proceeding has been gaining momentum as most arbitration institutions incorporated EA provisions when revising their arbitration rules. Since EA proceeding is a relatively novel procedure in mainland China, I hope the above case could reveal the manner and considerations of an emergency arbitrator when conducting an EA proceeding. An emergency arbitrator may act as the “guardian” to parties prior to the constitution of the arbitral tribunal, defusing conflicts and saving time and costs, but it is also critical to be aware of the limitations of the EA proceeding in the existing legal framework, especially with respect to the enforceability both domestically and internationally.

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Help, I am About to be Dragged into a Construction Project!

Thu, 2018-08-30 16:38

Jorge Huerta-Goldman

This is one of the five construction arbitration posts, providing the technical discussion from the SCAI, CAM, TILPA conference in Geneva and Mexico City.  The authors include: Ms Almudena Otero De La Vega (on State enterprises) Ms Tanya Landon & Ms Azal Khan (on evidence), Dr Manuel Arrollo (on multiple procedures), Mr Serge Y. Bodart (on dispute boards and PPPs) and Dr Jorge Huerta-Goldman (on prevention to arbitration & state disputes).

In July 2018, tragically, the Chirajara bridge construction project in Colombia was demolished, following the partial collapse of the bridge at the final stage of its construction.1)Allegedly, the cause of the problem was an improper design. jQuery("#footnote_plugin_tooltip_7686_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7686_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); What lessons may be learned to avoid having to resort to such extreme measures in the future?  What mechanisms could be used to improve communication between the various technical teams involved in the design of the project? What about those involved in the implementation and construction of the bridge?  The auditors? The supervisors?  What should be the role of the government agency granting the concession (which is also a party to the construction contract)? Or the government agency authorizing the project and enforcing the relevant regulations?

In other words, how to prevent and, if necessary, settle disputes?

These issues were discussed by experts in Geneva and Mexico City (connected through videoconference), in May 2018, at a conference entitled: “Help, I am about to be dragged into a construction project!.”  The Swiss Chambers’ Arbitration Institution (SCAI), the Centro de Arbitraje de México (CAM)and TILPA – Trade & Investment Lawco-organized the event, bringing together the arbitration and the construction communities in both countries.

The Goals in Construction Projects are Simple

Legitimate construction projects follow a simple logic. The client wants the construction, while the contractors are interested in their payment.  It is an exchange of rights and obligations.  So, breaches of contract can be classified in three main baskets:

  1. Category One: Time.Delays in fulfilling an obligation (g., late delivery of goods or services, or late payments).
  2. Category Two: Money. Requests to increase or decrease payments (g., a contractor requesting higher payments due to unforeseen complications).
  3. Category Three: Performance, either complete, partial or deficient? (g., a contractor delivering an electricity generation plant with inadequate production capability).

Two additional categories:

  1. Category Four: Other Claims.Disputes can also include the annulment of the contract, and arbitrability, among many others.
  2. Category Five: Claims against a State. This category includes both situations where a State is a party to the construction contract (covered in the contractual arbitration clause) and those where the State regulates the construction activity or the behaviour of State agencies parties to the construction contract (covered by an investment treaty, investment laws or an investment contract).

Construction Projects Can be Highly Complex

Think about a house.  If the contractor builds the house entirely and the employer has all the financial resources there would be a two-party construction contract, with two main obligations: a) payment, and b) the delivery of the house.  But many construction projects are far from being so simple.

For example, building a highway between two cities would require, among others: a contract between the employer (most likely the government) and the general contractor benefiting from the concession (most likely an ad-hocconsortium of contractors); several contracts with subcontractors; at least one contract with a financial institution; another contract with the long-term operator; and several contracts relating to maintenance.

The following illustrative list sets out a number of factors that increase the complexity of a construction project:

  1. The size of the project (g., the Hoover Dam in the US).
  2. The technology required (g., a deep-sea oil platform).
  3. The number of final users (g., the construction of a city with several housing units).
  4. The access to finance (g., access to loans in Mexico is more difficult and expensive than in Switzerland, so investors would most likely seek part of the profits).
  5. The access to insurance (g., unlike in Mexico, in Switzerland the responsibility of a contractor would most likely be covered by an insurance).
  6. The internationality of the project (g., the enforcement of the contract with respect to a foreign contractor through arbitral awards).
  7. The long-term construction projects (g., a 20-year public-private partnership agreement).
  8. The fact that construction includes both services and goods (g., “perfect tender” when delivering goods versus“substantial performance” in a services contract).
  9. The internal administrative law and administrationby the authorities (g., obtaining a construction permit would be easier in Mexico than in Switzerland).

These factors, among others, influence the design of the contract, the tools for administering the contract and the dispute settlement mechanisms.

The Dispute Settlement (& Prevention) Mechanisms

The tools available are vast.  Some are used at an earlier stage; some are based on good practices; some are semi-permanent, as opposed to ad-hoc; some aim at building an agreed solution; and others provide binding decisions by a neutral body.  The following is an illustrative list:

  1. Record-keeping practices are fundamental for each contracting party.Construction litigation is highly factual.  Maintaining organized files is key to prevent and prepare for litigation.  This includes communications between the parties, reports, decisions and assessments.  For example, an organized file would be extremely useful to the team that designed the Chirajara bridge in Colombia.
  2. Contractsshould be clear and simple. The parties’ obligations should be straightforward, such as deliverables by the contractors, and payments, including work calendars. Formal communications and notifications should be clearly identified.  Templates exist such as those from the International Federation of Consulting Engineers (FIDIC).  One common mistake at an earlier stage, when using templates, is to use ambiguous clauses in the special conditions to speed up the process but the danger is that at a later stage they may influence negatively the general conditions. Ambiguity is often used as a tool to finalize the contract during negotiation, but may backfire down the road.
  3. Engineers in the construction facilities can facilitate the development of construction and spot potential problems. Indeed many contracts provide such a role for monitoring the overall development in the construction site; monitoring the performances of different sub-contractors; providing periodic reports; and notifying the parties in case of a potential problem that might evolve into a dispute.
  4. Dispute boards, usually made up of construction experts, can address any potential issue spotted by the engineer, and issue recommendations. Semi-permanent DBs have the ability to react within a short period of time.  One example is the ICC Dispute Board Rules, where arbitration clauses have been particularly designed to envisage this two-tier adjudication, as complemented by friendly arbitration rules.
  5. Expert opinion can provide some solutions. Similar to DBs, the process focuses on technical experts. In other words, it allows the engineers and architects to find a solution before the file is sent to dispute settlement lawyers.  One problem that might arise is enforceability of the recommendations. They are not arbitral awards, presenting enforceability problems.  But arbitral awards on agreed terms, reflecting the agreement by the parties to solve the disputes through the expert recommendation, can improve enforceability (the New York Convention).
  6. Conciliation and mediation can allow the parties to find a solution.DBs and expert opinions, when properly managed, will use the mediation and conciliation techniques.
  7. Commercial arbitration is a reliable mechanism for construction.The contracting parties can take advantage of efficiencies developed by administering institutions.  To cite an example, the Swiss Rulesdeveloped fast arbitration through a) expedited procedures within 6 months; b) arbitration to be decided only on evidentiary evidence; c) faster answer to the notice of arbitration—15 days; and d) faster constitution of the tribunal.
  8. Domestic Courts can be an efficient mean to solve disputes in countries with reliable and fast State Court proceedings. But international contracts may face enforceability problems.

Construction Disputes Against States

Among others, the government procurementrules regulate the genesis of government contracts for goods, services and works, providing access to foreign suppliers based on the specific commitments.  Under WTO rules, the Transports Publics Genevois (the State company providing public transportation in the canton of Geneva) has to provide access to US bidders for construction projects larger than USD 7 million.  Likewise, under the EFTA FTA with Mexico, the Aeropuertos y Servicios Auxiliares(the body building and managing airports in Mexico) has to provide access to Swiss bidders for construction projects larger than USD 8 million.

When a State is a party to a contract, investment arbitrationis also available.  Centrally, contract law works normally.  But the State can direct its State entity to behave in certain way.  Such action might be subject to investment arbitration.  In the investment arbitration case Samsung v. Saudi Arabia(a pending dispute under the Korea-South Arabia BIT) the investor challenged the contract termination for a power plant construction.

Likewise, the actions or inactions (including regulating or other jure imperii actions) of a State towards a particular construction project can trigger State responsibility — without the need for the State to be a party to the contract.  In Lion Mexico Consolidated vs Mexico(a NAFTA pending investment arbitration) the investor challenged Mexican authorities’ cancellation of promissory notes and mortgages for real estate development claiming violations of fair and equitable treatment and expropriation.

The interaction between commercial arbitration and investment arbitration has been explored extensively (see for example the KLI book). But such link is highly relevant in the construction sector, which addresses both private contractual law and administrative law.

The goals in construction projects are usually simple, with reciprocal exchange of rights and obligations.  But, the construction projects can be highly complex, depending on several factors, such as technology, size, number of parties, combination of services and goods, among several others.  The complexity influences the design of the contract—or contracts—and the use of dispute mechanisms—from prevention to arbitration.  Finally, investment arbitration is often available for claims against the State, both when it participates directly as a party to the construction project and indirectly as regulator.

References   [ + ]

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Arbitration of Smart Contracts Part 3 – Issues to Consider When Choosing Arbitration to Resolve Smart Contracts Disputes

Wed, 2018-08-29 21:38

Ibrahim Mohamed Nour Shehata

This post, which continues the topic considered here and here, discusses the main issues to consider when choosing arbitration to resolve smart contracts disputes, and lists a number of red flags that emerge from a survey of white papers on arbitrating smart contract disputes prepared by the tech community.

(1) The Form of Smart Contract

As discussed by R3 and Norton Rose Fulbright here, there may be legal risks in some jurisdictions with having the smart contract entirely in code language. Accordingly, we advise parties to have a hybrid version of smart contract (sometimes called “Ricardian Contract”) whereby there is a text-based version of the same force in addition to the encrypted-coded-language smart contract. Further, Article II of the New York Convention requires an agreement to arbitrate to be in writing. In addition, the New York Convention requires an agreement to arbitrate to be signed unless it’s in the form of exchange of letters or telegrams. The definition of “an agreement in writing” and “signing” is interpreted differently across the various jurisdictions. It’s difficult to predict whether a smart contract encrypted in code would satisfy these requirements beforehand. Therefore, smart contracts run the risk of not being enforced under the New York Convention, unless they have an equivalent traditional word-format contract signed by both parties.

(2) The Seat of Arbitration:

Parties to smart contracts should prioritize their choice of the seat of arbitration. In essence, a seat of arbitration underpins the legal framework controlling all legal aspects of the arbitral process. As discussed by Clyde & Co here, the seat of the arbitration will normally determine the law applicable to the procedure of the arbitration as well as the involvement/ intervention, as appropriate, which the courts of the seat, will have. Also, the seat of arbitration will determine the arbitrability of the subject matter of the dispute. Unfortunately, some jurisdictions are not “arbitration-friendly” as they have laws which restrict party autonomy, for example, by allowing the courts to intervene extensively in the arbitral process. On the other hand, some jurisdictions’ laws are relatively “arbitration-friendly” and allow the parties a high degree of procedural autonomy. Whether an arbitral award may be challenged will be determined according to the seat of the arbitration. Further, the extent to which judicial review is available to parties will be dependent on the law of the seat of arbitration. Also, the law of the seat of the arbitration will govern the extent to which an award is considered final.In this regard, it is important to consider a myriad of questions, particularly when deciding upon the seat, including, how the local arbitration law of the seat operates, whether the local courts are “arbitration-friendly, and whether the seat acknowledges the legal binding effects of smart contracts.

(3) The Validity and Arbitrability of the Subject-Matter of the Smart Contract:

Before entering into a smart contract, the parties should be aware of the identity of the subject matter of their contract. They should try to investigate whether such a subject matter is valid under the law of the seat of arbitration and also under the law applicable to the merits. In this regard, the parties should also ensure that the subject matter of their smart contract is arbitrable under the law of the seat of arbitration. Failing to inquire about the validity and the arbitrability of the subject matter of the smart contract could deem the arbitration process entirely useless.

(4) The Capacity of the Parties to Enter into the Smart Contracts:

Parties to a smart contract must have legal capacity to enter into such a contract or otherwise it could be considered invalid. Parties should be aware that their capacity is usually determined by the law of domicile of each party, rather than the law of the seat of arbitration or any other law. Therefore, if one of the parties comes from a jurisdiction that does not recognize smart contracts, this might affect such a party’s ability to enter into the contract. Further, it might serve such a party as a legal loophole to evade its obligations under the smart contract in the future.

(5) The Law Applicable to the Merits of the Dispute:

The parties to smart contracts should choose the same jurisdiction for the seat of arbitration and the law applicable to the merits of the dispute. In this regard, jurisdictions such as Arizona, Tennessee, and Delaware are currently considered the friendliest jurisdictions for legal enforcement of smart contracts.

(6) The Number of Arbitrators:

The parties in international arbitration are usually allowed to choose their arbitrators. The norm is that each party chooses one arbitrator and then both parties or the selected arbitrators, as the case may be, will choose the chair of the arbitral tribunal. The parties should try and avoid choosing an even number of arbitrators as this could be considered to be in violation of various arbitration laws around the world. Also, the parties should not try to choose a number of arbitrators more than three arbitrators or otherwise they might run afoul of the law of the seat of arbitration. The provision regarding the number of arbitrators could be considered a public policy issue at the seat of arbitration.

(7) The Technical Qualifications of the Arbitrators:

Parties should try to choose arbitrators who possess the technical knowledge to adjudicate the smart contracts disputes, especially if the dispute is concerning a technical bug for example. This will save the parties time and money when they proceed with arbitration and will enable them to benefit from one of the most important benefits of arbitration.

(8) The Confidentiality of the Smart Contract Disputes:

Parties should be aware that arbitration is not confidential by default. Therefore, they should provide explicitly for the confidentiality of their dispute under the smart contract. Otherwise, they might run the risk of exposing their confidential information to the public.

Survey of Blockchain-Arbitration White Papers – Red Flags

The author has surveyed 6 white papers prepared by the tech community as blockchain-based arbitration solutions for smart contracts’ disputes. The author has carefully selected the white papers included in this survey; so, this is not an exhaustive survey by any means of all the white papers promoting blockchain-based arbitration services. The author tries to assess how far the tech community is taking into consideration all the potential legal dilemmas associated with arbitrating smart contracts’ disputes. The blockchain tech community has not developed a single project that analyzes thoroughly all the risks associated with using the international arbitration mechanism for smart contracts dispute resolution. Therefore, the tech community needs to develop their models exponentially to accumulate enough experience in the field of arbitration of smart contracts, if/when the rate of smart contract dispute raises to a level where it’s profitable enough to engage in the field of arbitrating smart contracts.

Red Flags:

  1. The Seat of Arbitration and the Applicable Law: This issue is usually crucial because it has so many legal implications ranging from determining the applicable procedural law to being the exclusive forum for annulment proceedings of any arbitral decision or award issued within the seat. The issue of choosing the applicable law is as important as determining the seat of arbitration. However, only one project decided to select the seat of arbitration and the applicable law for its arbitration services.
  2. Arbitrability: Smart contract disputes can be of various categories; this means that we need to determine whether any of such disputes would be arbitrable under the chosen applicable law. Only one project selected the seat of arbitration and the applicable law for its arbitration services, it’s quite surprising that none of the other projects has considered this issue despite its significance.
  3. Code Language: Only one project contemplates the legal risks associated with the code language of smart contracts, and tries to handle this issue by introducing the concept of “Ricardian contract.”
  4. Formal Requirements of the New York Convention: Although 4 out of 6 projects acknowledge the existence of the New York convention, only one project has contemplated the legal risks associated with the formal requirements of arbitration agreements and arbitral awards under the New York convention.
  5. The Capacity of the Parties: Arbitration contracts usually take the form of arbitral clauses embedded in the main contract in traditional arbitration. In this regard, the issue of the capacity of the parties to enter into the smart arbitration contract would be one of the first issues that would need to be dealt with. However, it seems that only two projects have expressly or impliedly dealt with this issue.
  6. Confidentiality: The majority of arbitration practitioners are under the impression that arbitration is confidential by default. However, this is an entirely mistaken belief. Therefore, the projects should provide expressly for the confidentiality of the smart contract disputes to resolve this issue. In this regard, only 50% of the projects handled this matter.
  7. Availability of Annulment Proceedings and Penalizing the Arbitrators: Arbitration is usually in the form of one phase, whereby the merits cannot be reviewed again by any court whatsoever. (There is an exception for example under English Law allowing for appealing the Merits of the Arbitration provided it relates to a point on English Law, and the Court provides its leave for such an appeal.) Despite this, two projects allow for appeal process of arbitration. In addition, the same two projects foresee that there is a right and a wrong answer. In this regard, they penalize the arbitrators whose awards get annulled in the following stage.

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Eureka! Foreign Attorneys Can Now Participate in California-seated Arbitrations

Tue, 2018-08-28 23:44

Giorgio Sassine

“Why don’t you go on west to California? There’s work there, and it never gets cold. Why, you can reach out anywhere and pick an orange.  Why, there’s always some kind of crop to work in. Why don’t you go there?”

– John Steinbeck, The Grapes of Wrath

Introduction

For many years, the answer for international arbitration practitioners had been simple: California law precluded foreign attorneys from participating in international arbitrations seated in California.  Knowing this, most often international arbitration agreements are drafted with a seat other than California.  That will soon change.  As reported on 9 July 2018 in the Global Arbitration Review, “[i]n a move aimed at overhauling California’s reputation as an arbitral hub, the lower house of the state legislature has passed a bill expressly permitting out-of-state and foreign lawyers to appear in international arbitrations seated there.”  GAR then reported on 19 July 2018 that California’s Governor Jerry Brown signed the bill into law.

So why should international arbitration not now mosey on out West?  Putting aside the idyllic sandy, golden beaches, the western sunsets drawn down over the Pacific, Karl the Fog blanketing over the rolling hills of San Francisco, and the heaven-like Napa Valley wine region, California also boasts economically powerful metropolises and is the United States’ backbone for international business throughout the Pacific Rim, if not the world.  Having grown-up in the San Francisco Bay Area, I am only amazed by Silicon Valley’s collective ambition to shape humanity’s future endeavors.  While there has been negative press lately regarding data privacy and the moral questions underpinning the same, cafés across the Bay Area are buzzing with new ideas – at a pace that I have not seen anywhere else in the world.  Not only that – the amount of international trade coming in and out of Los Angeles is staggering; and both Los Angeles and Long Beach are ranked one and two, respectively, as the largest U.S. ports.  Hundreds of billions of dollars are being poured into California for mega infrastructure and construction projects, such as the high speed rail system connecting Los Angeles and San Francisco.  San Francisco, alone, has seven billion-dollar mega projects planned over the next twenty years.  And, of course, one cannot forget about the state’s second most populous city – San Diego – where its close vicinity to Mexico and the greater-Latin American region makes it a pivotal location for trade and culture moving across borders. In all, California’s economy is the fifth largest in the world – larger than the United Kingdom, India and France – with an effective GDP in 2017 of $2.747 trillion

Background

All has not been rosy on the Western Frontier when it comes to international arbitration; but, like many great Hollywood scripts, the tale of California’s place in international arbitration has a bright start, a dramatic climax, only to be followed by a happy ending. Decades ago, when California enacted an international arbitration law based on the UNCITRAL Model Law, Andre Brunel noted in the Texas International Law Journal that “California hope[d] to become the forum of choice by creating a favorable arbitral setting …  [and needed] to send a clear message that this country (or this state) is hospitable to arbitration.”

That all changed in 1998, when the California Supreme Court in Birbrowerhad to decide “whether an out-of-state law firm, not licensed to practice law in [California] violated section 6125 when it performed legal services in California for a California-based client.”  California Business and Professional Code § 6125 provides that “[n]o person shall practice law in California unless the person is an active member of the State Bar”. However, the term “practice of law” had not been defined in Cal. Bus. & Prof. C. § 6125, so the Court traced its history to determine if the definition applied to out-of-state attorneys participating in an arbitration seated in California.  The Court concluded that “the practice of law in California entails sufficient contact with the California client to render the nature of the legal services a clear legal representation.”  Applying this rule, the Court explained that “we must consider the nature of the unlicensed lawyer’s activities in the state.  The primary inquiry is whether the unlicensed lawyer engaged in sufficient activities in the state or created a continuing relationship with the California client that included legal duties and obligations.”  The Court held that Birbrower’s contacts and activities were sufficient to amount to the unauthorized practice of law in the State of California.

In response to Birbrower, California’s legislature adopted California Code of Civil Procedure § 1282.4, which Professor Roger Alford noted as “adopt[ing] a pro hac vice approach for out-of-state attorney arbitration counsel.”  Cal. C. Civ. Proc. § 1282.4, in pertinent part, reads: “(a) a party to an arbitration has the right to be represented by an attorney at any proceeding or hearing in arbitration under this title … (b) notwithstanding any other provision of law, including Section 6125 of the Business and Professions Code, an attorney admitted to the bar of any other statemay represent the parties in the course of, or in connection with, an arbitration in this state”.  (Emphasis added).  However, Cal. C. Civ. Proc. § 1282.4 did not expressly address the participation of foreign attorneys in arbitrations seated in California.  Knowing this, companies that do international business have counsel that draft or negotiate arbitration agreements that place the venue of a potential arbitral dispute in a seat such as New York City, Singapore, or Hong Kong.

The Response From California’s International Arbitration Community

The international arbitration community in California responded with incredible resolve to amend the law.  For example, most recently, the California Supreme Court created the Supreme Court International Commercial Arbitration Working Group in February 2017, with the recommendation that:

California should join the 13 U.S. jurisdictions (including New York, Florida, Illinois, Texas, and the District of Columbia) and numerous foreign jurisdictions (including Great Britain, France, Italy, Switzerland, Singapore, and Hong Kong) that authorize foreign and out-of-state attorneys to represent parties in international commercial arbitrations without any filing or fee requirement.

Of all the potential proposals, the Working Group unanimously recommended that California adopt a rule based on the American Bar Association’s Model Rule for Temporary Practice by Foreign Lawyers (ABA Model Rule). The Working Group found the ABA Model Rule was “clearer and more inviting” than any alternative.

California’s legislature responded to the Working Group’s findings and drafted Senate Bill 766, which has now been signed into law.  This is an important achievement and much credit is due to California’s international arbitration community and those outside California who see no reason why California should not be a hub for international arbitration.

California – the next hub for international arbitration

As Lao Tzu said, “the journey of a thousand miles begins with one step.”  For California, it is a significant step in the right direction.  As Maria Chedid, partner at Arnold & Porter, explained: “Our legislature has now spoken: when it comes to international arbitration, California’s doors should be opened wide”. California has the multi-cultural diversity, open and peaceful climate, large international metropolises, and top-tier international law firms and universities to attract international arbitration.  California has also set the foundation to be a burgeoning international arbitration hub when it enacted its international arbitration law based on the UNCITRAL Model Law.  In time, California will be on par with Singapore and Hong Kong and New York and Miami as an international arbitration hub of the Pacific Rim and Latin America, respectively.  The journey out West has only just begun.

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HEPI v. India: Stay Denied but Public Policy Prevents Enforcement

Mon, 2018-08-27 16:53

Thomas Snider

In Hardy Exploration & Production (India), Inc. v. Government of India, Ministry of Petroleum & Natural Gas, Civ. Action No. 16-140 (D.D.C. 7 June 2018), the U.S. District Court for the District of Columbia (“District Court”) refused to stay the enforcement of a foreign arbitral award that ordered the Indian Government (“India”) to reinstate an investor as the operator of a hydrocarbons block in India pending set-aside proceedings in Indian courts.  However, the District Court went on to conclude that it could not enforce the award because the award’s order of specific performance against India violated the public policy of the United States.  The District Court also refused to confirm a portion of the award that had granted interest on the investment up until the time that the investor was reinstated as the operator of the block.

Background to the Dispute

Hardy Exploration & Production (India), Inc. (“HEPI”) entered into a production sharing contract with India that allowed HEPI to search for and extract hydrocarbons from a block in southeast India.  In 2006, HEPI claimed that it had discovered natural gas, which, under the contract, granted HEPI a five-year appraisal period to determine whether the extraction was commercially viable.  India, however, claimed that the discovery was of crude oil, which only entitled HEPI to a two-year appraisal period.  After this two-year period ended, India relinquished HEPI’s rights to the block on the basis that HEPI failed to submit its declaration of commercial viability in a timely manner.

HEPI then initiated arbitration proceedings against India.  The tribunal consisted of three former Chief Justices of the Supreme Court of India, and the “venue” for the arbitration was Kuala Lumpur, Malaysia, as per the contract.  In 2013, the tribunal issued an award in which it concluded that the discovery was of natural gas and ordered India to allow HEPI back into the block for another three years to continue to assess whether the natural-gas discovery was commercially viable.  The tribunal also awarded HEPI interest on its original investment in the block until such time it was reinstated.

India thereafter filed a petition with the Delhi High Court to invalidate the award, and HEPI filed a separate application with the same court to enforce the award.  The High Court initially dismissed India’s plea for lack of jurisdiction on the ground that the proper venue for the application was the Madras High Court (because it was the court in closest geographical proximity to the block) and, following an appeal, on the ground that the seat of arbitration was in Malaysia.  India filed for leave to appeal the dismissal and stay the award with the Supreme Court of India.

In 2016, HEPI, having not been granted access to the block, filed a petition with the District Court for enforcement of the arbitral award.  India responded by arguing that (1) the District Court should stay enforcement of the award pending a final decision from the Indian courts and (2) confirmation of the portions of the award on specific performance and interest would contravene U.S. public policy.  In a Memorandum Opinion (“Mem. Op.”) dated 7 June 2018, the District Court refused to grant a stay but concluded that enforcement of the award would violate U.S. public policy.

Request for Stay

India maintained that the District Court should stay enforcement of the award pending a final decision from the Indian courts on set aside pursuant to Article VI of the New York Convention.  In response, HEPI argued that Article VI did not apply because India had brought proceedings in India rather than Malaysia, the seat of the arbitration.

The District Court noted that the record before it did not indicate whether the Supreme Court of India had ruled yet in the set-aside proceedings.  The District Court also noted the disagreement between HEPI and India regarding whether the Indian courts were a competent authority under the New York Convention given that the arbitration occurred in Malaysia.  Rather than delving into this issue directly, the District Court turned to the broader issue of whether it was proper for it to issue a stay assuming that the Indian courts were a competent authority.

In assessing whether to grant a stay of proceedings, the District Court looked to Europcar Italia, S.p.A v. Maiellano Tours, Inc., 156 F.3d 310 (2d Cir. 1998), which set forth six factors to be considered by courts when assessing whether to stay an enforcement proceeding, namely (1) the expeditious resolution of disputes, (2) the estimated time for foreign proceedings to be resolved, (3) whether the award will receive greater scrutiny in the foreign proceedings, (4) the characteristics of the foreign proceedings, (5) a balance of the hardships of the parties, and (6) any other circumstance that could shift the balance in favour of or against granting the stay.

The District Court denied India’s request to stay the proceedings on the basis of these factors.  In relation to the first, second, fourth, and fifth factors, the District Court focused on the delay of the proceedings in India.  The District Court noted that the proceedings in India have “been delayed over and over again due to the actions of the Government of India and the Supreme Court” and the parties could provide no “indication of how long they expect it will take the Indian court system to reach a final resolution in this case.” (Mem. Op. at 14.)

With respect to the third factor, the District Court accepted India’s argument that Indian courts would apply a greater level of scrutiny since they would consider whether the award comports with Indian law in determining whether to enforce it.

In relation to the sixth factor, the District Court noted “in particular the fact that the Supreme Court of India has already declined to stay the arbitration award pending India’s appeal regarding the Delhi High Court’s jurisdiction over the set-aside suit….  This Court is disinclined to question that assessment.” (Mem. Op. at 17.)

Specific Performance

On the basis of Article V(2)(b) of the New York Convention, India also argued that confirmation of the portion of the award on specific performance “would violate the U.S.’s clear public policy preference of respecting the sovereignty of foreign nations, including their right to control their own lands and national resources.”  (Mem. Op. at 20.)  India also maintained that an order of specific performance under these circumstances would contravene Indian law, would be difficult to enforce and supervise, and would violate the doctrines of comity and act of state.  In response, HEPI argued that India overstated the sovereignty issue.

The District Court confirmed that the public-policy exception should be narrowly construed but found that “India does not overstate the United States’ public policy interest in respecting the right of other nations to control the extraction and processing of natural resources within their own sovereign territories.”  (Mem. Op. at 21.)  The District Court highlighted three reasons why it believed enforcing the order of specific performance would contravene public policy.  First, while the District Court made clear that it did not believe that enforcing the award would be complicated for the District Court to supervise or that allowing HEPI back into the block would amount to HEPI possessing the block, the District Court nevertheless concluded that its “forced interference with India’s complete control over its territory violates public policy to the extent necessary to overcome the United States’ policy preference for the speedy confirmation of arbitral awards.”  (Mem. Op. at 26.)

Second, the District Court was “persuaded that the FSIA’s contemplation of jurisdiction over foreign countries in suits seeking compensatory (but not punitive) damages, and allowing for specific, domestic methods of ensuring that plaintiffs receive those damages, demonstrates the United States’ public policy commitment to respecting the sovereignty of foreign nations by only holding them liable for certain forms of relief.” (Mem. Op. at 27.)

Third, the District Court noted that the United States had not waived its own sovereign immunity in U.S. courts in relation to specific performance in contractual disputes.  As a matter of international comity, therefore, it would be inappropriate for a U.S. court to order specific performance over a foreign state in relation to acts occurring in that foreign state’s territory, and “it would defy comprehension” for U.S. public policy to allow for a foreign court to order specific performance against the United States within U.S. territory.  (Mem. Op. at 28.)

Interest

India also urged the District Court to decline the tribunal’s decision to award interest on HEPI’s USD 113 million investment in the block until HEPI was reinstated.  The District Court, however, held that “[t]his portion of the award is so inseparable from the specific performance portion of the award, the confirmation of which would violate U.S. public policy, that the confirmation of the interest portion of the award must also be found, necessarily, [to] violate U.S. public policy.” (Mem. Op. at 31.)

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Arbitration of Smart Contracts Part 2 – Recommendations for the Future Landscape of Smart Contracts

Sun, 2018-08-26 21:34

Ibrahim Mohamed Nour Shehata

Following up on a previous post, this post provides a number of recommendations for the future landscape of smart contracts.

(1) Un-Anonymizing the Identity of the Parties to Smart Contracts: From a purely legal perspective, having a contract entered into by pseudonymous parties raises more than one question. First and foremost, how would one be able to validate the capacity of such parties to the first place? Also, what if both parties wanted to amend their agreement to be in line with the new economic conditions or amend it for any reason; would the parties be able to do so if they do not even know the identity of each other. What if one of the parties thinks there is a force majeure that should allow him to terminate the smart contract? As discussed in Primavera and Wright’s Blockchain and the Law: The Rule of Code (2018), would such a party be able to proceed with such an argument if he does not even know the identity of his counter party? This party cannot even file a lawsuit; against whom will he file such a lawsuit. Even if such a party were able to obtain a default judgment (against “John Doe”), such a default judgment would not be of much use or effect as long as the identity of John Doe remains unknown.

(2) Enabling the Amendment and Termination of Smart Contracts: Public blockchains are immutable; this makes amending or terminating a smart contract on a public blockchain a far more complicated process than modifying any software code. This could result in (1) yielding higher transaction costs; and (2) increasing the margin of error for effectuating such amendments. Further, smart contracts do not yet offer analogous self-help remedies similar to those available under traditional contracts. For instance, as described here, under a traditional contract, a party can engage in the so-called “efficient breach”. This is simply not available under smart contracts. That’s why there are currently projects underway to create smart contracts that are amendable and terminable at any time.

(3) The inclusion of Oracles in Complex Smart Contracts: The promise of smart contracts as a decentralized mechanism for contracting is extremely overestimated and overhyped. This promise is true only when all the obligations resulting from the smart contract will take place on the blockchain (“on-the-chain”). If inputs are rather required from the real world (“off-the-chain”), then the promise of decentralization will completely evaporate in the air. In addition, supporting the process of completely “on-the-chain” smart contracts especially concerning dispute resolution would also require a trusted third party. Fortunately, as discussed here, there is a solution; use a trusted third party or what is commonly referred to as an “oracle.”

Oracles can be individuals or programs that store and transmit information from “off-the-chain,” thereby providing a means for blockchain platforms to interact with real-world persons and potentially react to such external events. For example, oracles can be connected to a data feed from a third party conveying the latest London Interbank Offered Rate (LIBOR). Also, as discussed by Michael del Castillo here, we can make an oracle convey the insights of human beings or support private dispute resolution and private arbitration systems. With oracles, smart contracts can respond to changing conditions in near real time. Parties to a contract can reference an oracle to modify payment flows or alter encoded rights and obligations according to newly received information.

In this regard, oracles could be used to determine or update obligations based on the subjective judgment of certain individuals. In this way, parties can rely on “the deterministic and guaranteed execution of smart contracts for objective promises that are readily translatable into code.”[6]At the same time, they can choose a human oracle to assess promises that cannot easily be encoded into a smart contract, either because they (1) are too ambiguous, or (2) require a subjective assessment of real-world events. Despite the benefit of using oracles, using them introduces a potential “point of failure.” For example, as discussed here, an oracle might provide erroneous data or simply go out of business. Therefore, parties to smart contracts should be vigilant when choosing their oracles. 

Smart Contract Disputes are Inevitable? Some technologists had proclaimed that smart contracts will avoid disputes altogether on the basis that the parties’ bargain is automatically implemented in a decentralized manner, when the conditions agreed between the parties are satisfied. This view is very much overestimated; it does not take into consideration how disputes generally arise in real life. Self-executing smart contracts and blockchain applications might have the potential to increase the efficiency of dispute resolution dramatically. However, disputes will not disappear altogether. On the contrary, as Craig Tevendale and Charlie Morgan have observed here, the nature of the blockchain makes it crucial that any aspects of parties’ agreement are anchored within a valid legal framework and that the parties’ identify at the outset the applicable dispute resolution mechanism. Further, smart contracts’ disputes would most likely take the form of cross-border disputes because trade is a cross-border activity. Therefore, legal advice on the applicability and enforceability of smart contracts based on the legal framework of each participating jurisdiction will be required beforehand. In this regard, we can identify at least five main potential disputes that could arise in the realm of smart contracts as follows:

  1. Is the Smart Contract legally binding?

In most jurisdictions, as discussed here and here, a contract would only be valid if it is entered into by a person with legal capacity to do so. The fact that pseudonymous parties can enter into smart contracts would make it impossible to validate whether they have the capacity to perform the obligations under such contracts or not. Some civil-law jurisdictions lay down some legal requirements (i.e., writing and signing requirements) for the formation of a legally binding contract.

  • Coding limitations as mentioned in the previous part might cause unexpected performance issues.
  • Parties might want to terminate a smart contract on the grounds of misrepresentation, mistake or duress or fraud. Also conflicts regarding the definition, interpretation, and general frameworkof smart contracts might arise, as discussed by Gauthier Vannieuwenhuyse here.
  • Subsequent changes of law or regulations might make the performance of smart contracts illegal, as discussed here.
  • Smart contracts might perform on the basis of an inaccurate data feed.[15]

 Is Arbitration the Favourable Dispute Resolution Mechanism for Smart Contract Disputes?

As discussed here, the key features that make arbitration the optimal dispute resolution mechanism for smart contract disputes are arguably the flexibility of arbitral proceedings and the straightforward enforcement of arbitral awards under the New York Convention:

(1) Resolving Uncertainty over Jurisdiction &Governing Law. As smart contracts operate via distributed nodes, it might be difficult to determine the applicable law and the concerned jurisdiction; especially that most of smart contract disputes will take the form of cross-border disputes.

(2) Protecting Confidential Information. Some smart contract disputes are likely to involve evidence about proprietary software and/or hardware. The fact that parties can agree to arbitration to make their disputes confidential will enable the parties to limit their exposure.

(3) Having a Tribunal with Specialist Technical Knowledge.  Some smart contract disputes will be fairly vanilla contract law disputes, but others will be of a highly technical nature, for example, where the code does not operate as expected or a technical bug takes place. The courts in many jurisdictions are experienced at dealing with technical issues quickly, but the parties to a smart contract can agree to an arbitration clause which enables them to appoint someone, for example, with an understanding of coding and smart contracts on a certain blockchain.

(4) Ease of World-Wide Recognition and Enforcement. Arbitration offers parties the potential to agree to flexible procedures that might help overcome the challenges presented by smart contracts. In addition, the fact that 159 jurisdictions have adopted the New York Convention facilities the process of recognition and enforcement of any arbitral award resulting from a smart contract dispute on a global basis.

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