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India’s Tryst with the Group of Companies Doctrine: Harbinger or Aberration?

Tue, 2018-11-27 06:00

Juhi Gupta

This blog previously carried a post (“previous post”) on the Indian Supreme Court’s (“SC”) progressive approach to binding non-signatories to an arbitration agreement in Ameet Lalchand Shah and Others v Rishabh Enterprises and Another (“Ameet Lalchand”). The present post briefly discusses another aspect of this approach in context of Cheran Properties Limited v Kasturi and Sons Limited and Others (“Cheran Properties”), which was incidentally decided just nine days prior to Ameet Lalchand.

In Cheran Properties, the SC held that an arbitral award can be enforced against a non-signatory based on facts and circumstances. The case involved a domestic arbitration under a share purchase agreement (“SPA”). The award was sought to be enforced against the appellant, Cheran Properties, which was not a signatory to the arbitration agreement contained in the SPA and was a nominee of one of the signatories, an individual by the name of KC Palanisamy (“KCP”). The SPA expressly recorded the right of KCP and/or his nominees to transfer their shareholding to any other person of their choice. Pursuant to the SPA, 95% of the shares was transferred to Cheran Properties. Prior to the dispute arising, KCP sent a letter to the opposite signatory party (“KSL”) as the authorised signatory of Cheran Properties, stating that in pursuance of the SPA, “our Group Companies, by themselves and/or by their nominees have agreed to purchase shares…” and requesting KSL to execute share transfer deeds “in the following names…[including Cheran Properties]”.

As in Ameet Lalchand, the SC in Cheran Properties took recourse to Chloro Controls India Private Limited v Severn Trent Water Purification Inc. (“Chloro Controls”), this time relying upon the ‘group of companies’ doctrine, which was recognised for the first time by the SC in Chloro Controls. To the best of the author’s knowledge, there appears to be no other reported decision where Indian courts have considered enforcing an arbitral award against a non-signatory on basis of this doctrine.

The SC noted that the doctrine facilitates fulfillment of a mutually held intention between parties, where circumstances indicate that the intention was to bind both signatories and non-signatories (affiliates) – “the effort is to find the true essence of the business arrangement and to unravel from a layered structure of commercial arrangements, an intent to bind someone who is not formally a signatory but has assumed the obligation to be bound by the actions of a signatory”.

The SC was cognisant of the exceptional nature of the doctrine and held that its application turns on construction of the arbitration agreement, and circumstances surrounding conclusion and performance of the parent contract. Applying the law to the facts, the SC found that Cheran Properties was conscious of and accepted the terms of the SPA, which specifically provided that KCP’s nominees would be bound by it. This would include the arbitration agreement contained in the very same agreement and therefore, Cheran Properties was bound by the arbitral award. It acted as KCP’s nominee at all material times and this was unequivocally confirmed by KCP’s letter to KSL in which KCP indicated, as its authorised signatory, that the group of companies agreed to purchase the shares.

While Ameet Lalchand focussed on identifying the principal/mother agreement in a network of agreements that contained an arbitration clause (which was similar to the facts in Chloro Controls), Cheran Properties focussed on identifying the mutual intention of parties to bind signatories and non-signatories that are related to each other in a corporate structure and where only one agreement is involved. The SC expressly clarified that interpretation of the Chloro Controls dictum could not be restricted to the parent-ancillary agreements situation.

The SC also clarified that the material legal provision in Cheran Properties was section 35 of the Arbitration Act, 1996, and not sections 8 or 45 as contended by Cheran Properties, since the case dealt with a post-award situation. Section 35 clearly stipulates that an arbitral award shall be final and binding on the parties and persons claiming under them. The expression “persons claiming under them” widens the net of those who are bound by an arbitral award – it is a “legislative recognition [that] an arbitral award binds every person whose capacity or position is derived from and is the same as a party to the proceedings”. Cheran Properties derived its capacity or position from KCP and was therefore bound by the arbitral award.

It is not often that the group of companies doctrine is applied in the arbitration context. The doctrine must be distinguished from ‘piercing the corporate veil’, which arbitral tribunals and courts have often done and approved to bind non-signatories, such as shareholders, to arbitration agreements and awards. The doctrine, on the other hand, involves binding a distinct legal entity on account of it being a part of an undivided economic reality or being inseparable from the signatory such that its participation and acquiescence is deemed.

Perhaps the leading arbitration decision on the doctrine is Dow Chemical – here, an ICC interim award that was upheld by the Paris Court of Appeals permitted non-signatories to contracts containing arbitration agreements to raise claims along with the signatories. It was held that Dow Chemicals, one of the non-signatories, was the parent company of the signatories and had participated in the conclusion, performance and termination of the contracts. The arbitral tribunal and court affirmed existence of the mutual intention to bind the non-signatories and implied consent of the non-signatories to the disputed contracts. While a detailed analysis of the doctrine in case law is beyond the scope of this post, what can be deduced from Dow Chemical and subsequent decisions is that (1) willingness to bind non-signatories varies greatly across civil and common law jurisdictions (see previous posts on this blog here and here); and (2) when the doctrine is applied, mutual intention and consent (express or implied) of the non-signatory are vital touchstones.

In the limited repository of decisions on the doctrine in the arbitration context, where does Cheran Properties stand? Admittedly, the SC did not undertake much of a nuanced or principled analysis of the doctrine. Given KCP’s express nomination of Cheran Properties and language of “our Group Companies” in his letter, as well as the wording of section 35, the SC did not have to assess the relationship between KCP and Cheran Properties from a group company perspective or Cheran Properties’ conduct in the conclusion and performance of the SPA in much detail. Arguably, given Cheran Properties’ nominee status combined with section 35, did the SC have to refer to the doctrine at all? Likewise, if either or both of these factors were absent, would the SC have paid more attention to the group company aspect and potentially delineated some test or principles?

While these are academic questions worth pondering, they should not dilute the significance of a decision on a doctrine of limited and fairly reluctant acceptance in the arbitration context. In its limited discussion, the SC struck the right notes by emphasising the touchstones of mutual intention and implied consent of Cheran Properties to the SPA. The decision gives effect to the express stipulation in section 35 and has positive implications for reducing roadblocks to the enforcement of arbitral awards and consequently, upholding commercial contracts and agreements in India.

Interestingly, the Madras High Court subsequently applied the doctrine to refer non-signatories [SEI Adhavan (“Adhavan”) and SunEdison India] to a SIAC arbitration; however, no reference was made to Cheran Properties. The Court’s key observations were: (1) it was undisputed that the non-signatories and one of the signatories [SunEdison Holding (“SunEdison”)] constituted a single economic reality and all transactions pertained to a project undertaken by Adhavan; (2) “for the convenience sake, the group of companies divided the work between themselves to carry out different activities among which the project is one”; (3) the undertaking executed by SunEdison, which contained the arbitration clause, expressly reflected that Adhavan was its alter ego, evidenced by its appointment as SunEdison’s agent and other provisions; (4) the undertaking was prepared by SunEdison’s President who controlled all operations of Adhavan; and (5) the arbitration clause clearly envisaged the non-signatories and SunEdison in one basket. The Court referred to Chloro Controls, holding that it read the doctrine into section 45 of the Arbitration Act (referring parties to international arbitration). However, while the Court cited Ameet Lalchand on the point that Chloro Controls applies to section 8, (referring parties to domestic arbitration), in my opinion, Cheran Properties ought to have been cited given it is on the doctrine and would have aided the building of jurisprudence on the doctrine in India.

Nevertheless, the decision is a positive development and combined with Cheran Properties, bodes well for the application and acceptance of the doctrine in India. The decisions reinforce India’s progressive approach to binding non-signatories to arbitration agreements and awards, and to arbitration in general, and also reflect the commercially pragmatic and pro-arbitration attitude of Indian courts.

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Interview with Deline Beukes, CEO of the China Africa Joint Arbitration Centre Johannesburg

Mon, 2018-11-26 00:34

Sadaff Habib (Assistant Editor for Africa)

With development in the African continent on the rise, the region is seeing the introduction and/ or revamping of its arbitration centres. One such development is the establishment of the China Africa Joint Arbitration Centre (CAJAC) to resolve commercial disputes between Chinese and African parties. Not an unsurprising development given China’s commitment to invest $60 billion in Africa.

Kluwer Arbitration Blog invited Deline Beukes, CEO of CAJAC Johannesburg to provide some insight into the development of CAJAC, its structure and challenges.

1. Can you give us a brief background on the inception of CAJAC and the reasons for its creation?

The rapid development of trade and investment between China and Africa necessitated the establishment of a China-Africa dispute resolution mechanism which would be supported and utilized by the business and legal communities of both China and Africa.

In June 2015, the Beijing Consensus, reflecting the views of Chinese and African stakeholders, was signed in Beijing and the decision was taken to establish, with immediate effect, a Sino-African arbitration mechanism to facilitate, safeguard and enhance Sino-African trade and investment.

In December 2015 the Forum on China-Africa Cooperation (FOCAC) representing 50 African States and China, agreed to a program of mutual cooperation and committed to the establishment of CAJAC.

CAJAC is therefore not an arbitration authority standing by itself, but an integral part of the support structure specially crafted to foster trade and investment between China and Africa.

2. How is CAJAC structured?

CAJAC was designed to make use of existing arbitral institutions. The Shanghai International Arbitration Centre (SHIAC) and the Arbitration Foundation of Southern Africa were the first two centres entrusted with the responsibility of establishing CAJAC in both Johannesburg and Shanghai.

In March 2017, three more CAJAC centres were established in Beijing, Shenzhen and Nairobi. Every CAJAC centre is supported by an established and reputable arbitral authority with the knowledge, experience and resources to deal with international disputes and to develop such an ambitious project. The centres are, CAJAC Johannesburg under the auspices of AFSA ; CAJAC Shanghai under the auspices of the Shanghai International Arbitration Centre (SHIAC); CAJAC Beijing under the auspices of the Beijing International Arbitration Centre (BIAC); CAJAC Shenzhen under the auspices of the Shenzhen International Court of Arbitration (SCIA) and CAJAC Nairobi under the auspices of the Nairobi Centre for International Arbitration (NCIA).

This allows CAJAC to become operational almost immediately.

3. In addition to CAJAC Johannesburg, which countries in the African continent does CAJAC intend to set up a centre?

As CAJAC grows and develops, the idea is to also establish a CAJAC centre to serve the different regions in Africa: North Africa, West Africa and the OHADA states. CAJAC Johannesburg will primarily focus on Southern Africa while CAJAC Nairobi will focus on East Africa. The centre entrusted with the responsibility to resolve a dispute will, however, be the choice of the parties concerned.

4. Does CAJAC have its own arbitration rules as yet? If not, when if at all, will the CAJAC rules be issued?

Currently, each of the centres have their own international rules but at the 1st CAJAC International Conference held in Cape Town in November 2017, it was agreed that CAJAC should have the same rules and procedures to ensure conformity and the same high standard wherever a dispute may be heard. CAJAC centres will, therefore, adopt a uniform set of rules. CAJAC Johannesburg is tasked with the responsibility of producing the first draft which will be debated and finally agreed by all CAJAC Centres. It is intended that the rules will be far advanced by the middle of 2018.

5. Many of the African countries, such as South Africa and Kenya, have already established arbitration centres. If you have a CAJAC Centre and a local arbitration centre, why would investors opt for CAJAC? What would be the benefit?

CAJAC was officially called into existence by the decision of the 51 states which are signatories to the 2015 Johannesburg Action Plan as part of FOCAC. The purpose of the creation of CAJAC is to address China-Africa disputes as an integral part of the Belt and Road interaction. This implies the harmonization of China and Africa business practice, centralized norms and arbitral systems and requires a cadre of arbitrators familiar with the cultural norms and practices of China and Africa who will build together a shared jurisprudence. This is a unique purpose and it is anticipated that African and Chinese investors will benefit from the use of such an institution.

6. Since its inception in 2015, how many arbitrations have been referred to CAJAC Johannesburg?

It was never anticipated that there would be an immediate reference to CAJAC. The CAJAC framework had first to be finalized and a model clause widely published for incorporation in commercial contracts.

The introductory phase is close to completion and we are aware that CAJAC clauses are being incorporated in commercial contracts by banks, financial institutions and in other commercial contracts. The passage of the International Arbitration Act in South Africa at the end of 2017, has given CAJAC further impetus as a recognized Model Law venue. CAJAC is open for business and it awaits referral of its first disputes.

7. It is understood that one of the aims of CAJAC is for matters to be disposed of quickly compared to national courts. How long have the arbitrations thus far initiated lasted?

CAJAC is administered by AFSA and the general experience in AFSA is that contested matters are finalized in about a year. The experience of our partner centres in China indicates that CAJAC disputes in China will be adjudicated at a faster pace, i.e. a matter of months.

8. Typically, what is the demographic of the arbitrators appointed? How are challenges to appointments dealt with? Does CAJAC have some sort of committee that deals with arbitrator appointments?

The concept of a shared panel for all CAJAC centres is fundamental. We want to ensure that disputants have an identical choice of arbitrator, or panels of arbitrators, irrespective of the centre in which their dispute is heard. We want to avoid any suggestion of “home-town” panels.

Each of the international institutions elect arbitrators to serve on the CAJAC panel. These arbitrators have expert experience in different fields and in particular in international arbitration.

9. What is the default seat for arbitrations under the future CAJAC rules (if any)? In the arbitration agreements thus far, what have you seen as the most common seat of arbitration? Do you think CAJAC increases the likelihood of the seat of arbitration being Africa and the arbitrators originating from Africa?

The uniform CAJAC rules, once finalized, will not have a default seat for arbitrations. Initially we would expect that a preponderance of matters will be handled by CAJAC China centres but, with the emergence of South Africa as a well-placed international venue, we think that there is a likelihood that matters referred to CAJAC Johannesburg will steadily increase. We also see strong potential for the use of CAJAC Nairobi.

10. Rule 8 of CAJAC Johannesburg states that it will accept matters referred to it by agreement of the parties, regardless of the seat of arbitration. What happens if the chosen seat is not a party to the New York Convention or does not incorporate the UNCITRAL Model Law?

Where CAJAC is mandated to administer a matter in a chosen seat which is not party to the New York Convention (e.g. Namibia), the party will routinely be advised of the limitations which may following regard to the recognition and enforcement of agreements and awards. Where the chosen seat is not a country which incorporates the Model Law, much will depend upon the adequacy of the particular arbitral system and may require the parties to consider a relocation of the chosen seat.

11. Does CAJAC have a system of reviewing the final award before it is rendered?

No such reviewing system is contemplated, but, no doubt, the matter will be considered at the final stage of the uniform rules.

12. What kind of challenges, if any, has CAJAC Johannesburg faced to date?

CAJAC Johannesburg has faced the usual challenges which confront any arbitral institution, but has been greatly assisted by the support of AFSA and the ability to draw on its resources, experience and skill.

The interaction between CAJAC partners has also facilitated the project as well as the support of 51 states to ensure its establishment.

13. What do you mean by usual challenges? How has CAJAC overcome any culture or social barriers, if any, to operating as a centre?

Usual challenges would include ensuring adequate funding for the period leading up to the administration of cases (AFSA is a wholly independent self-funding non-profit organization), creating awareness in the business and legal sectors of the availability of a tailor-made service and determining the specific needs of the target market.

In offering a China-Africa dispute resolution mechanism, CAJAC Johannesburg also had to ensure that the arbitrators nominated by CAJAC Johannesburg had a thorough understanding of the Chinese Arbitration Act, Chinese arbitration practice and procedure as well as an appreciation of Chinese culture. In addition to many exchange visits between China and South Africa, a delegation of CAJAC Johannesburg arbitrators also paid a visit to China to discuss various topics of common interest including arbitration principles relating to the exchange of pleadings; the production of documents; testimony of witnesses and the role of Counsel.

CAJAC Johannesburg further appointed a well-qualified lawyer and MBA graduate with wide experience and originally from mainland China, to facilitate communication and to ensure cultural understanding.

Finally, AFSA extended its Advanced Training Course, offered under the aegis of the University of Pretoria, to include a module on International Arbitration covering all the different aspects of international arbitration and in particular Chinese arbitration practice and procedure.

14. Given the make up of the continent and its general abundance of natural resources, do you see more energy and natural resource related disputes being referred to CAJAC or general commercial disputes?

We expect a variety of disputes to be referred to CAJAC Johannesburg covering all aspects of business conducted between China and Africa. This could include general commercial disputes, construction and infra-structure disputes, disputes arising in the telecommunications industry as well as in the financial and the energy sector. Only time will tell.

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Cybersecurity in Arbitral Proceedings: How to Kick-Start the Conversation about Protecting your Clients’ Data

Sun, 2018-11-25 00:41

Vanessa Naish and Maguelonne de Brugiere

Herbert Smith Freehills

The advent of the EU General Data Protection Regulation (GDPR), which came into force on 25 May 2018 within the EU and the European Economic Area, has sparked a renewed debate within the arbitration community about importance of adequate consideration being given to the collection, preservation and protection of data in arbitral proceedings. The GDPR has also highlighted that all parties involved in the arbitral proceedings, be they arbitrators, counsel, institutions, experts, or even witnesses, are potentially taking on the roles of controller1) ‘Controller’ is defined in the GDPR as “the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data; where the purposes and means of such processing are determined by Union or Member State law, the controller or the specific criteria for its nomination may be provided for by Union or Member State law“. jQuery("#footnote_plugin_tooltip_4099_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4099_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or processor2) ‘Processor’ is defined in the GDPR as “natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller“. jQuery("#footnote_plugin_tooltip_4099_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4099_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); of data, and risk incurring significant penalties if they fail to comply with the regulatory requirement to ensure that appropriate security measures are in place to protect personal data. However, the risks of failing to implement adequate cybersecurity practices, in particular in arbitration, are not new.3) We have seen the impact of cyberhacks in arbitration already, with documents obtained through hacking increasingly being relied on in proceedings as was the case in Libananco v Republic of Turkey (ICSID ARB/06/8), Opic Karimum Corporation v Venezuela and Kılıç v. Turkmenistan (ICSID Case No. ARB/10/14), Caratube International Oil Company and Mr Devincci Saleh Hourani v Kazakhstan (ICSID Case No. ARB/13/13). High profile hackings also include the hacking of the website of the Permanent Court of Arbitration in the Hague in 2015 to obtain information regarding a maritime boundary dispute between China and the Philippines. And those are just a few of the cyberattacks and hacking attempts that have been uncovered or heard of in the public domain. Undoubtedly, attacks of this nature will only continue to rise. jQuery("#footnote_plugin_tooltip_4099_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4099_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given the types of companies which might choose to resolve their disputes by way of arbitration, the frequent involvement of state entities, and the potential impact on the financial markets that arbitration awards can have, arbitration proceedings are prime targets for hackers.

 

We have seen promising developments in the field of cybersecurity in arbitration in the past year, with the publication of the draft International Council for Commercial Arbitration (ICCA) Cybersecurity Protocol for International Arbitration in April, and the International Bar Association’s (IBA) Cybersecurity Guidelines in October. The former aims to provide a framework which parties would need to agree to apply to their proceedings. It is still in draft consultation form and does not yet set out proposals in terms of the technological or organisational measures to be put in place to ensure the cyber integrity of proceedings. By contrast, the latter contains some very practical guidance on technological measures to avoid compromising the safety of data. However these guidelines are primarily aimed at law firms and single practitioners and are not tailored to arbitration proceedings. Neither provides a complete framework for cybersecurity in arbitration, nor can they. In reality, addressing cybersecurity in arbitration comprehensively will require a collective effort on the part of arbitrators, practitioners and institutions to change our working practices and to ensure that the correct measures are implemented on a case by case basis in each proceeding.

 

The parties and their legal advisors

 

In practice, cybersecurity in any specific arbitration will need to start with the parties and their legal advisors. Given the importance of confidentiality in the client-lawyer relationship, larger law firms will have stringent cyber security protections and internal rules and codes for lawyers regarding the protection of client data.  Legal advisors are often best placed to assess the nature of the information that will be shared during the arbitral process and the impact of a cybersecurity breach on their client’s business. They are also important actors in shaping the arbitral procedure and the main parties contributing to the flow of data.

 

Cybersecurity must therefore start with an initial risk assessment to be carried out in conjunction with the client. Legal advisors might consider whether highly commercially sensitive data is pertinent to the dispute and whether a particular approach should be taken to the collation of data from the client or the storage and review of that data within the law firm. They may also wish to discuss with the client whether release of that data, any particular pieces of information, the fact of the arbitration or its outcome could have a significant impact on their business.4) E.g. for a listed company, the outcome of an arbitration may affect share price and the hack of arbitral award before it has been sent to the parties could have important ramifications. jQuery("#footnote_plugin_tooltip_4099_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4099_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Depending on the risk assessment carried out for the specific arbitration, a number of further steps may be necessary at the outset of the arbitration. Parties should consider secure ways of sending initial submissions to institutions and Tribunal members. Similarly, when considering who to appoint as an arbitrator or analysing the appointment made by the other side or arbitral institution cyber security should be a factor. Where they deem necessary, parties may wish to send a cyber practice checklist to nominated arbitrators to identify any potential security concerns which may justify a decision to refuse to appoint or challenge an arbitrator’s appointment.

 

Once the arbitral tribunal has been constituted, cybersecurity should be one of the issues raised and discussed at the first procedural conference. The ICCA Protocol may be used to prompt that discussion or to form a basis for an arbitral protocol or agreement covering the proceedings. The cybersecurity measures that are appropriate will be based on the types of data (commercial and personal), the level of risk of a cyber-attack and the implications of breach for the parties involved. Cost will also be a factor.  As part of this analysis, all stakeholders involved at this stage of the process will want to reach agreement about how, and with whom, data is to be shared and stored. Options might include the use of end-to-end encryption for email, password protection on documents sent by email, the use of secure file transfer to share documents or hosting all documents on a secure data storage platform which requires two stage authentication and does not permit downloads.

 

The Tribunal

 

It is also important that arbitrators acknowledge the critical role which they play in determining and implementing cybersecurity measures. In light of extensive digitalisation of arbitration proceedings and the increasing risks and costs associated with cyberattacks, an arbitrator’s duty to preserve and protect the integrity and legitimacy of the arbitral process arguably now extends to ensuring that adequate cybersecurity measures are adopted in each proceedings.

 

Arbitrators should ensure they are taking appropriate cybersecurity and confidentiality precautions. On a practical, non-technical level, this might entail very basic steps, such as the use of privacy screens when viewing confidential documents on screen in public settings, ensuring that his or her operating system automatically applies updates, that their antivirus/malware software is up to date, that they use a secure email provider, that they have a unique login to their computer and that hard drive encryption is activated on their computer or any other electronic device they plan to use during the arbitration. Individuals acting as arbitrators may also want to consider whether their cyber breach insurance is sufficient.

 

It also follows that Tribunals should give adequate consideration to the measures that need to be taken to preserve the confidentiality of the proceedings and to safeguard the arbitral process. Indeed, given the scope of their powers and the ongoing decisions which they make regarding the volume and flow of information, Tribunals are well placed to invite parties to make submissions on the cybersecurity measures they believe to be necessary to the proceedings in question, and to adjudicate on the appropriate levels of protection necessary, bearing in mind the consequences of breach and the costs of implementing the measures, as well as to determine the penalties for breach. Any cybersecurity protocol or agreement should cover the reporting of security concerns and actions that should be taken in the event of known breach.

 

Arbitral Institutions

 

Arbitral Institutions similarly have an important role to play in safeguarding arbitral proceedings from cyber-breaches. Arbitral Institutions are often the first to receive a transfer of data from the parties in an arbitration. Depending on the rules in question, they may also be copied in on much of the same data as is sent to the arbitrators.

 

However, the extent to which arbitral institutions should be involved in the security of the wider arbitration is less clear. Institutions may be questioning whether it is an unnecessary cyber risk for them to receive the large quantities of confidential data that they currently receive. Rule revisions may be being considered to highlight the importance of cyber security, along with specific institutional cybersecurity protocols. But how much further should arbitral institutions go? Should institutions be offering training to arbitrators on this issue? Should they require potential arbitrators to confirm that they have appropriate levels of security in place? Should other institutions follow the HKIAC’s example in offering or facilitating the use secure storage platforms for arbitrations?5) Article 3.1(e) of the new HKIAC Rules. jQuery("#footnote_plugin_tooltip_4099_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4099_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The market will be watching all the arbitral institutions with interest to see whether any consensus on these issues emerges, or whether each institution will reach their own conclusion on where to draw the line.

 

Conclusion

 

As the global integration of electronic communications continues to grow with the daily use of new communication technologies, we all have a part to play in ensuring that the arbitral process is not left behind. A failure to adapt our processes to new cyber threats jeopardises the attractiveness of arbitration as an international method of dispute resolution. Simple steps, such as those recommended above, can be taken at the outset of any arbitration proceedings to ensure that appropriate measures are put in place to preserve and protect the confidentiality of data in our proceedings. These steps are not necessarily complex ones. What they require, however, is a mindset shift, and an acceptance on the part of all practitioners that cybersecurity is not an optional point for discussion at the outset of proceedings, but a necessary one.

References   [ + ]

1. ↑ ‘Controller’ is defined in the GDPR as “the natural or legal person, public authority, agency or other body which, alone or jointly with others, determines the purposes and means of the processing of personal data; where the purposes and means of such processing are determined by Union or Member State law, the controller or the specific criteria for its nomination may be provided for by Union or Member State law“. 2. ↑ ‘Processor’ is defined in the GDPR as “natural or legal person, public authority, agency or other body which processes personal data on behalf of the controller“. 3. ↑ We have seen the impact of cyberhacks in arbitration already, with documents obtained through hacking increasingly being relied on in proceedings as was the case in Libananco v Republic of Turkey (ICSID ARB/06/8), Opic Karimum Corporation v Venezuela and Kılıç v. Turkmenistan (ICSID Case No. ARB/10/14), Caratube International Oil Company and Mr Devincci Saleh Hourani v Kazakhstan (ICSID Case No. ARB/13/13). High profile hackings also include the hacking of the website of the Permanent Court of Arbitration in the Hague in 2015 to obtain information regarding a maritime boundary dispute between China and the Philippines. And those are just a few of the cyberattacks and hacking attempts that have been uncovered or heard of in the public domain. Undoubtedly, attacks of this nature will only continue to rise. 4. ↑ E.g. for a listed company, the outcome of an arbitration may affect share price and the hack of arbitral award before it has been sent to the parties could have important ramifications. 5. ↑ Article 3.1(e) of the new HKIAC Rules. 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: Arbitration in Belgium: A Practitioner’s Guide
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Proposed 2018 Amendments to Indian Arbitration Law: A Historic Moment or Legislative Blunder?

Sat, 2018-11-24 01:43

Pranav Rai

YIAG

The proposed amendments (“Bill”) to the Indian arbitration law may soon get the force of law. The Bill is based on the report (“Report”) of a High Level Committee and suggests several changes which may have far-reaching negative effect.

 

In my earlier post, it was argued that the Report and the Bill have some fundamental policy flaws. It was accordingly suggested that the Bill be reconsidered by the legislature. This post endeavors to point out the major legislative flaws in the Bill, which, as a concept, have been proposed to be introduced for the first time in the Indian arbitration law. These new concepts, discussed below, relate to designation of arbitral institutions (“AI”), confidentiality obligations, and qualifications, experience and general norms for arbitrators.

 

Designation of Arbitral Institutions  

 

As a result of the Report’s focus on developing institutional arbitration in India, the Bill now makes a provision for the designation of AI by the Supreme Court (for international commercial arbitration) and the High Courts (for domestic arbitration). The Bill then provides that, in the absence of an agreed arbitration procedure between the parties, the AI (and not the appropriate court as per the current law) will be the appointing authority for arbitrator/s.

 

Although inspired from Singapore’s International Arbitration Act (“IAA”) and Hong Kong’s Arbitration Ordinance (“HKO”), this provision misses an important aspect which is present in both IAA and HKO. Only one AI is designated as the appointing authority under both IAA and HKO – Singapore International Arbitration Centre and Hong Kong International Arbitration Centre, respectively. Consequently, it also fails to construe an important reason for limiting such AI to only one – Quality.

 

In an ideal scenario, this number should have been one or possibly two – one for international commercial arbitration and another for domestic arbitration. The least which could have been done here is to put a cap on the number of such IA which can be so designated by the courts. The Bill does neither, but leaves it open for the courts (1 Supreme Court plus 24 High Courts) to start the designation process for an (infinite) number of AI.

 

Further, to be designated as such, the courts are only required to see if the AI has been “graded” by the Arbitration Promotion Council of India. There is no clarity (yet) on what grades will be considered good for this purpose.

 

So, on the whole, this provision leaves the designation aspect at the wisdom of the courts. This is however fraught with danger. There have been several instances in the past where the Indian courts have taken positions contrary to the legislative intent of the arbitration law (see here for an example). We can only imagine what can happen if even the legislative intent is not clear, as in the present case. Not to mention the plight of the parties negotiating the arbitration agreement, who will now have “too many” AI to choose from and agree to, even in domestic arbitration.

 

Confidentiality

 

The Report suggested a provision for explicit obligation of confidentiality in arbitral proceedings. The Bill incorporates this suggestion, with some deviations, and provides for confidentiality obligations upon the parties, the arbitrator and the AI. But, as we shall see, this provision raises some concerns.

 

First, although the Report correctly suggests that there is a divergence of views on this subject, it did not make any effort to find out the reasons for these divergent views. After a short (ten line) discussion on the position in Hong Kong (explicit confidentially obligations) on the one hand, and Singapore and UK (implied duty of confidentiality on parties through case law) on the other, it simply concluded that that an express confidentiality provision for arbitral proceedings is required. Also, during this process, the Report did not look into the nuances linked to this obligation or study other jurisdictions which have maintained position similar to India. One such jurisdiction clearly missed out is Australia, which had for long maintained a contrarian position on this issue (similar to India’s current position) and has only recently applied confidentiality provisions on an “opt-out” basis. Only if this aspect could have been studied holistically, with an effort to appreciate the reasoning adopted by these jurisdictions for the approach chosen, it would have served the cause better and could have provided concrete options to work with.

 

Secondly, the Report found inspiration for the explicit confidentiality provision from the HKO model, but surprisingly failed to capture or discuss the various aspects of the confidentiality dealt even by the HKO. The HKO does this very differently from what the Bill proposes, for it also: a) provides for confidentiality in court proceedings related to the arbitral proceedings; b) makes confidentiality obligations of the parties’ subject to the principle of party autonomy; and c) has several other nuances, for example, the various exceptions to confidentiality obligations (see Articles 16-18 of HKO).

 

Thirdly, the Report did not consider that such matters with respect to confidentiality could have also been taken care of by the AI and that there was at least a case for not providing for this explicitly in the legislation but leaving it at the judgement of the AI. This approach, if considered and adopted, would have been in sync with what most prominent AI do globally (for example, see Rule 39 – Confidentiality of SIAC Rules and Rule 30 – Confidentiality of LCIA Rules).

 

As a result, the Bill ends up providing for an express confidentiality provision applicable as a blanket obligation upon the parties, arbitrator and even the AI. It is devoid of the party autonomy principle and does not capture the various nuances which should be present if the legislation provides for this expressly. This is compounded by the inept drafting of even this binary form of confidentiality obligation which makes it impractical to be observed. To illustrate, there is no exception provided for non-disclosure of any “arbitral proceedings”, except for the arbitral awards. Even for the arbitral awards, the only exception provided is “where its disclosure is necessary for the purpose of implementation and enforcement of award.” There is no mention of other standard exceptions, such as, for challenging the award or when a disclosure is required to protect or pursue a legal right, although this was pointed out by the Report.

 

This is not to suggest that confidentiality obligations in arbitration should be rejected outright. But instead, this is to propose that any provision which is new to the arbitration law in India should be incorporated with more thought and study than has been done in the present instance. Particularly when such a provision also affects one of the important principles of arbitration – Party Autonomy.

 

Qualifications, experience and general norms for arbitrator

 

The Bill adds a new schedule. The first part of this schedule classifies certain professions and provides that persons outside of this list shall not be qualified to be arbitrators. The second part provides for certain general norms applicable to arbitrators. The legislative intent here appears to be to apply these only to the arbitrators on the panel of AI and not to ad hoc arbitration. However, due to ambiguity in drafting, even this cannot be said with certainty.

 

In the first part, regarding qualifications and experience for arbitrators, an exclusive list of professionals has been provided for and only they can be arbitrators. For example, an India qualified chartered accountant, having ten years of experience, is regarded as qualified for this purpose, but there is no mention of an architect or a company secretary or a cost accountant who may all do a perfectly fine job as an arbitrator in their respective spheres. No good reasoning for such classification can be found in the Bill or the Report.

 

Even within this exclusive list of professions, there is an unreasonable classification. So, while there is no experience requirement for certain persons (such as officers of Indian Legal Service), an experience of ten years is required for others (such as Advocates and Chartered Accountants). Undefined terms like “officer of the Indian Legal Service”, “senior managerial position” and “senior legal experience” make this even more difficult to decode.

 

The second part of this schedule, providing for the general norms applicable to arbitrator, is inordinately wide and eludes objectivity on almost all occasions. For example, it expects the arbitrator (for domestic or international commercial arbitration) to: be “conversant with labour laws”, have a “robust understanding of international legal system on arbitration” and not be involved in “any legal proceeding.” Here again, no effort has been made by the legislation to explain the reasoning of applying such widely worded norms upon arbitrators.

 

If this schedule becomes a part of the legislation then it would be a unique case. There are of course standards for admission to arbitration panels in almost all prominent AI, but making it a part of law in such wide and vague terms is unheard of. A prescription on these matters should have been best left to the wisdom of the AI, as it would have been in their own interest to self-regulate on matters such as these and they would have likely been more moderate and specific in their expectations.

 

Conclusion

 

An incoherent government policy on arbitration (discussed in the earlier post) was a problem in itself. There is then, on arbitration law and policy, a history of divergence in the views of the Indian judiciary on the one hand and legislative intent on the other. In such an environment, introduction of new legislative elements devoid of any reasonable justification and without even conducting a holistic study of the international arbitration environment (which the Report claims to rely upon) is fraught with complexities and pitfalls.

 

“Justice hurried is justice buried,” is a phrase often heard in the context of Indian judiciary. If the Bill, in its current form, becomes a law, a new phrase would need to be coined to reflect this realty – “legislation hurried is legislation buried.”

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To ‘Extend’ or Not to ‘Extend’? An Analysis of the Brazilian Superior Court of Justice’s Judgement in REsp. 1.639.035 – SP

Thu, 2018-11-22 16:05

Giovana Perette Leites

The debate around the ‘extension’ of arbitration agreements has, once again, been placed under the spotlight in Brazil. The Brazilian Superior Court of Justice (‘SCJ’) recently considered the issue in disputes involving groups of contracts between the same parties. The SCJ ruled in favour of the ‘extension’ of the arbitration agreement contained in the main contract to its ancillary contracts in a multi-contract bank loan operation1)REsp. no. 1.639.035 – SP, Brazilian Superior Court of Justice, September 18th, 2018. jQuery("#footnote_plugin_tooltip_8471_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

The dispute arose in the context of the financial restructuring of Paranapanema S.A. (‘Paranapanema’), conducted by its financial advisors Banco BTG Pactual S.A. (‘BTG’) and Banco Santander S.A. (‘Santander’). In mid-2007, the parties entered into a Loan Agreement, under which BTG and Santander (the ‘Lender Banks’) would lend R$ 200 million to Paranapanema. The Lender Banks instructed the payment for the loan to be made through the subscription to Paranapanema’s shares.

The arrangement was straightforward: the Lender Banks subscribed to Paranapanema’s securities up to the limit of the loan. Paranapanema, in exchange, assured a minimum market value for its shares. As a means of guaranteeing the Lender Banks’ compensation for the loan, the parties also entered into Swap Agreements (‘Swaps’) under which Paranapanema undertook to reimburse the Lender Banks for the difference between the market price of the shares and the total sum of the Loan Agreement, should the securities not reach the minimum market value promised. The Loan Agreement contained an arbitration clause. The Swaps, however, contained a choice of forum agreement providing for the jurisdiction of State Courts.

As the 2008 financial crisis arose, the Lender Banks sold Paranapanema’s shares, but the parties diverged in relation to Paranapanema’s obligation to pay the difference between the amount of the loan and the amount of the return obtained by the Lender Banks from the sale of the shares during the financial crisis. As a result, Santander commenced arbitration under the arbitration agreement in the Loan Agreement before the CAM/CCBC against Parapanema and BTG.

The Arbitral Tribunal found in Santander’s favour, ordering Paranapanema to reimburse Santander more than R$ 250 million.

Following the Award in Santander’s favour, Paranapanema challenged the Award before a 1st Instance Court in the State of São Paulo on grounds that:

  • the Tribunal lacked jurisdiction to resolve the dispute, insofar as Santander’s claim arose from the Swaps, which did not contain an arbitration agreement;
  • the appointment of the members of the Tribunal by CAM/CCBC had violated the principle of equality between the parties – pursuant to article 21, §2 of the Brazilian Arbitration Act (Statute no. 9.307/1996) –, tainting the procedure as a whole and rendering the Award null2)The issue relating to the appointment of the members of the Arbitral Tribunal will not be discussed in this article, given that the SCJ did not rule upon the matter, because it found that it would require a reexamination of the factual background, as well as of the relevant supporting evidence of the case. According to binding precedents, the SCJ is barred from reexamining the facts of the cases it rules upon, having to limit its decision to any violations of Brazilian federal legislation. jQuery("#footnote_plugin_tooltip_8471_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

The 1st Instance Judge set aside the Award for the violation of the parties’ right to equal representation, but rejected the argument on the lack of jurisdiction of the Arbitral Tribunal under the Swaps.

Santander and BTG appealed to the São Paulo Court of Appeals (‘SPCA’) from the decision that set aside the Award under article 32, VIII, of the Brazilian Arbitration Act. Paranapanema also applied to the SPCA appealing the 1st Instance decision that dismissed its request to set aside based on the improper ‘extension’ of the arbitration agreement. The SPCA upheld the 1st Instance decision on both counts.

The SPCA found that the Loan Agreement, as the main agreement of the group of contracts, set out core provisions for its ancillary contracts, i.e. the Swaps, indicating the existence of connection between the two. The SPCA also ruled that the choice of forum agreement in the Swaps should be considered a subsidiary alternative to the resolution of disputes between the parties3)Although the decision was silent in this matter, it is likely that the SCJ intended to limit the use of the choice of forum agreement to instances where use of the arbitration agreement would not be possible, e.g. interim measures requested before formation of the arbitral tribunal, annulment or enforcement of arbitral awards, etc. jQuery("#footnote_plugin_tooltip_8471_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

Following the SPCA’s decision, BTG and Paranapanema appealed to the SCJ.

BTG appealed the SPCA’s decision on the matter of the deficiency in the formation of the Arbitral Tribunal, but the SCJ did not rule upon the merits of that claim4)See footnote no. 2 supra. jQuery("#footnote_plugin_tooltip_8471_4").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. Nonetheless, the SCJ did extensively review Paranapanema’s appeal on the issue of the ‘extension’ of the arbitration agreement in disputes arising from group of contracts, upholding the lower instances’ decisions. It endorsed the lower instances’ ruling in finding that it was possible for the arbitration clause and the choice of forum agreement to coexist and that the Swaps and the Loan Agreement were connected and dependent. The SCJ emphasized that, insofar as the connected contracts related to the same business transaction, they had to be interpreted together. In its ruling, the SCJ also relied upon the ‘center of gravity’ doctrine, which provides that the main contract establishes a legal framework within which the ancillary contracts must function.

The ruling demonstrates the pro-arbitration approach adopted by Brazilian Courts, but one should still be cautious when addressing this issue.

Although the cornerstone of the debate around the ‘extension’of arbitration agreements is the existence of consent – or lack thereof –, the reasoning of decisions on the matter often encompass logical fallacies and, by ‘jumping to conclusions’, ignore the issue of consent, or, at least, relegate it to second place.

Courts and Tribunals commonly decide the matter looking into whether there is a connection between the relevant contracts or not. However, the existence of connection between certain contracts is insufficient to allow the automatic ‘extension’of an arbitration clause to all connected agreements5)Justice Luis Felipe Salomão addressed this aspect of the Judgement in his Dissenting Opinion. jQuery("#footnote_plugin_tooltip_8471_5").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.In fact, the Termopernambuco case6)REsp. no. 1.519.041 – RJ, Brazilian Superior Court of Justice, September 1st, 2015. jQuery("#footnote_plugin_tooltip_8471_6").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });is an example where two contracts were considered connected, but retained their autonomy and independence, leading to the dismissal of the ‘extension’of the arbitration agreement plea.

Turning again to Paranapanema, the SCJ went one step further and studied the existence of dependence, not just connection, between the Loan Agreement and the Swaps. Nonetheless, the SCJ failed to examine whether such connection and dependence were enough to demonstrate the parties’ consent to arbitrate. That is to say, the decision ignored that the dependency or connection between particular contracts is not what justifies the ‘extension’ of the arbitration agreement from one to the other, but rather is merely a strong indication of parties’ consent to arbitrate disputes relating to all contracts of the group.

Moreover, in the case at hand, the SCJ repeatedly referred to an ‘extension’ of the arbitration agreement to the Swaps, which may wrongly suggest that the scope of the arbitration agreement had been broadened to encompass a contract other than the one it was originally contained in. In fact, in arbitration practice, there is a relatively solid understanding that the idea of extension is a “misleading concept”7)Bernard Hanotiau, Non-signatories in International Arbitration: Lessons from Thirty Years of Case Law, Albert Jan van den Berg (Ed.), International Arbitration 2006: Back to Basics?, ICCA Congress Series, Volume 13, The Hague: Kluwer Law International, 2007. jQuery("#footnote_plugin_tooltip_8471_7").tooltip({ tip: "#footnote_plugin_tooltip_text_8471_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, because, in general, decisions on the matter are ultimately based on consent.

Albeit the SCJ did not analyse whether the dependence between the contracts had risen to the level of demonstrating consent to arbitrate disputes relating to the whole loan operation, in this author’s view, it did. The dependence between the Loan Agreement and the Swaps was shown by the fact that the latter were nothing more than a guarantee of the payment of the Loan Agreement. Hence, when interpreting their provisions, one should bear in mind that they should be compatible, in the sense that one would never contradict the other. Thus, in light of the characteristics of each of the contracts of the group and how they were linked to each other, the SCJ adopted the most reasonable interpretation, that is to say the interpretation that confirms the existence of parties’ intent to be bound by the same dispute resolution mechanism under all contracts of the group, ensuring that the same body had jurisdiction to decide over the loan (Loan Agreement) and its respective guarantees (Swaps).

References   [ + ]

1. ↑ REsp. no. 1.639.035 – SP, Brazilian Superior Court of Justice, September 18th, 2018. 2. ↑ The issue relating to the appointment of the members of the Arbitral Tribunal will not be discussed in this article, given that the SCJ did not rule upon the matter, because it found that it would require a reexamination of the factual background, as well as of the relevant supporting evidence of the case. According to binding precedents, the SCJ is barred from reexamining the facts of the cases it rules upon, having to limit its decision to any violations of Brazilian federal legislation. 3. ↑ Although the decision was silent in this matter, it is likely that the SCJ intended to limit the use of the choice of forum agreement to instances where use of the arbitration agreement would not be possible, e.g. interim measures requested before formation of the arbitral tribunal, annulment or enforcement of arbitral awards, etc. 4. ↑ See footnote no. 2 supra. 5. ↑ Justice Luis Felipe Salomão addressed this aspect of the Judgement in his Dissenting Opinion. 6. ↑ REsp. no. 1.519.041 – RJ, Brazilian Superior Court of Justice, September 1st, 2015. 7. ↑ Bernard Hanotiau, Non-signatories in International Arbitration: Lessons from Thirty Years of Case Law, Albert Jan van den Berg (Ed.), International Arbitration 2006: Back to Basics?, ICCA Congress Series, Volume 13, The Hague: Kluwer Law International, 2007. 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: Arbitration in Belgium: A Practitioner’s Guide
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The UNCITRAL Model Arbitration Law and the UAE Federal Arbitration Law: Points of Convergence and Divergence

Wed, 2018-11-21 16:27

Malak Nasreddine

Arbitration in the UAE is governed by the Federal Arbitration Law No. 6 of 2018 (“UAE Arbitration Law”). The UAE Arbitration Law, which entered into force in June 2018, repealed Articles 203 to 218 of the UAE Civil Procedures Law No. 11 of 1992 (“CPC”), which previously governed arbitration in the UAE. Unlike the former arbitration provisions of the CPC, the UAE Arbitration Law is largely modelled on the UNCITRAL Model Law on International Commercial Arbitration, as adopted by the United Nations Commission on International Trade Law of 1985 and amended in 2006 (“Model Arbitration Law”).

The UAE Arbitration Law enacted 61 provisions, many of which can be traced back in the Model Arbitration Law in an effort to modernise the current arbitration process and align the UAE arbitral framework to international standards. However, while the newly-enacted law is largely based on the Model Arbitration Law, the UAE Arbitration Law also comprises of several provisions that diverge from the Model Arbitration Law. These points of convergence and divergence are discussed, below.

 

Points of Convergence with the Model Arbitration Law:

There are significant points of convergence between the UAE Arbitration Law and the Model Arbitration Law. Firstly, in line with the Model Arbitration Law, the UAE Arbitration Law distinguishes between international arbitration and domestic arbitration. The UAE Arbitration Law applies to both domestic and international arbitration proceedings, and expressly distinguishes between the two.

Secondly, the UAE Arbitration Law requires that the arbitration agreement must be evidenced in writing, and allows parties to meet this requirement through any correspondence, including electronic mails (Article 7 of the UAE Arbitration Law). This provision is similar to Article 7 of the Model Arbitration Law.

Thirdly, Article 6 of the UAE Arbitration Law recognises the severability of arbitration agreements. In line with Article 16 of the Model Arbitration Law, the nullity, rescission or termination of the main contract does not have any effect on the arbitration clause and does not suspend the arbitral proceedings, provided that the arbitration clause is considered valid (e.g., is not deemed null and void due to the absence of a party’s legal capacity).

Fourthly, Article 8 of the UAE Arbitration Law gives effect to Article 8 of the Model Arbitration Law. The UAE courts are required to dismiss any action that falls within the scope of an arbitration agreement. The initiation of court proceedings will not preclude the commencement or continuation of the arbitration proceedings.

Fifthly, Article 26 of the UAE Arbitration Law mirrors Article 18 of the Model Arbitration Law. The parties in the dispute must be treated with equality and must be provided a fair and full opportunity to present their case.

Sixthly, in line with Article 16 of the Model Arbitration Law, Article 19 of the UAE Arbitration Law permits the arbitral tribunal to rule on its own jurisdiction, including objections in relation to the existence or validity of an arbitration agreement. The arbitral tribunal may rule on a plea either as a preliminary question or in a final award. A party may, in the event where the tribunal rules as a preliminary question that it has jurisdiction, request the competent court to review and make its own determination on the matter.

Furthermore, consistent to the Model Arbitration Law, the UAE Arbitration Law empowers an arbitral tribunal to order interim measures, unless otherwise agreed by the parties. Article 21.2 of the UAE Arbitration Law provides that the arbitral tribunal may require the party (requesting the interim or precautionary measure) to submit a security for costs, which is in line with Article 17E of the Model Arbitration Law. The arbitral tribunal may also require the party (requesting the interim or precautionary measure) to bear the damage resulting from the enforcement of the order, where the tribunal subsequently decides that the party was not entitled thereto (Article 21.2 of the UAE Arbitration Law, consistent with Article 17G of the Model Arbitration Law). In addition, the UAE Arbitration Law empowers the arbitral tribunal to amend, suspend or repeal the order of the interim measure, upon the request of a party or on its own motion (Article 21.3 of the UAE Arbitration Law, consistent with Article 17D of the Model Arbitration Law).

Finally, consistent with Article 34 of the Model Arbitration Law, the UAE Arbitration Law provides limited grounds to annul the arbitral award (Article 53 of the Arbitration Law).

 

Points of Divergence from the Model Arbitration Law:

While the UAE Arbitration Law is largely based on the Model Arbitration Law, the UAE Arbitration Law also comprises of several provisions that deviate from it, which will be discussed below.

Firstly, the UAE Arbitration Law provides that the signatory must be authorised in order to enter into the arbitration agreement, otherwise the arbitration agreement is considered null and void (Article 4 of the UAE Arbitration Law). A representative of a juridical person must have specific authority to enter into an arbitration agreement. This is usually in the form of a power of attorney or board resolution. Proof of a signatory’s authority is not required under the Model Arbitration Law.

Secondly, according to Article 27 of the UAE Arbitration Law, the arbitral proceedings are deemed to have commenced from the date following the formation of the arbitral tribunal, unless otherwise agreed by the parties. In contrast, Article 21 of the Model Arbitration Law provides that the arbitral proceedings are deemed to have commenced on the date on which the request for arbitration is received by the respondent.

Thirdly, Article 28 of the UAE Arbitration Law provides that, unless otherwise agreed by the parties, the arbitral tribunal may hold the arbitration hearings (a) at any physical venue it deems appropriate, or (b) through modern means of communication and technology (e.g., video conferencing). However, the Model Arbitration Law does not provide the option for the arbitral tribunal to hold the arbitration hearings through modern technological means. The UAE Arbitration Law introduces technological advancements in an effort to provide flexibility to international arbitrators and parties.

Fourthly, the UAE Arbitration Law expressly protects the confidentiality of arbitration hearings and arbitral awards, unless otherwise expressly agreed by the parties (Articles 33 and 48 of the UAE Arbitration Law). The Model Arbitration Law does not expressly protect the confidentiality of arbitral hearings and awards.

Fifthly, Article 22 of the UAE Arbitration Law empowers the arbitral tribunal to join a third party to the arbitral proceedings, following the request of either party or the third party itself and provided that the third party is a party to the underlying arbitration agreement. The Model Arbitration Law does not provide for third party joinder.

Sixthly, Article 54 of the UAE Arbitration Law provides that the party seeking to set aside the arbitral award must submit its request within thirty days from the date of the notification of the award. Article 34 of the Model Arbitration Law permits the party three months from the date of receipt of the award.

Finally, where a party submits an application to annul or set aside the award, the Model Arbitration Law empowers the court (where recognition or enforcement is sought) to stay enforcement even if the parties have not requested it (Article 36.2 of the Model Arbitration Law). However, the UAE Arbitration Law provides that a party’s request for annulment does not stay enforcement of the award. While it empowers the court (hearing the request for annulment) to stay enforcement, it may not do so sua sponte but only at the request of either party (Article 56.1 of the UAE Arbitration Law).

In addition, unlike the Model Arbitration Law, Article 56 of the UAE Arbitration Law prescribes time limits. The court must decide on the stay of enforcement within 15 days from the date of the first hearing of such request. Where the court decides to stay the enforcement of the award, the court must decide on the annulment of the award within 60 days from the date of issuance of the stay of enforcement order.

 

Conclusion

As may be seen, there are significant points of convergence between the UAE Arbitration Law and the Model Arbitration Law. There are also significant points of divergence. But even where the UAE Arbitration Law diverges from the Model Arbitration Law, it tends to enhance the support to the UAE arbitral process.

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The Standard of Review of Interim Orders of an Arbitral Tribunal Seated in India: A Significant Step Towards Certainty

Wed, 2018-11-21 05:50

Sharad Bansal

Background

The Indian Arbitration and Conciliation Act, 1996 (“Act”) provides, in Section 37(2)(b), for an ‘appeal’ from an arbitral tribunal’s order on interim/provisional measures (“interim order”). It, however, does not stipulate the standard of review that the court must apply while reviewing an interim order. Sans any prescribed legislative standard, courts have two alternatives available: test interim orders on the same grounds as those applicable for annulment of awards, laid down in Section 34 of the Act; or treat Section 37(2)(b) proceedings as an appeal and assess the legality of interim orders on merits.

Discussion on the applicable legal standard in court decisions rendered under Section 37(2)(b) is sparse and loose. While some judgments simply observe that the scope of courts’ interference in interim orders passed by arbitral tribunals is limited (Subhash Chander Chachra v. Ashwani Kumar Chachra), others have conducted a full-blown enquiry on merits to test the legality of the tribunal’s interim orders (Sanjay Gambhir v. BDR Builders and Developers Pvt. Ltd., Intertoll ICS Cecons O & M Co. Pvt. Ltd. v. National Highways Authority of India, NTPC Ltd. v. Jindal ITF Ltd.). A third category of decisions applies the same standard of review to Section 37(2)(b) proceedings as that applicable to appeals against a court’s order on provisional measures (A. Jayakanthan v. J.R.S. Crusher).

The Supreme Court’s Judgment in National Highways Authority of India v. Gwalior Jhansi Expressway Limited

Recently, the Supreme Court of India in National Highways Authority of India v. Gwalior Jhansi Expressway Limited dealt with a challenge to an interim order of an arbitral tribunal which was subsequently upheld by the High Court under Section 37(2)(b). As in the earlier decisions concerning ‘appeals’ against interim orders under Section 37(2)(b) of the Act, the Court did not dwell on the standard of review for interim orders. Even the parties’ submissions (as noted in the Court’s judgment) did not address this issue. The Court nevertheless set aside the interim order on the basis that the arbitral tribunal’s approach and ruling were in contravention of the fundamental policy of Indian law.

According to Explanation 1 to Section 34(2)(b)(ii) of the Act, introduced through a legislative amendment in 2015, ‘fundamental policy of Indian law’ constitutes one of the three elements of the public policy of India. As in other jurisdictions, breach of public policy is one of the grounds for setting aside an arbitral award. It may, therefore, be argued that the Supreme Court in Gwalior Jhansi Expressway Limited assessed the legality of the arbitral tribunal’s interim order on the same grounds as those applicable for setting aside of arbitral awards. The application of the ‘fundamental policy of Indian law’ standard necessarily excludes any possibility of review on merits, since Explanation 2 to Section 34(2)(b)(ii) mandates that “the test as to whether there is a contravention with the fundamental policy of Indian law shall not entail a review on the merits of the dispute”.

The appropriate standard of review for appeals against interim orders

The Supreme Court’s application of the ‘fundamental policy of Indian law’ standard cannot be said to conclusively resolve the issue, as the Court did not take into account the provisions of the Act while applying this standard. Nor did it comment on the other grounds available for setting aside an interim order under Section 37(2)(b). A party challenging an interim order under Section 37(2)(b) can rely on two textualist arguments in support of a broader standard of review: First, Section 37(2) uses the term ‘appeal’, as opposed to the phrase ‘setting aside’ used in Section 34 (for ‘awards’). Second, ‘appeal’ in Section 37(2) is common to Section 37(2)(a) and Section 37(2)(b). Section 37(2)(a) concerns an appeal against an order of an arbitral tribunal declining its jurisdiction, which would require a review on merits. Arguably, therefore, it should have the same connotation in Section 37(2)(b). Nonetheless, for reasons submitted below, it is submitted that the Court’s approach in Gwalior Jhansi Expressway Limited is preferable.

 A full review of an interim order by a court is an invitation to all losing parties to seek recourse under Section 37(2)(b) of the Act and is plainly against the objective behind the amendments made to Sections 9 (power of courts to grant interim reliefs) and 17 (power of an arbitral tribunal to order interim measures) of the Act in 2015.  Section 17(1) now empowers an arbitral tribunal to pass all orders which a court may pass and Section 17(2) provides teeth to a tribunal’s interim orders by making them enforceable in the same manner as an order of a court. Once an arbitral tribunal has been constituted, courts can grant interim relief under Section 9 only in exceptional circumstances. The Law Commission of India’s 246th Report, which recommended these amendments, stated that the modifications were aimed at reducing the role of courts in the grant of interim measures once an arbitral tribunal is in place. The Supreme Court’s decision in Gwalior Jhansi Expressway Limited is aligned with this intent. Courts in subsequent cases can rely on purposive interpretation to follow this approach, notwithstanding the textualist arguments against it highlighted above.

Testing the legality of an interim order and an arbitral award on the same grounds is also in consonance with the provisions of the UNCITRAL Model Law on International Commercial Arbitration (“Model Law”). Although the Model Law does not provide any recourse against interim orders, it lays down the grounds on which recognition or enforcement of an interim order may be denied (Article 17I(1) of the Model Law). These grounds are identical to the grounds for refusal and enforcement of awards (a few additional grounds specific to interim orders are also included). In fact, Article 17I(2) of the Model Law specifically states that “[t]he court where recognition or enforcement is sought shall not, in making that determination, undertake a review of the substance of the interim measure”. Thus, one finds that under Model Law, the approach regulating review of awards and interim orders is consistent and an enquiry into the merits of the case is discouraged.

Conclusion

The issue concerning the applicable standard of review of an interim order assumes particular significance after the 2015 legislative amendments to the Act since, save in exceptional circumstances, parties are bound to approach the arbitral tribunal for seeking interim relief. National Highways Authority of India v. Gwalior Jhansi Expressway Limited takes the appropriate stance on this subject and is the latest addition to a series of judgments of the Supreme Court of India seeking to minimize court intervention in arbitration proceedings.

(The author would like to thank Mr. Sulabh Rewari for his comments on the piece.)

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Multiparty Investment Arbitration and Derivative Claims: Initial Thoughts on the NAFTA Case of B-Mex and Others v Mexico

Mon, 2018-11-19 16:14

Ridhi Kabra

The last decade has seen multiparty arbitration emerge as a contentious issue in investment treaty arbitration. Beginning with Abaclat v Argentina, investment tribunals have grappled with whether similarly-situated, but otherwise unrelated investors with distinct investments, can bundle their claims in a single arbitration. While decisions on this issue continue to evolve, a new ground for challenging multiparty arbitrations has emerged in the context of derivative claims in the NAFTA case of B-Mex and others v Mexico. Under NAFTA Article 1117, a foreign investor enjoys the derivative right to bring a claim on behalf of a local enterprise, if the investor ‘owns or controls’ the enterprise ‘directly or indirectly’. In the currently-pending B-Mex case, a group of 37 US shareholders have asserted their right to pursue a derivative claim on behalf of Mexican companies on the grounds that they collectively own/control the companies through their ownership of a majority of the companies’ shares. In this post, I offer a brief account of jurisdictional issues concerning the multiparty nature of the proceedings and present brief (initial) observations on the viability of Mexico’s objections.

Relevant case facts

The case concerns Mexico’s allegedly arbitrary and discriminatory interference with the claimants’ investments in five casinos in the Mexican gaming industry. Three US nationals were responsible for identifying the investment opportunity and making the initial investment.

They channeled their investments through corporate entities established in the US and Mexico. Each casino was owned by a locally-incorporated company (the ‘Mexican Companies’). In all, the principal investors in the Mexican Companies comprised the three US nationals and five US-incorporated companies owned by the US nationals (the ‘Original Claimants’).

The notice of intent to submit to arbitration listed only the Original Claimants as the intended claimants. The remaining 29 shareholders in the Mexican companies (the ‘Additional Claimants’) were included subsequently as claimants in the request for arbitration. Mexico contends that this later addition of the Additional Claimants was made necessary because the Original Claimants, by themselves, lacked ownership/control over the Mexican Companies. This contention is better explained by describing the shareholding structure of the Mexican Companies.

Broadly speaking, shares in the Mexican Companies were designated into two classes – Class A and Class B. Class A shareholders enjoyed limited voting rights. Class B shareholders had broad voting rights and could control shareholder resolutions through a majority vote. The Original Claimants owned between 41% and 82% of all shares in the Mexican companies. However, in four out of the five Mexican Companies, the Original Claimants owned less than 50% of the Class B shares. By joining the Additional Claimants to the arbitration, the claimants’ combined shareholding increased to between 56% and 82%, and their cumulative ownership of Class B shares (and the associated voting rights) crossed the 50% threshold.

Mexico has challenged the claimants’ standing on two grounds. First, Mexico contends that ownership of a local company requires full (and not majority) ownership of shares. Secondly, Mexico asserts that a group of unrelated shareholders – in this case the Original Claimants and the Additional Claimants – cannot be said to collectively control a company simply because they own a majority of the company’s shares.

Proof of collective ownership – full or majority shareholding?

In its bid to defeat the claimants’ standing, Mexico argues that investors can collectively present a derivative claim under the ownership limb of Article 1117’s ‘own or control’ only if they enjoy ‘full ownership’ over the local enterprise. Absent full ownership, investors must prove control to pursue a derivative claim (Reply on Jurisdictional Objections).

NAFTA does not define the terms ‘own’ or ‘control’. NAFTA tribunals have presumably considered it unnecessary to enunciate a test of ownership, because proof of majority shareholding in a local enterprise carries with it the presumption of control (Caratube v Kazakhstan). The B-Mex tribunal might find it relevant to clarify whether majority ownership tantamounts to ownership under NAFTA. Judicial economy would dictate that if the tribunal found positively on this issue, it would not need to consider Mexico’s objections to claimants’ standing based on collective control.

The phrase ‘own(ed) or control(led)’ appears in investment treaties in various contexts – including in the definition of ‘investment’, denial of benefits clauses, and investor standing to bring an investment claim. Yet, it is notoriously undefined. Definitions have begun to emerge recently, particularly in treaties concluded by Japan (see example, Japan-Australia Economic Partnership Agreement, art 14.17.[/fn] These treaties define ownership of an enterprise as ownership of a majority of the enterprise’s shares. The definition seems to be borrowed from the General Agreement on Trade in Services (GATS). Under GATS Article XXVIII, a company is deemed to be owned by the person who owns more than 50% of the company’s equity interests. Control, on the other hand, covers situations in which a person has the power to appoint a majority of the company’s directors or otherwise direct the company’s actions.

Mexico hinges its contention on the claim that the ‘control’ limb would be rendered redundant if ownership were to include majority ownership. This contention is arguably unsustainable. Indeed, situations of ownership and control can overlap – as in the case of full or majority ownership. But, a steady line of jurisprudence clarifies that ‘control’ reaches beyond ownership and covers situations of de facto control, such as when minority shareholders have sufficient voting strength to assert control (Thunderbird v Mexico), or when foreign investors exert substantial influence over the management of the enterprise (Vacuum Salt v Ghana). This is unsurprising given that shareholding in modern corporations is widely dispersed, and different voting rights attach to different classes of shares. Decision-making power is thus not necessarily connected to majority share ownership. Control – as distinct from ownership – allows jurisdiction over a local enterprise’s claims when control rests in the hands of a foreign investor, even though ownership might not. The Aguas del Tunari v Bolivia tribunal similarly explained the difference between ownership and control as:

“the Tribunal views this provision as meaning “owned [established by majority ownership] or controlled [established by minority ownership plus voting rights].

Whether ownership is restricted to cases of full ownership is the less contentious of the two objections raised by Mexico. As the tribunal’s Procedural Order No. 5 indicates, the tribunal has sought detailed analysis of the legal standards for proving collective control from the parties in their post-hearing briefs.

Collective control by a group of majority shareholders

Having asserted that ‘control’ and not ‘ownership’ should determine claimants’ standing in the case, Mexico argues next that a group of shareholders that collectively own more than 50% of an enterprise’s voting rights cannot be said to ‘control’ the enterprise, unless they are bound by a legal instrument, such as a shareholders’ agreement, to vote collectively.

Exclusive control v control by a group of shareholders

In the early stages of the written proceedings, Mexico reserved its right to challenge multiparty arbitration under  NAFTA Article 1117 ‘by a group of claimants contending that they collectively control an enterprise’ (Memorial on Jurisdiction). Relegated to a footnote in Mexico’s memorial, it was unclear at that stage whether Mexico was arguing for an objective bar against multiparty arbitration. Such an objection would not be novel. It has arisen in the context of ‘control’ under the ICSID Convention Article 25(2)(b) (which allows jurisdiction over claims by a foreign-controlled local enterprise). The tribunal in Vacuum Salt v Ghanaacknowledged that ‘an issue may exist’ as to whether ‘control’ is limited to ‘exclusive control’ or covers collective control by a group of shareholders. That tribunal left the question unanswered, but some authors (see example Douglas) have asserted that the ICSID Convention’s use of a singular ‘national’ requires control to lie in the hands of one controlling foreign investor. 1)Douglas, Z. (2009). The International Law of Investment Claims. Cambridge: Cambridge University Press. doi:10.1017/CBO9780511581137. jQuery("#footnote_plugin_tooltip_3075_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3075_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Article 1117 does not expressly permit multiparty arbitration. NAFTA parties have previously opposed multiparty arbitration, but such a challenge has not been based on any objective bar in the text of Article 1117. In Loewen v USA, for instance, the US conceded that Article 1117 ‘does not expressly provide that only one investor may file such a claim’ (US Memorial on Jurisdiction). In that case, the US’s objection to multiparty arbitration was born out of the case facts and the structure of the claimants’ corporate relationship. The claimants in Loewen comprised the local enterprise’s direct shareholder (The Loewen Group) and its ultimate indirect shareholder (Raymond Loewen). The two claimants did not appear jointly in the arbitration; they retained separate counsels and presented separate submissions. Furthermore, the claimants were in a vertical corporate relationship with the local enterprise. As each claimant could independently sustain a claim on behalf of the enterprise, the US feared that allowing multiparty arbitration in such a situation would create the possibility of claimants offering divergent and conflicting theories on behalf of the same enterprise, which it would have to separately defend. Accordingly, the US suggested that limits to multiparty arbitration should be read into NAFTA Article 1117 so as to ‘prevent multiple claims on behalf of the same enterprise’, and only the direct shareholder should be allowed to present the derivative claim. 2)The tribunal did not pronounce on the US’s objections. jQuery("#footnote_plugin_tooltip_3075_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3075_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The US’s line of objection is of limited assistance in this case. As described, the US was opposed to the pursuit of multiple claims on behalf of the same company. That objection does not apply when a group of horizontal shareholders – as in B-Mex – pursue a derivative claim. No single investor enjoys independent standing to present the claim, as the collective might of all investors is necessary to demonstrate ownership/control over the enterprise.

NAFTA tribunals have not limited standing under Article 1117 to cases of exclusive control. Horizontal shareholder groups have successfully pursued derivative claims, but in the relatively few examples of such cases, the group has normally comprised shareholders who had collectively decided to invest in the host State (see example Azinian v Mexico).

As arguments have developed in the case, it has become clear that Mexico is not seeking to limit standing under Article 1117 to situations of exclusive control. Instead, Mexico seeks to distinguish between collective control by related and unrelated shareholders (Post-Hearing Brief). Mexico concedes that related shareholders can be said to exercise control if they are collectively the majority shareholders of a local enterprise. Unrelated majority shareholders, in Mexico’s view, need to additionally prove their obligation to vote as a bloc through the existence of a binding agreement.

Unrelated majority shareholders and proof of collective control

At the heart of Mexico’s argument lies the difference between proof of the ability to exercise collective control and proof of actual exercise of collective control. Majority shareholding indicates only the ability to exercise collective control. Whether a group of shareholders actually exercise collective control depends on the existence of a formal or informal agreement to act together.

This is an accepted distinction in domestic corporate laws. Under domestic definitions of ‘control’ or ‘controlling shareholder(s)’, a group of persons are treated as controlling shareholders only when they are ‘acting in concert’ (see example Companies Act, Listing Rules and Takeover Code). Proof of concert requires a case-specific analysis. Concert is presumed for related shareholders, such as family members or business associates. Otherwise, concert is proved through a formal shareholders’ arrangement or tacit evidence of concert, such as repeated pattern of bloc voting.

By contrast, proof of actual exercise of collective control is not required in the only known treaty description of collective control – the Iran-US Claims Tribunal’s Claims Settlement Declaration (art VII(2). At the Iran-US Claims Tribunal, a group of shareholders could bring an indirect claim on behalf of a company if their ownership interest was collectively sufficient to control the company. As the ability to exercise collective control, without more, was sufficient to prove control under the treaty, the Tribunal has consistently found it of no import that collective control is based on the aggregation of individual shares of different shareholders (see example Mcharg and others v Iran).

Investment treaties, whilst occasionally defining control, do not expressly address the issue of collective control. Control is commonly defined as the ability to exercise substantial or decisive influence over a company’s management, including by way of ownership of a majority of the company’s voting rights (see example Energy Charter Treaty, art 1(6), Australia-India BIT, art 1(h), Netherlands-Argentina BIT, Protocol).

Given that the NAFTA does not define ‘control’, the B-Mex tribunal could distinguish the example of the Iran-US Claims Tribunal, and import the test of ‘concert’ from domestic laws. Some support for this view can be found in the case-law on ‘collective control’ in the similarly-undefined test of control in ICSID Convention Article 25(2)(b). In Sempra v Argentina and Camuzzi v Argentina, the tribunal decided that a foreign investor could aggregate its shares with another foreign investor to establish control, if the evidence proved that the shareholders were acting in ‘alliance’ or operating ‘jointly’.

Other tribunals have found the ability to exercise collective control sufficient to prove control. In Transgabonais v Gabon, the tribunal held that ICSID Convention Article 25(2)(b)’s test of ‘control’ is met if foreign investors collectively own a majority of a local company’s voting rights; proof of actual control through a shareholders’ agreement is not required. Notwithstanding, the tribunal conceded that the existence of foreign control by a plurality of entities is a question of ‘pure fact’. Ultimately, the tribunal held that allegations of ‘dissonant conduct among the different foreign nationals’ could affect a finding of control.

What amounts to collective control requires further in-depth analysis, but preliminary research suggests that actual exercise of control by unrelated investors has a role to play in jurisdictional assessments. It is also clear that, contrary to Mexico’s assertion, collective control does not require proof of formal agreement. The question might ultimately be one of burden of proof. Under the Sempra/Camuzzi approach, the claimants would have the burden of demonstrating actual control. Under the Transgabonais approach, actual control by majority owners of voting rights is presumed unless the respondent establishes otherwise.

Conclusion

Mexico’s objections in the case have created the opportunity for an investment tribunal to address not only the issue of collective control, but also clarify comprehensively the legal standards for proving ownership and control. It has been shown that Mexico’s arguments regarding ‘ownership’ as being ‘full ownership’ are unlikely to hold water. Such a reading would depart from established jurisprudence. It has also been shown that the NAFTA does not limit control to situations of exclusive control. Where the tribunal is likely to break new ground is on the issue of proving collective control by unrelated shareholders. The tribunal should not be persuaded by Mexico’s argument that only a formal agreement can prove collective control. There is no authority for such a proposition in domestic or international law. However, it would not be erroneous for the tribunal to build into the test of control, proof of actual exercise of collective control. Whether the tribunal would require such proof from the claimants at the outset, or whether majority share ownership would create a presumption of collective control in the absence of evidence to the contrary, is yet to be seen.

References   [ + ]

1. ↑ Douglas, Z. (2009). The International Law of Investment Claims. Cambridge: Cambridge University Press. doi:10.1017/CBO9780511581137. 2. ↑ The tribunal did not pronounce on the US’s objections. 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: Arbitration in Belgium: A Practitioner’s Guide
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Blowing Hot and Cold: Assessing the Permissibility of Fresh Jurisdictional Challenges During Setting-Aside Proceedings

Mon, 2018-11-19 04:59

Anirudh Lekhi

The Supreme Court of India (“SC”) in its recent decision M/s Lion Engineering Consultants v. State of M.P. & Ors. (“Lion”) has held that a party that had failed to raise a jurisdictional challenge before the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996 (“Act”), would yet be permitted to raise such a challenge during setting-aside proceedings under Section 34 of the Act. The sole reason for this inference is that setting-aside proceedings are independent of proceedings before an arbitral tribunal. However, Lion’s observations are ostensibly against the scheme of Section 16, which allows jurisdictional challenges to be raised only before the arbitral tribunal. Additionally, the decision is in conflict with existing judicial precedents addressing the same issue.

In order to resolve this ensuing confusion, it is imperative to appreciate the distinct nature of each jurisdictional challenge and the objects underlying Section 16. In this light, I explore whether new jurisdictional challenges can be urged during setting-aside proceedings.

 

Anatomy of Section 16

The relevant part of Section 16 reads as follows:

  1. Competence of arbitral tribunal to rule on its jurisdiction-

(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objection with respect to the existence or validity of the arbitration agreement…

(2) A plea that the tribunal does not have jurisdiction shall be raised not later than the submission of the statement of defence;

It is evident from the above that a tribunal may determine any objection to its jurisdiction on its own. The appearance of the word “including” in Section 16(1) denotes that jurisdictional challenges to the existence or validity of the arbitration agreement are merely illustrative and not exhaustive. Thus, various kinds of jurisdictional challenges are permissible under Section 16.  In order to appreciate the varying facets of jurisdictional challenges, it would be useful to refer to the International Arbitration Practice Guideline on Jurisdictional Challenges (“Practice Guideline”).

According to Article 2 of the Practice Guideline, most jurisdictional challenges arise in relation to whether—(i) the arbitration agreement exists; (ii) the parties to the dispute are the same as the parties to the arbitration agreement; (iii) the arbitration agreement is defective; (iv) the arbitration agreement was made in the required form; (v) the subject-matter falls within its scope; and (vi) the arbitrators have the necessary powers. Therefore, jurisdictional challenges akin to those envisaged in the Practice Guideline may also be raised before the arbitral tribunal under Section 16.

Further, as per Section 16(2), objections to the jurisdiction of the tribunal can only be raised prior to the submission of the statement of defense. The objectives of this provision are two-fold. First, it ensures that the tribunal determines its jurisdiction at the very threshold. This precludes belated adjudication on questions of jurisdiction and preserves time and expense of the parties. Second, the provision reduces the supervisory role of Courts if parties fail to raise jurisdictional challenges within the period prescribed under Section 16(2). Consequently, the inability of Courts to revisit certain questions of jurisdiction may encourage parties to raise jurisdictional challenges promptly. Any interpretation of Section 16 should not lose sight of these objects.

 

Conflict in judicial precedents

The SC’s observations in Lion are at odds with its previous decision in Narayan Prasad Lohia v. Nikunj Kumar Lohia & Ors. (“Lohia”). The jurisdictional challenge in Lohia pertained to the composition of the arbitral tribunal. It was not raised before the tribunal and urged for the first time during setting-aside proceedings. In this regard, the SC observed— “Such a challenge must be taken under Section 16(2), not later than the submission of the statement of defence…If a party chooses not to so object, there will be a deemed waiver under Section 4.” Therefore, Lohia opined that a party’s failure to raise a jurisdictional challenge before the arbitral tribunal would result in a waiver of its right to raise such challenge subsequently. Since Lohia and Lion have been decided by benches of equal strength (three judges), it is unclear which of the two decisions holds the ground.

The SC in Gas Authority of India Ltd. v. Keti Constructions (I) Ltd. (“GAIL”) also determined a similar issue. Negating a jurisdictional challenge during setting-aside proceedings, GAIL held that since the objective of the Act is to secure expeditious resolution of disputes, such challenges must be made before the arbitral tribunal itself. However, the SC qualified its conclusion by observing— “If a plea of jurisdiction is not taken before the arbitrator as provided under Section 16 of the Act, such a plea cannot be permitted to be raised in proceedings under Section 34 of the Act for setting aside the award, unless good reasons are shown.” Thus, GAIL permitted fresh jurisdictional challenges during setting-aside proceedings if good reasons were shown. However, GAIL was decided by a smaller bench of two judges and to that extent, its qualification appears to ignore Lohia.

Additionally, two decisions of the High Courts of Bombay and Allahabad have offered very compelling reasons for allowing parties to raise jurisdictional challenges for the first time during setting-aside proceedings. These decisions opine that an inherent lack of jurisdiction cannot be sanctified by the failure of a party to raise an objection promptly. Accordingly, since questions of jurisdictions go to the root of the matter, a party may raise a jurisdictional challenge at any stage.

 

Way Forward

It is true that the lack of a tribunal’s jurisdiction cannot be rectified by a party’s failure to raise a jurisdictional challenge. However, it is also essential to keep an unscrupulous party from delaying proceedings through frivolous challenges during setting-aside proceedings. Therefore, an intermediate view may be deduced by recalling the different kinds of jurisdictional challenges provided under the Practice Guideline.

These jurisdictional challenges can be classified into two categories—(i) challenges relating to a defect in the jurisdiction and (ii) challenges on account of a lack of jurisdiction. This classification is rooted in the decision of the Privy Council in Ledgard v. Bull, which postulates that though a consent or waiver may cure a defect in the jurisdiction, it cannot cure an inherent lack of it. Therefore, jurisdictional challenges raised due to a defect in the jurisdiction must be distinguished from those based on an inherent lack of it.

In this regard, a jurisdictional challenge that the subject matter is not arbitrable is an illustration of a ground based on an inherent lack of jurisdiction. For instance, an objection that the subject matter relates to penal laws should be permitted during setting aside proceedings under Section 34, even if it was not urged before the tribunal under Section 16. This is because a party’s failure to raise this challenge before the tribunal, cannot confer jurisdiction upon the tribunal when the claim itself is not arbitrable.

However, the same latitude may not be given to fresh jurisdictional challenges relating to defects in the jurisdiction. Since jurisdictional defects are capable of a cure, the Courts should permit fresh jurisdictional challenges relating to defects in jurisdiction only if “good reasons are shown”. For example, jurisdictional challenges questioning the constitution of an arbitral tribunal or the existence of an arbitration agreement are illustrations of challenges based on defects in the jurisdiction. In such cases, a party’s failure to raise a challenge before the tribunal under Section 16(2) may lead to a waiver of the right to object subsequently.

The SC in Prasun Roy v. Calcutta M.D.A considered a fresh challenge to the constitution of an arbitral tribunal during setting-aside proceedings and surmised—“The principle is that a party shall not be allowed to blow hot and cold simultaneously. Long participation and acquiescence in the (arbitral) proceedings precludes such a party from contending that the (arbitral) proceedings are without jurisdiction.” In this light, it appears that the conduct of a party and the time taken to raise a jurisdictional challenge may be considered by the Court to ascertain whether there was a waiver or not.

In view of the above, the Court’s inquiry into the existence of “good reasons” may also include a determination of whether there was a waiver of the right to object or not. This would be in keeping with the SC’s verdict in GAIL as well as the objectives of Section 16 as parties would now have to establish cogent reasons for raising new jurisdictional challenges during setting-aside proceedings.

 

Conclusion

The arbitral regime in India is clogged with decisions that do not appreciate the unique nature of each jurisdictional challenge. Evidently, decisions such as Lion and Lohia have painted every jurisdictional challenge with the same brush and yet reached plainly opposite conclusions. It is, therefore, crucial to distinguish jurisdictional challenges based on an inherent lack in the jurisdiction from those founded on defects in the jurisdiction. Their nature would determine whether a party would be precluded from raising such challenges or be allowed if “good reasons” so warrant. This intermediate approach may resolve the prevailing confusion and preclude parties from employing dilatory tactics.

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Ex Aequo et Bono: An Overlooked and Undervalued Opportunity for International Commercial Arbitration

Sun, 2018-11-18 01:43

Nobumichi Teramura

Ex aequo et bono1)The author is grateful to Professors Leon Trakman and Luke Nottage for their comment on early drafts of this blog article.This blog post is based on the author’s PhD thesis. jQuery("#footnote_plugin_tooltip_5472_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); is a legal concept that confers on arbitrators the power to decide a dispute in accordance with their sense of fairness and good conscience, instead of rigorously applying terms of a specific body of law. The principle has been unpopular in contemporary arbitration practice because there has been a tacit understanding among arbitration lawyers that to apply ex aequo et bono is to ruin arbitral procedure. This blog posting challenges this perception and urges the international arbitration community to de-mystify and revitalise ex aequo et bono, particularly to redress the ‘over-judicialisation’ (encroaching formalisation) of international commercial arbitration.

‘Negative’ Reputation Undeserved

While ex aequo et bono can be found in various legal instruments2)Article 28(3) of the Model Law. jQuery("#footnote_plugin_tooltip_5472_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and institutional rules3)For example Article 31 of CAAI Arbitration Rules; Article 21 (3) of ICC Rules of Arbitration; Article 29.2 of ACICA Arbitration Rules; Article 22.4 of LCIA Arbitration Rules; Article 33.2 of Swiss Rules of International Arbitration; Article 27(3) of SCC Rules; Article 35.2 of HKIAC Administered Arbitration Rules; Article 31.2 of SIAC Rules; and Rule 60.3 of JCAA Rules. jQuery("#footnote_plugin_tooltip_5472_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, it has long been perceived by some arbitration lawyers as arguably causing negative impacts on arbitral procedure: unpredictability of results and the potential for abuse of discretion (if any) by arbitrators. As to the former, it is suggested that the uncertain nature and scope of ex aequo et bono may undermine certainty in arbitration4)Karyn S. Weinberg, Equity In International Arbitration: How Fair is Fair? A Study of Lex Mercatoria and Amiable Composition, 12 Boston University International Law Journal 227, 246-7 (1994); Edouard Bertrand, Amiable Composition: Report of the ICC France Working Group, International Business Law Journal 753, 763 (2005); Regis Bonnan, Different Conceptions of Amiable Composition in International Commercial Arbitration: A Comparison in Space and Time, 6 Journal of International Dispute Settlement 522, 538 (2015). jQuery("#footnote_plugin_tooltip_5472_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. As to the latter, it is argued that to adopt ex aequo et bono is to permit arbitrators to ‘ignore’ the actual intentions of the parties5)Emmanuel Vuillard & Alexandre Vagenheim, Why Resort to Amiable Composition, International Business Law Journal 643, 650 (2008). jQuery("#footnote_plugin_tooltip_5472_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });. These concerns seem to have been a major cause of the limited application of the principle in arbitration practice. According to Born, tribunals in only 2-3% of arbitration cases annually apply ex aequo et bono6)Gary Born, International Commercial Arbitration 2770 (Kluwer Law International 2nd ed. 2014). jQuery("#footnote_plugin_tooltip_5472_6").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.

However, these criticisms of ex aequo et bono may be misplaced.

Commentators pointing out the unpredictability of results seem to assume that international commercial arbitration, through the strict application of legal rules, is more predictable than that of under ex aequo et bono. But is this assumption true?7)See, e.g., Edouard Bertrand, Under What Circumstances is It Suitable to Refer Disputes to Amiable Composition, International Business Law Journal 609, 610-11 (2008). jQuery("#footnote_plugin_tooltip_5472_7").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Concepts such as good faith or reasonableness inherently contain a degree of discretion and vagueness. If legal norms containing such concepts are enforced, there is already no absolute certainty in the arbitrators’ decision-making. Therefore, the old saying ‘the only certainty is that nothing is certain’ may apply to arbitration in general.

Moreover, are arbitrators allowed to overturn party intentions through applying ex aequo et bono, if they must respect the principle of party autonomy? Arbitrators decide a dispute by exercising powers granted by the parties, even in arbitration adopting ex aequo et bono.8)Article 28(2) of the Model Law. jQuery("#footnote_plugin_tooltip_5472_8").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); If they confer authority to decide ex aequo et bono on themselves and ignore the actual intentions of the parties, this would certainly constitute an undue exercise of discretion.

Such a situation would rarely happen because the parties must expressly agree to adopt ex aequo et bono for the principle to be applied under the UNCITRAL Model Law. Article 28(2) states that ‘[t]he arbitral tribunal shall decide ex aequo et bono … only if the parties have expressly authorized it to do so’; arbitrators are not able to rely on their idea of fairness without clear authorisation by parties. Article 28(4) also provides that ‘the arbitral tribunal shall decide in accordance with the terms of the contract and shall take into account the usages of the trade applicable to the transaction’.

In addition to these explicit limitations imposed by the Model Law, arbitrators with the power of deciding ex aequo et bono must observe applicable mandatory rules of law. For example, the award should not violate mandatory rules of the seat of arbitration. This is because an important duty for arbitrators is to issue an enforceable arbitral award. According to the 2018 QMUL Survey and many other empirical studies, enforceability of arbitral awards is one of the most valuable characteristics of arbitration. Parties expect arbitrators to issue an enforceable decision.

What these limitations clarify is that ex aequo et bono under the Model Law mandates arbitrators to implement the principle of party autonomy thoroughly but flexibly. The arbitrators are not allowed to abuse their discretion and ignore the express intentions of the parties.

Potential in Ex Aequo et Bono to Respond to ‘Over-Judicialisation’

In fact, there can be benefit in using ex aequo et bono more often in international arbitration.

The flexibility inherent in ex aequo et bono has potential to improve the practice of international commercial arbitration, by redressing excessive formalisation in arbitral procedures.

Although international commercial arbitration was originally developed as a cost-effective and flexible dispute resolution system,9)Nigel Blackaby, Redfern and Hunter on International Arbitration 1,2 (Constantine Partasides, et al. eds., Oxford University Press 6th ed. 2015). jQuery("#footnote_plugin_tooltip_5472_9").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it can be seen as expensive and inefficient in some cases. In particular, the increasing number of procedural guidelines and the importation of litigation-style techniques have possibly made arbitration more cumbersome. In fact, international arbitration institutions revise their rules every few years, almost always adding new provisions. Professional associations, in turn, draft new guidelines, sometimes introducing new procedural steps. Due to the development of information technology, the amount of evidence submitted during an arbitral procedure is sharply increasing. While the aim of these initiatives is not to make arbitration burdensome but to decrease procedural ambiguities10)Luke R Nottage, The Procedural Lex Mercatoria: The Past, Present and Future of International Commercial Arbitration, Sydney Law School Research Paper No. 06/51; CDAMS Discussion Paper No. 03/1E, at 5. jQuery("#footnote_plugin_tooltip_5472_10").tooltip({ tip: "#footnote_plugin_tooltip_text_5472_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, the efforts can often (unfortunately) exacerbate procedural complexities.

However, this may not be the direct cause of delay in arbitral proceedings. Unless otherwise agreed by parties, arbitrators have no legal duty to observe procedural guidelines, which are default rules, and litigation-style techniques, which are alien to arbitration. Arbitrators nevertheless appear to be forced to follow these default rules by their so-called ‘due process paranoia’: the ‘reluctance by tribunals to act decisively in certain situations for fear of the arbitral award being challenged on the basis of a party not having had the chance to present its case fully’ (see for example, here, here, and here). In short, arbitrators’ psychological state seems to be a significant underlying cause of inflexibility and delay.

Ex aequo et bono may improve this mentality of arbitrators. The primary aim in applying the principle is to give them the authority to make decisions flexibly to deliver effectively on the arbitrators’ mandate to decide the dispute as granted by the parties. By agreeing to ex aequo et bono proceedings, at least for some types of disputes, the parties permit arbitrators to act robustly to provide efficient dispute resolution. The arbitrators, therefore, do not have to become overly sensitive to every single procedural issue. They only have to observe norms arising from the principle of party autonomy: contract terms, trade usages, and mandatory rules of law at the seat of arbitration.

This real feature of ex aequo et bono needs to be disseminated more broadly in the arbitration community; otherwise, it would be impossible, through ex aequo et bono, to cure arbitrators’ due process paranoia and thereby to counter-balance the over-judicialisation of international commercial arbitration. Since the application of ex aequo et bono requires express agreement by the parties to resort to the principle, it is crucial to make those parties – as users of arbitration – to realise that ex aequo et bono has a potential to make arbitration more efficient. Ex aequo et bono alone is not effective enough to combat against the encroaching over-judicialisation; the parties’ agreement for the tribunal to use it is essential.

Conclusion

Unlike their counterparts in the European Middle Agents, modern merchants are not inclined to resort to ex aequo et bono. This blog posting suggests that the contemporary business world’s disinclination to use ex aequo et bono derives from an inadequately informed perception of the principle. Their arguably erroneous understanding is that ex aequo et bono hampers arbitral procedures by giving rise to irreconcilable uncertain outcomes and by encouraging arbitrators to abuse their discretion. However, uncertainties persist in arbitration under the strict application of legal terms, while ex aequo et bono arbitration is in fact bound by significant elements of party autonomy. Accordingly, it is unclear if we should keep emphasising the allegedly negative features of ex aequo et bono. This blog has instead proposed to use (or at least plan to use) the flexibility inherent in the principle in order to boost the efficiency of international commercial arbitration.

References   [ + ]

1. ↑ The author is grateful to Professors Leon Trakman and Luke Nottage for their comment on early drafts of this blog article.This blog post is based on the author’s PhD thesis. 2. ↑ Article 28(3) of the Model Law. 3. ↑ For example Article 31 of CAAI Arbitration Rules; Article 21 (3) of ICC Rules of Arbitration; Article 29.2 of ACICA Arbitration Rules; Article 22.4 of LCIA Arbitration Rules; Article 33.2 of Swiss Rules of International Arbitration; Article 27(3) of SCC Rules; Article 35.2 of HKIAC Administered Arbitration Rules; Article 31.2 of SIAC Rules; and Rule 60.3 of JCAA Rules. 4. ↑ Karyn S. Weinberg, Equity In International Arbitration: How Fair is Fair? A Study of Lex Mercatoria and Amiable Composition, 12 Boston University International Law Journal 227, 246-7 (1994); Edouard Bertrand, Amiable Composition: Report of the ICC France Working Group, International Business Law Journal 753, 763 (2005); Regis Bonnan, Different Conceptions of Amiable Composition in International Commercial Arbitration: A Comparison in Space and Time, 6 Journal of International Dispute Settlement 522, 538 (2015). 5. ↑ Emmanuel Vuillard & Alexandre Vagenheim, Why Resort to Amiable Composition, International Business Law Journal 643, 650 (2008). 6. ↑ Gary Born, International Commercial Arbitration 2770 (Kluwer Law International 2nd ed. 2014). 7. ↑ See, e.g., Edouard Bertrand, Under What Circumstances is It Suitable to Refer Disputes to Amiable Composition, International Business Law Journal 609, 610-11 (2008). 8. ↑ Article 28(2) of the Model Law. 9. ↑ Nigel Blackaby, Redfern and Hunter on International Arbitration 1,2 (Constantine Partasides, et al. eds., Oxford University Press 6th ed. 2015). 10. ↑ Luke R Nottage, The Procedural Lex Mercatoria: The Past, Present and Future of International Commercial Arbitration, Sydney Law School Research Paper No. 06/51; CDAMS Discussion Paper No. 03/1E, at 5. 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: Arbitration in Belgium: A Practitioner’s Guide
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Japan’s (In)Capacity in International Commercial Arbitration

Fri, 2018-11-16 20:00

Nobumichi Teramura and Luke Nottage

Not long after the ICCA Congress held in Sydney, the Japan International Dispute Resolution Center (JIDRC) was established in Osaka on 1 May 2018, with some fanfare from the Japanese government and local legal circles. ‘JIDRC-Osaka’ does not provide arbitration services but offers specialist facilities for international arbitration hearings and other forms of Alternative Dispute Resolution (ADR). Facilities are reasonably priced as they are housed quite centrally in a modern Ministry of Justice building.

Further, on 1 September, the International Arbitration Center in Tokyo (IACT) started operation as the first Asian international arbitration body specialised in intellectual property disputes. Unusually for international arbitration institutions, the top page of the IACT’s website displays prominently an extensive list of former judges agreeable to serving as presiding arbitrators, including Dr Annabelle Bennett SC from Australia.

These new initiatives are based on the ‘Basic Policy on Economic and Fiscal Management and Reform 2017’ approved by the Cabinet of Japan. The Justice, Sports, Trade and Transportation ministries in Japan are reportedly discussing how they should promote Japan as a seat for international commercial arbitration (“ICA”) to the world in English.
We examine the challenges in developing Japan as a regional arbitration hub, keeping in mind our separate article regarding Australia’s capacity in ICA.

Japan’s ICA Capacity

While not as comprehensive as the Austrade brochure, the Japan Commercial Arbitration Association (JCAA) earlier published a pamphlet entitled ‘Responding to the needs of international business: A guide to international commercial arbitration in Japan’ (“JCAA Pamphlet”). It argues for Japan as a compelling arbitration forum mainly because of a revised Japanese Arbitration Law and a modern Japan that is ‘energetic yet refined, fully wired but also enticing: … where fast-paced international business mixes seamlessly with a cultural yearning to seek consensus amid traditional notions of fair play’.1)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1547_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Regarding arbitration law, the pamphlet mentions:

  • a global standard (the Japanese Arbitration Law was introduced in 2004 based on the 1985 UNCITRAL Model Law)
  • party autonomy
  • court assistance and minimal interference (‘Court intervention in arbitral proceedings is prohibited under the … Arbitration Law except in specifically defined circumstances. Instead, courts play a supporting role, rendering valuable assistance by appointing arbitrators, serving notice or taking evidence’)2)JCAA Pamphlet at page 2. jQuery("#footnote_plugin_tooltip_1547_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • representation by foreign legal counsel (registration is unnecessary to represent clients in ICA cases seated in Japan)
  • the New York Convention (Japan is a signatory and the Arbitration Law is in line with it).

The first point might surprise some readers as a selling point because Japan was quite late in Asia to adopt the 1985 Model Law, and the Japanese Arbitration Law has still not officially adopted any of the 2006 amendments to the Model Law.3)http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html jQuery("#footnote_plugin_tooltip_1547_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, most Model Law jurisdictions have not adhered to the amendments either, so it could be argued that they do not yet constitute a ‘global standard’. Moreover, the Japanese Arbitration Law is partly based on UNCITRAL’s deliberations resulting in the 2006 amendments.

As for the attraction of a ‘modern’ Japan, the pamphlet claims:

  • an advanced nation (‘Japan possesses all the facets necessary for reliable and effective resolution of commercial disputes by arbitration’)4)JCAA Pamphlet at page 8. jQuery("#footnote_plugin_tooltip_1547_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • good communications and transport connections
  • a business and financial hub (especially Tokyo)
  • cultural benefits (‘Equality before the law and fair play are highly valued norms of Japan’s democratic society’)5)JCAA Pamphlet at page 9. jQuery("#footnote_plugin_tooltip_1547_5").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The pamphlet’s authors may have been too modest, an enduring trait of Japanese culture, as there are further advantages for choosing Japan as the seat for ICA. Parties can now find Japanese and non-Japanese expert arbitrators based in Tokyo (and even Osaka or Seoul, both not far away), as well as some ICA specialisation among law firms and lawyers (Bengoshi and Gaikokuho-Jimu-Bengoshi).6)See for example: Who’s Who Legal jQuery("#footnote_plugin_tooltip_1547_6").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japanese arbitration institutions also have strong connections with internationally well-known arbitrators from various jurisdictions.7)List of Arbitrators and Mediators (Non-Japanese) who have conducted JCAA Arbitration and/or Mediation cases filed since 1 January 1998 jQuery("#footnote_plugin_tooltip_1547_7").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In addition, as introduced at the outset of this blog posting, the country has new arbitration centres and support facilities established under the Japanese government’s recent pro-arbitration policy. Finally, Japan lies in Asia, although Japan is no longer ‘the largest economy in the world’s most dynamic region’.8)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1547_8").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Japan’s political and economic environment has also been stable particularly in recent years, although it is necessary to monitor the Trump government’s unpredictable trade and diplomatic strategies (see, for example, comments here).

Japan’s ICA Incapacity

Nonetheless, as in our other posting’s assessment of the recent Austrade brochure promoting Australia for ICA, such advantages need to be weighed against some downsides. The most serious immediate challenge for promoting Japanese ICA is probably still a relative paucity of arbitrators based in Japan who are able to confidently handle arbitration cases in English.9)According to ICC Statistical Report (Language of awards): “Awards approved in 2017 were drafted in a total of 13 languages. English remains the predominant language (for 77% of the awards).” jQuery("#footnote_plugin_tooltip_1547_9").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Although the Japanese arbitration community has maintained a pool of good-quality arbitrators and attorneys who are fluent in the language, their total numbers remain low.

Although the Japanese government and legal profession are aware of this situation and have tried to improve it, their commitment has sometimes come into question. A recent example is the ‘Opening Ceremony’ for JIDRC-Osaka, entitled ‘The Future of International Arbitration in Japan’ but conducted in Japanese instead of English. To really establish Japan as a new international ADR hub, it seems important to create opportunities to expose local practitioners to legal English and to engage in the lingua franca of modern ICA.

Another challenge for seating ICA in Japan is the country’s geographical inconvenience. Although certainly not as remote as Australia, Japan is on the outskirts of Asia. Tokyo is one of the world’s leading megalopolises, but the city itself is distant from other major Asian economic centres: seven hours from Singapore; four hours from Hong Kong; three hours from Taipei, Shanghai and Beijing. Tokyo might be an appealing arbitration venue for companies doing business in the city itself or around Japan. But other parties, especially Asian corporations with no strong business interests there, will probably continue to favour the very popular regional arbitration venues like Singapore and Hong Kong.

One way to overcome the geographical disadvantage is to develop a niche marketing approach, as we urged recently for Australia. The establishment of the IACT is a promising experiment, although there is a risk of impeding a critical mass in ICA caseload and the development of a consistent ‘Japan’ brand. (The caseload is already split between the JCAA and TOMAC, and a ‘JIDRC-Tokyo’ facility is also now envisaged ‘in the very near future’.) There is also still scope to focus on disputes between parties in the Americas or along the ‘Belt and Road’ where Chinese investors are involved in multi-national consortiums. Moreover, e-arbitrations would be helpful to combat geographical inconvenience, but few Japanese arbitration institutions (even IACT) seem to be interested in developing online arbitration platforms yet.

A final difficulty relates to the putative ‘cultural yearning to seek consensus’.10)JCAA Pamphlet at page 1. jQuery("#footnote_plugin_tooltip_1547_10").tooltip({ tip: "#footnote_plugin_tooltip_text_1547_10", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Given world-wide concerns about the costs, delays and over-formalisation of ICA, can this be niche-marketed as a positive, for example by emphasising the Arbitration Law’s nod to Arb-Med and its practice notably in JCAA arbitrations? Or do the persistence of such concerns show that it is implausible to compete on price, given the information asymmetries in the ICA ‘market’ (on the demand side) and the growth of large law firms even in Asia (on the supply side)? Is the attraction of consensus even cultural (as opposed to economic), or changing (alongside at least some aspects of Japan’s wider legal order), or something best addressed in separate international mediation proceedings and institutions (like another new ADR facility, the Japan International Mediation Centre – Kyoto)?

Conclusion

Given such difficult questions, and Japan’s advantages and disadvantages particularly in the context of established and emerging regional hubs (including now Kuala Lumpur and Seoul), the Japanese government probably and quite understandably cannot be expected to invest much taxpayers’ funding into any ambitious project to promote Japanese ICA. The features identified as demonstrating Japan’s ICA capacity are nothing really new or distinctive; they can be found in the existing hubs – often even more so – and even in jurisdictions like Australia that are now trying again to join the inner circle. Japan also faces capacity constraints, including some lack of human resources and geographical inconvenience, and difficult issues around how to explain and promote its broader approach towards dispute resolution in a complex society.

More than one year has passed since the Japanese government announced its then new initiative, but government ministries still mostly appear to be engaged in drafting some detailed plan for promoting Japanese ICA. Benjamin Franklin famously said, ‘time is money’. If this American saying seems incongruous, what about: ‘Odawara-hyō-jō (小田原評定)’? But this seems depressing because it evokes how the Go-Hōjō samurai clan (one of the strongest in 16th century) were defeated due to their long-running but unproductive debate over tactics. The lesson now is that the world of ICA changes fast: make your next move, Japan!

References   [ + ]

1, 8, 10. ↑ JCAA Pamphlet at page 1. 2. ↑ JCAA Pamphlet at page 2. 3. ↑ http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/1985Model_arbitration_status.html 4. ↑ JCAA Pamphlet at page 8. 5. ↑ JCAA Pamphlet at page 9. 6. ↑ See for example: Who’s Who Legal 7. ↑ List of Arbitrators and Mediators (Non-Japanese) who have conducted JCAA Arbitration and/or Mediation cases filed since 1 January 1998 9. ↑ According to ICC Statistical Report (Language of awards): “Awards approved in 2017 were drafted in a total of 13 languages. English remains the predominant language (for 77% of the awards).” 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: Arbitration in Belgium: A Practitioner’s Guide
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Investment Arbitrations Against Spain in a Post-Achmea Scenario: A New Hope for Mediation?

Fri, 2018-11-16 02:30

Josep Gálvez

Introduction

Unquestionably, Spain captures the highest percentage of arbitration procedures for cuts applied to renewable energies, accumulating almost thirty ongoing lawsuits from foreign investors, with claims pending in the ICSID, in the SCC and in the ICC arbitrations. Spain as the respondent was successful in the first two arbitrations, but these were unique cases and not extendable to the other claims. The amount currently set by arbitrators to compensate the four successful claimants is far from the aspirations of Spain which has defended its right to change the premiums for renewables, but also far from the claimants demands whereby they have been awarded less than the amount claimed.

In a nutshell, arbitrators appear to be accepting the cuts the Spanish government introduced in 2011 (among others, limitation of hours, plant life to 25 years, etc.) and endorse the 7% tax on electricity generation. However, other premium cuts, such as those that were subsequently adopted in 2014, are not accepted as these cuts were in breach of ‘legitimate investor confidence‘ under the Energy Charter Treaty.

The main problem for previous investors who have subsequently become claimants is to project with a high degree of confidence how the awards can be enforced, with Spain trying to use the recent Achmea ruling by the European Court of Justice (ECJ). In this sense, the European Commission has informed Spain that Spain cannot pay out any awards in respect of its renewable incentive scheme because that action would constitute illegal state aid. Furthermore, any attempt to enforce an ICSID award against Spain before any EU Member State courts will probably be met by the response that the Achmea judgment renders intra-EU investor-state arbitration illegal under EU law.

Clearly Spain is shielding its position by using the Achmea ruling to avoid enforcement of awards before any EU national court, with Sweden having already suspended the enforcement of Novaenergía’s award. However, the arbitral Courts of the ICSID and the Stockholm Chamber of Commerce maintain their competence to rule. Hence, it appears that the arbitrations brought by investment funds against Spain are becoming the foundations for a major conflict between the EU and the international arbitration system, especially the World Bank’s ICSID, with a subsequent impact for the claimants who obtain a favourable award.

Whilst the Spanish government continues to avoid the payment of awards by using the Achmea judgement, claimants are also entitled to enforce their award outside of the EU. Some plaintiffs are filing precautionary measures requests before various US Courts to obtain injunction orders over Spanish sovereign assets. However, there is no current confirmation of any Spanish sovereign asset freeze.

Mediation: A New Hope in a Post-Achmea Judgement Era?

Certainly, tension between Spain and international funds and companies that suffered cuts due to their investments in renewables continues to rise. According to the Spanish Government the global figure of 7.5 billion euros has been updated to over 8.2 billion euros, representing nearly a 10% increase in the financial damages sought, and a potential threat to the financial balance of the Spanish electricity system.

The score is dramatic: after four arbitration awards against the country and only two in favour of Spain, the total sums claimed continue to rise day by day. In addition, the awards are also generating a spiralling costs and accruing interest that already exceeds 20 million euros. The Spanish Government appears to view these increases in the amounts claimed because plaintiffs have detected that the awards granted in favour of plaintiffs have been between 30% and 50% of what was initially demanded. The claimants, therefore, increased the amounts being sought.

In this scenario, which is complicated for both Spain and claimants, it is worth considering if the recent change of government in Spain might lead to a change in attitudes towards this subject. Following a vote of no confidence in the Spanish Parliament on 1 June, Spain has a new Prime Minister and a new Socialist government. Although the new government is currently and understandably silent on this matter within the public domain, we are of the view that the government would welcome a solution to significant financial issues that also affects the image and reputation of Spain in the international investment community.

In fact, the fourth ICSID award against Spain was awarded at a time when the new socialist government had replaced the previous conservative government, the award being in favour of the investment fund Antin, which had bought two solar plants in Spain and claimed 238 million euros for the premium cuts approved by the previous cabinet. Spain’s new government is facing a problem that is increasing in scale. It is well known that several law firms and litigation fund managers are considering the possibility of raising new arbitrations given the latest court rulings, the consequences of which could be severe for Spain. But can a Sovereign state allow itself to be put in a position where the time spent trying to defend itself does nothing but increase with more and more arbitration claims being considered?

With the current uncertain scenarios, mediation between investors and the current Spanish government appears to be a viable solution. Exploring the possibilities of an agreement could be well received within the international markets and perceived as a significant success for the new cabinet, improving the reputation of Spain whilst removing the current mentality on all sides of “them vs. us”.

If settlements could be reached that were acceptable to both sides, Pedro Sánchez’s government could achieve a goal of seeing arbitration proceedings against Spain withdrawn whilst simultaneously solving some of the perceived problems mainly created by the previous cabinet. Although the ruling by the Court of Justice of the European Union has invalidated this type of intra-EU arbitration, this not only supposes a new economic setback for Spain, but also could open a mediation opportunity for all parties involved in this matter. If mediation results in investors receiving return of capital sooner rather than later, and the Spanish government improves its image in the international investment community whilst reducing the time that has to be spent fighting its legal position and also reducing the financial amounts to be paid, then why would mediation not be a possible solution for all sides, rather than each side running the risk of “winner takes all” arbitration? “Casino bankers” was a term used frequently in the aftermath of the 2008 financial crisis, but “Casino speculators” could almost apply to those seeking an “all or nothing” approach rather than exploring the possibility of alternative dispute resolution.

We endorse the idea of mediation, especially when considering the context in which the new Spanish Minister of State for Energy, Mrs. Teresa Ribera has publicly acknowledged the issues for regaining investor confidence in Spain. The new cabinet’s strategy indicates that among the measures that will be included, the inclusion of investment guidelines should be facilitated to help build future stable, predictable and competitive scenarios, with special emphasis on green technologies with respect to what will be the needs of the future. In this sense, an energy transition in Spain should probably include open dialogue with affected investors.

Conclusions

Following the ECJ’s Achmea judgment, the situation for claimant investors against Spain has become significantly more complex than prior to the Achmea judgement, as even with a favourable award, the chances of obtaining a rapid payment without additional costs are severely hampered.

For investors, enforcement actions outside the EU is also an option, but at the same time costly and involves a prior search for sovereign assets property of the Kingdom of Spain, as was the case in Argentina in 2012, for example. For many investor funds the Internal Rate of Return is used as the relevant benchmark, favouring a quicker solution for return of capital.

A conflict outside of the EU does not present better options for Spain either, as it has been repeatedly losing before international arbitration courts. Accordingly, the Spanish government can no longer continue to accumulate awards against the country, nor procedures that seriously endanger the country’s image internationally, with potential consequences for the economy and for the new cabinet.

Therefore, we are of the view that all parties should be encouraged to initiate dialogue through mediation by a third party outside of the arbitration process, as a way that may finally settle the dispute. In this way, for the Spanish government it will mean a clear victory over its predecessor in office, allowing the current government to move forward and carry out the legal reforms of energy transition. For claimants, they will be able to obtain a quicker payment and probably under better conditions than by trying to enforce the award outside the EU or by selling any award to third parties.

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‘The Grandfathers I Never Had’: Should We Choose Arbitral Rules with Grandfathering Provisions?

Thu, 2018-11-15 06:00

Andrew Foo and Promit Chatterjee

Many arbitration centres trumpet innovativeness as their selling point. One commonly cited proof of innovativeness is ‘software upgrades’, i.e., centres revising rules to introduce new arbitral procedures. These are intended to make arbitration cheaper, faster, and fairer.

Introducing New Arbitral Procedures – First Movers

New procedures introduced over the past decade include emergency arbitration (“EA“), expedited procedure (“EP“), consolidation, joinder, and early dismissal.

However, how do we tell if one institution is more innovative than another? One simple way would be to judge them by the speed at which they introduce new rules.

Some institutions are typically ‘first movers’. For example, the SIAC and SCC introduced EA provisions in 2010. The ICC, HKIAC, and LCIA then followed suit between 2012 and 2014. Further, among these institutions, the SCC was the first to expressly provide for consolidation, and with the SIAC were, up to 31 October 2018, the only commercial institutions expressly providing for early dismissal/summary determination.

However, the ‘first mover’ advantage can be eroded by homogenisation: other institutions introducing similar features. For example, between 2010 and 2014, the world’s top 5 most preferred institutions (based on the Queen Mary 2018 International Arbitration Survey) all introduced EA. Further, all 5 institutions have now introduced consolidation and joinder provisions.

Therefore, to properly distinguish between these institutions, a deeper understanding of their attitudinal differences is required.

One litmus test of an institution’s approach towards innovation is whether it complements new procedures with grandfathering provisions. A grandfathering provision states that an old rule continues to apply to existing situations, while the new rule will apply to future cases. It is an express departure from the default position, that the applicable version of a set of arbitral rules are “those in force when the time for invoking…[those rules] arises” (Bunge SA v Kruse [1979] 1 Lloyd’s Rep 279).

Grandfathering – Divergent Approaches

Among the leading institutions, there is a discernible difference in grandfathering approaches.

For example, the current rules of the HKIAC1) HKIAC Administered Arbitration Rules 2018, Art. 1.5. jQuery("#footnote_plugin_tooltip_6744_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, ICC2) ICC Rules of Arbitration 2017, Art, 29(6)(a) jQuery("#footnote_plugin_tooltip_6744_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and LCIA3) LCIA Arbitration Rules 2014, Art. 9.14. jQuery("#footnote_plugin_tooltip_6744_3").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); expressly state that their EA provisions do not apply to arbitration agreements entered into before these provisions came into force (unless parties agree otherwise). On the other hand, the SIAC and SCC are more aggressive – their rules do not contain grandfathering provisions for EA.

This difference in approach can significantly affect how disputes are resolved. While the more aggressive approach enables parties to avail themselves of the latest features of the rules and can therefore theoretically provide shorter routes to relief, it can sometimes result in protracted enforcement battles.

Case Studies – JKX v Ukraine, AQZ v ARA, and Noble Resources v Shanghai Good Credit

JKX v Ukraine4)SCC EA 2015/002; discussed in Ipp, “SCC Practice Note:  Emergency Arbitrator Decisions Rendered 2015-2016“, Section 3.1 (accessed on 7 November 2018) jQuery("#footnote_plugin_tooltip_6744_4").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, AQZ v ARA5)[2015] SGHC 49 jQuery("#footnote_plugin_tooltip_6744_5").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and Noble Resources v Shanghai Good Credit6)[2016] Shanghai No. 1 Intermediate People’s Court jQuery("#footnote_plugin_tooltip_6744_6").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); are instructive examples. These cases have been discussed in previous posts on this blog (JKX, AQZ, Noble Resources).

JKX v Ukraine – In 1998, Ukraine ratified the Energy Charter Treaty (the “ECT“). The ECT provides for SCC arbitration. At that time, EA was not part of SCC arbitration.

Fast forward to 2014 – Ukraine received notice of a claim by a UK-headquartered MNC, JKX, under the ECT. Within 2 months, Ukraine was ordered by an SCC emergency arbitrator to stop applying a particular domestic law on gas production royalties to JKX. Six months later, the arbitral tribunal issued an interim award, effectively mirroring the terms of the emergency arbitrator’s decision.

It is unclear whether the emergency arbitrator’s decision was ultimately enforced. However, at least at first instance the Ukrainian courts found that the SCC EA procedure was in accordance with the parties’ agreement.7)Hamama and Sendetska, “Interim measures in support of arbitration in Ukraine: lessons from JKX Oil & Gas et al v Ukraine and the recent reform of Ukrainian legislation” https://academic.oup.com/arbitration/article/34/2/307/5033005 (accessed on 7 November 2018) jQuery("#footnote_plugin_tooltip_6744_7").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

On the other hand, both AQZ and Noble Resources involved EP under the SIAC Rules.

In AQZ, parties concluded a coal shipment contract in 2009. The SIAC arbitration clause therein provided for disputes to be settled by three arbitrators. At that time, the SIAC Rules did not contain an EP.

Fast forward to 2013 – the claimant successfully applied for arbitration conducted under the EP. The SIAC Rules then in force (2010 version) stipulated that under the EP a sole arbitrator would be appointed, unless the SIAC decided otherwise. The SIAC-appointed sole arbitrator then issued an award, which the respondent applied to set aside.

However, the Singapore High Court said it was “commercially sensible” to interpret the arbitration agreement as conferring the SIAC with discretion to appoint a sole arbitrator, provided the SIAC took into account the fact that the arbitration agreement pre‑dated the EP coming into force. The Court also observed that unlike the ICC’s EA provisions, the SIAC Rules do not contain grandfathering provisions. The Court said this “fortified” the conclusion that the EP provisions “override parties’ agreement for arbitration before three arbitrators.

Noble Resources involved similar facts, save that the arbitration agreement post-dated the coming into force of the SIAC EP provisions.

However, the Shanghai First Intermediate Court refused enforcement, on the grounds that appointment of a sole arbitrator under application of the EP was not in accordance with the parties’ agreement for three arbitrators.

These cases amply demonstrate how, in the absence of grandfathering, claimants can attempt a faster route to relief, under relatively new arbitral procedures such as EA and EP. This is so even if the parties’ chosen arbitral rules did not contain such procedures at the time of contracting / time of the respondent’s consent to arbitration.

Subsequent enforcement battles can raise question marks over the efficacy of the relief obtained (discussed here). However, claimants may nonetheless regard the threat of enforcement, adverse publicity, potential impact on respondents’ credit lines, etc. as useful pressure points.

Familiarity with New Procedures – Differing Levels of Experience

As ‘first movers’ and ‘non-grandfathers’, the SIAC and SCC have gained significantly more experience than other institutions in administering new procedures.

For example, as of 2016, the SIAC and SCC have administered 76 EA applications in total, against 2,626 new cases – 2.9%. This compares favourably to the 60 EA applications administered in total by the ICC, HKIAC and LCIA, against 5,145 new cases – 1.2%.8)We have used statistics from their respective annual reports to compute the number of EA applications and arbitrations administered by the SIAC, SCC, ICC, LCIA and HKIAC during 2010-2016, 2011-2016, 2012–2016, and 2014-2016 (the LCIA and HKIAC) respectively. jQuery("#footnote_plugin_tooltip_6744_8").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Grandfathering – Suited to Taste

Given the differences in grandfathering approaches, businesses should carefully choose their arbitral institutions. This is particularly so for long-term contracts, since the chosen arbitral rules are more likely to be updated during the lifetime of the contract. For example, between 2007 and 2016 the SIAC revised its rules 4 times.

There is no ‘one size fits all’ approach, whereby the most aggressive or most conservative institution must be the best fit for all businesses in all situations.

For example, in infrastructure projects, a contractor as payee is more likely to make than face claims. It may therefore prefer an institution that takes a more aggressive approach towards innovation. This is because institutions typically introduce procedures that short-cut a claimant’s route to relief, and the absence of grandfathering provisions would allow the contractor to utilise such procedures.9)In choosing a ‘non-grandfathering institution’, a party would have to accept some uncertainty, and perhaps trust that, in Michael McIlwrath’s words, “we are far from a day when an arbitration institution might go too far in developing a [procedure] that is more efficient and proportionate to the value of the dispute.“ jQuery("#footnote_plugin_tooltip_6744_9").tooltip({ tip: "#footnote_plugin_tooltip_text_6744_9", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Risk appetite matters too. For example, listed/governmental entities may prefer arbitral centres that take a more measured approach towards rule revision. This can provide shareholders/public with greater certainty about the arbitral procedures eventually applicable when a dispute does arise. Alternatively, parties could specify in their contracts that the applicable arbitral rules shall be a specific version, e.g., the 2014 LCIA Rules, to avoid being subject to unpredictable future rule revisions.

Parties should also consider the potential jurisdictions where any award/order is likely to be enforced (particularly the enforcement of relief rendered under less conventional or truncated procedures), before opting for a ‘non-grandfathering institution’.

Conclusion

In summary, when choosing an arbitral institution, parties should go beyond evaluating the institution’s track record or its current set of rules. Instead, parties should also factor in something more fundamental: “What bargain does this institution strike with its users?” Does it lean towards respectful assistance, or proactive legislation? The answer to that question may well hold the key to how satisfactorily a party’s disputes are resolved.

Note: Clifford Chance Asia is a Formal Law Alliance in Singapore between Clifford Chance Pte Ltd and Cavenagh Law LLP.

References   [ + ]

1. ↑ HKIAC Administered Arbitration Rules 2018, Art. 1.5. 2. ↑ ICC Rules of Arbitration 2017, Art, 29(6)(a) 3. ↑ LCIA Arbitration Rules 2014, Art. 9.14. 4. ↑ SCC EA 2015/002; discussed in Ipp, “SCC Practice Note:  Emergency Arbitrator Decisions Rendered 2015-2016“, Section 3.1 (accessed on 7 November 2018) 5. ↑ [2015] SGHC 49 6. ↑ [2016] Shanghai No. 1 Intermediate People’s Court 7. ↑ Hamama and Sendetska, “Interim measures in support of arbitration in Ukraine: lessons from JKX Oil & Gas et al v Ukraine and the recent reform of Ukrainian legislation” https://academic.oup.com/arbitration/article/34/2/307/5033005 (accessed on 7 November 2018) 8. ↑ We have used statistics from their respective annual reports to compute the number of EA applications and arbitrations administered by the SIAC, SCC, ICC, LCIA and HKIAC during 2010-2016, 2011-2016, 2012–2016, and 2014-2016 (the LCIA and HKIAC) respectively. 9. ↑ In choosing a ‘non-grandfathering institution’, a party would have to accept some uncertainty, and perhaps trust that, in Michael McIlwrath’s words, “we are far from a day when an arbitration institution might go too far in developing a [procedure] that is more efficient and proportionate to the value of the dispute.“ 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: Arbitration in Belgium: A Practitioner’s Guide
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Choice of Law, Brexit and the ‘Ice Cream Flavour’ Dilemma

Wed, 2018-11-14 00:33

Gustavo Moser

The title of this post may, at a first sight, seem rather odd, but this author submits that choice of a governing contract law can actually be explained using ice cream as an analogy.

 

Assuming an individual generally likes ice cream, a question that arises is whether any thought has ever gone into why someone chooses a particular ice-cream flavour over another? It could be the consistency, the colour, the calories, the nutrients, the preparation or cultivation of the ingredients, ethical, environmental or religious considerations, or it may even be part of a certain diet. Alternatively, an individual may choose a flavour because they have (or have not) chosen that particular flavour before, or they were taught to choose one over the others; or a third party (someone we like or not) once recommended a particular flavour, or because the individual simply enjoyed that particular flavour on a previous occasion. Perhaps one has absolutely no idea what the thought processes behind ice-cream flavour choices are at all. And here lies the main point of the post: choices and (un)certainties.

 

The analogy is not as equivocal as one would have thought at the outset: like with governing contract laws, we also decide on the ice cream’s choice based on some level of rationality as listed above. However, the rational and non-rational elements are not easily balanced during the decision-making process. We therefore turn to Daniel Kanheman’s works to aid our understanding and reflect on how Brexit impacts on the topic.

 

  1. Kanheman’s Systems 1 and 2

Daniel Kahneman, a psychologist and 2002 Nobel prize winner in Economic Sciences, distinguishes between two systems in the mind for decision-making: System 1– the subconscious, which operates quickly and efficiently; and System 2– conscious and directed thought, which nevertheless operates in a rather slow and inefficient fashion.

 

1.1 System 1

System 1 has learned associations between ideas (e.g., an individual associating law of country X with a good choice in governing contract law because a colleague had a recent successful experience in a case where X law was applied, or associating Y law in a governing contract law as being efficient because of numerous published reports about the efficiency of Y courts); it has also learned skills such as reading and understanding nuances of social situations. This knowledge is stored in memory and accessed without intention or effort. In our example above, the association of X law with success equals not the idea of success.

 

Mental actions that are governed by System 1 are completely involuntary; e.g., the same individual thus concluding without further thought in a governing contract law decision that Y courts are efficient. System 1 is fast and efficient, but Kahneman postulates that it is unable to estimate the values and probabilities associated with each available option. Therefore, to run System 1 and execute decisions in a timely fashion we rely on intuition (discussed under item 2 below).

 

1.2 System 2

Under Kahneman’s System 2, in choosing a governing contract law, parties would process all available information, make choices, and execute behavior(s) in a way that is calculated to maximise their expected utility, i.e., the differential between expected benefits and expected costs. In other words, on this basis contracting parties make decisions utilising a cost-benefit analysis to achieve Pareto-efficient results. A scenario is considered Pareto-efficient if it is impossible to change it so as to make at least one person better off (in their own estimation) without making another worse off (again, in their own estimation).

 

However, assessment and comparison of all available options would only be possible with an extraordinary amount of energy and time. This may be unattainable in certain decision-making settings, in addition to a human being’s limited computational skills. Accordingly, in these scenarios it would seemingly be inappropriate for decisions to be made under Kahneman’s System 2, where the mind is slower, rule-based, analytic and controlled and where reason dominates. Hence, in situations where there are time, financial and energy constraints, such as in decisions involving a governing contract law, a decision may have to be taken under System 1, although it may not be a conscious decision by the contracting party.

 

  1. The use of mental shortcuts

Perhaps not surprisingly, in a business context, people work under pressure, tight timeframes and busy schedules, the result of which being that choice of governing contract law is typically deferred to the last phase of negotiation. This choice is not infrequently – yet equivocally – treated as the “last minute” clause, being the final “detail” in the design of the contract.  It is also regrettable that the governing law clause is typically positioned at the very end of the agreement, rather than at the outset when attention would arguably be at a higher level.

 

Parties may or may not choose a particular law or rules in order to: (i) prevent the application of less ‘credible’ laws or rules and parties’ benefitting from a more acceptable legal framework; (ii) avoid a particular law or rules so as to escape the application of other laws (for various reasons, including the lack of trust of some of players in that law’s or rules’ application by state court judges); or (iii) ensure that a given legal framework concerning which the parties have bargained would apply fully. Players may also contextualise their negotiation deals as to whether one or the other choice was made in accordance with the other side’s jurisdiction or whether they had included an arbitration agreement.

 

Choices of governing contract laws are therefore rather often grounded on a parties’ success or failure in a real-world environment and not according to logical and/or arithmetical rules. There is, arguably, a good reason to do so: if you spent time and resources on a litigation/arbitration matter, regardless of whether you succeeded or not, it is likely that you have acquired knowledge in, or a better grasp of, that particular law or rules and will or will not use it again (at least you are more inclined to come to this realisation due to the so-called sunk costs!). Therefore, using mental shortcuts to make these decisions (e.g., opt into law Z given the score obtained previously) may save time and could thus be particularly appealing in time-pressure situations. However, no two cases are the same and players may fall into the trap of making insufficient adjustments to distinguish case A from B. To add a further complication to this mix, especially in the context of the choice of law being England and Wales, are the complexities brought about by Brexit.

 

  1. Brexit

In current times, it is sensible for parties to discuss as to whether or not to revise their standard contracts, boilerplate clauses, and choice of law strategies, in light of the Brexit uncertainties. It is necessary to realise that cognitive biases may however drive this decision, in particular given the presence of ‘status quo’ bias in our decision-making processes.

 

The ‘status quo’ bias refers to an individual’s tendency to prefer an option which is consistent with the current state of affairs, i.e., the player would be more acquiescent to a risk-averse approach to, or less appetite for, changes. ‘Status quo’ bias would apply to standard contracts, boilerplate clauses and choice of law strategies more generally. This could explain why contracting parties will likely keep a certain practice such as opting-in or out of certain laws, e.g., England and Wales or using standard contracts where governing contract laws are already defined without further consideration. Long story short: we are generally risk-averse to changes but changes can also be positive!

 

In view of the above, parties need to be conscious not to fall into the trap of relying on the ‘status quo’, especially given the uncertainties surrounding Brexit. This includes whether Rome I and Rome II Regulations will be incorporated into national legislation. Parties will need to be mindful that in the event Rome I and Rome II Regulations are not immediately incorporated into national legislation, then the UK will revert to pre-existing common law framework. If so, if an issue arose relating to governing law before the English courts, at least in respect of contractual obligations, it is unlikely that the existing position will change significantly because the common law principles are similar to those in Rome I.  However, the position is less clear with regard to the governing law in respect of non-contractual obligations as Rome II does not reflect the English common law so closely. Uncertainty in this area is likely to be burdensome on parties from a time and cost point of view as parties dispute the interpretation of non-contractual obligations.

 

On the other side of the spectrum, parties should also be conscious not to fall into the trap of the ‘halo’ effect, i.e., once a good or bad impression is formed, that impression can often be extended and exaggerated. Hence, in the context of Brexit, parties should not be complacent about the effects of their choice of law decisions, but equally, should not panic over the choice of law being England and Wales in existing and future agreements, and the potential consequences of this choice. There are, and there will continue to be, vast benefits of choosing English law. It is also useful to bear in mind that the rules on governing law may not extend to arbitration, and Brexit is likely to have minimal immediate impact on this area of dispute resolution.

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The Tension Between Principle and Policy: Calibrating the Right of Non-Participating Respondents to Challenge Awards

Tue, 2018-11-13 06:00

Nicholas Poon

Introduction

On 23 July 2018, this blog posted a commentary entitled “Choice of Remedies Doctrine – A Jack-In-The-Box?”

The commentary explored the Singapore High Court’s decision in Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2018] SGHC 78 (“Rakna”), and its implications.  The commentary also revisited the Singapore Court of Appeal’s decision in PT First Media TBK (formerly known as PT Broadband Multimedia TBK) v Astro Nusantara International BV and others and another appeal [2014] 1 SLR 372 (“Astro”) which upheld the “choice of remedies doctrine”.

Revisiting the choice of remedies doctrine in Rakna

Simply put, the doctrine recognises that an award debtor has the right to elect between an active remedy in the form of attacking an award by applying to have it set aside, and a passive remedy in the form of resisting enforcement only when the award creditor brings enforcement proceedings.  An award debtor’s decision not to avail itself of an active remedy does not preclude it from resorting to the passive remedy later on.  Suffice to say, Astro has generated controversy, with the legal position differing across jurisdictions.1)See for e.g. Jonathan Hill, “Enforcement of Awards under the New York Convention: Choice of Remedies and the Significance of Time Limits” (25 June 2018) (link). jQuery("#footnote_plugin_tooltip_5986_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5986_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Referring to an earlier piece which I had written and in which I had argued that the choice of remedies doctrine should not be viewed as “anti-arbitration”, the commentary suggests that the conduct of a “” respondent who refuses to participate in the arbitration proceedings and/or take steps earlier to challenge the tribunal’s jurisdiction, but subsequently objects to the tribunal’s jurisdiction at the setting aside or enforcement stage may be “anti-arbitration”.  The commentary raises a number of insightful, credible arguments in support of the notion that such anti-arbitration conduct should be sanctioned, for instance, by precluding the recalcitrant respondent from raising its jurisdictional objections at the setting aside and even the enforcement stage.

There is no need to repeat here the salient facts and holding of Rakna which are amply set out in the commentary.  As the commentary rightly points out, from the claimant’s perspective, the conduct of the recalcitrant respondent leaves much to be desired.  It is also true that there would be a substantial wastage of resources if the recalcitrant respondent is allowed to raise jurisdictional objection after the final award is rendered, and succeeds in doing so, at least from the claimant’s and perhaps a neutral observer’s perspective.

Going beyond the distracting labels of pro- and anti-arbitration

But important as it is to focus on the unfortunate ramifications of any successful challenge against an award, the ideal of justice is – and must be seen to be – party-blind.  It would be wrong, even in an arbitration-friendly jurisdiction such as Singapore, for justice, manifested in the arbitral jurisprudence and policies, to be seen to be predisposed to claimants in an arbitration.

Accordingly, any analysis of the fairness of a policy cannot begin and end from only the perspective of only one party to the dispute.  Indeed, intentionally favouring the claimant is not “pro-arbitration”; it is simply “pro-claimant”.  In the same vein, strong-arming the respondent to submit to arbitration by undermining its ability to mount legitimate challenges against an arbitral award is not “anti-arbitration”; it is “anti-respondent”.

There is no merit in an efficient dispute resolution mechanism if it does not further the interest of justice.  A respondent cannot fairly be described as being recalcitrant, when it has a legitimate jurisdictional objection.  The jurisprudence in Singapore, conventionally seen as a “pro-arbitration” jurisdiction, is dotted with examples of awards being set aside or refused enforcement on jurisdictional grounds.  Astro is but one example.

As persuasive as the argument is that jurisdictional objections should be resolved as early as practicable, there is equal force in the argument that a claimant who pursues arbitration in spite of an evident jurisdictional defect undertakes the risk that the resources invested into the process may come to naught.  That is neither the fault of the system nor the respondent.  Hence, instead of characterising a particular conduct, approach or policy as “anti-arbitration” or “pro-arbitration”, which is merely a label that detracts from the underlying merits, in the words of Chief Justice Sundaresh Menon, it is “much more useful” to look at the reasoning of the Courts in enforcing, adopting and/or reject the conduct, approach or policy.2)See Sundaresh Menon, “The Somewhat Uncommon Law of Commerce” (2014) 26 SAcLJ 23 at [59]. jQuery("#footnote_plugin_tooltip_5986_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5986_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In Rakna, the respondent “stayed away from the arbitration, did not file a response, did not nominate an arbitrator, refused to pay any fees, did not file a statement of defence and then raised a jurisdictional challenge by way of a terse letter and absented itself from the preliminary meeting, refused to file any submissions in support of its stand and allowed the arbitration to proceed without participation” (see Rakna at [72]).  In the High Court’s judgment, the respondent’s conduct was in blatant disregard of the policy behind Article 16(3) of the Model Law and amounted to an “abuse of process”.

But, as the commentary correctly points out, on the authority of Astro, the very same “abusive conduct” would not have prevented the respondent from resisting enforcement of the award in reliance on the same jurisdictional objections.

The challenge of reconciling policy with principle

The abuse of process is understandable, from a policy perspective, if it is rationalised as arising from pursuing a similar (but not identical) active remedy in the form of setting aside proceedings despite failing to take advantage of an active remedy available at an earlier stage to challenge the tribunal’s ruling on jurisdiction, i.e. Article 16(3) of the Model Law.  However, the application of the abuse of process doctrine as a policy response meets stern resistance in the form of legal principle.

The travaux, in particular the Analytical Commentary (see Rakna at [68]), puts it beyond argument that both active (setting aside) and passive (resisting enforcement) remedies remain available to a party who did not participate in the arbitration.  It is worth noting in this regard that the part of the travaux referred to by the High Court in Rakna in support of its conclusion predates the Analytical Commentary.  Applying the travaux strictly, therefore, the respondent in Rakna was fully entitled to wait until the final award is issued and only thereafter apply to set aside the final award on the basis of its jurisdictional objections.

Whether the Court of Appeal will land on the same side as the High Court is anyone’s guess.  But this is unlikely to be one of those cases where the Court of Appeal has plainly no reason to disagree from the High Court.  Quite apart from whether the intention in the travaux should be given effect to in construing Article 16(3) of the Model Law and/or section 10 of the International Arbitration Act (“IAA”), there is also the deeper, fundamental question whether it is right to burden a respondent who has a meritorious jurisdictional objection with taking positive steps to challenge a preliminary ruling on jurisdiction that has been issued within the time limited under the Model Law and section 10 of the IAA.

This question admits of no easy answer, but any answer must account for and recognise that placing this burden on the respondent has the potential effect of restricting the respondent’s access and right to present its jurisdictional arguments to the Court of Appeal.  This is because the High Court’s decision in a challenge of a preliminary ruling on jurisdiction under section 10 of the IAA is not appealable to the Court of Appeal unless leave is granted by the High Court, unlike a decision in setting aside and resisting of enforcement proceedings which is appealable to the Court of Appeal as of right.

Restricting a party’s right of appeal is not inherently wrong.  But where the restriction hinges on the tribunal exercising its unfettered discretion in favour of deciding its jurisdiction in a preliminary ruling and not together with the merits in a final award, which invariably leaves the respondent’s right of appeal at the mercy of the tribunal, the justification for endorsing the restriction will have to be exceptionally strong.

References   [ + ]

1. ↑ See for e.g. Jonathan Hill, “Enforcement of Awards under the New York Convention: Choice of Remedies and the Significance of Time Limits” (25 June 2018) (link). 2. ↑ See Sundaresh Menon, “The Somewhat Uncommon Law of Commerce” (2014) 26 SAcLJ 23 at [59]. 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: Arbitration in Belgium: A Practitioner’s Guide
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Public Policy: National, International and Transnational

Mon, 2018-11-12 03:01

Margaret Moses

Institute for Transnational Arbitration (ITA)

On the 60th anniversary of the New York Convention, we can generally conclude that the public policy basis for refusing to enforce an arbitration award has for the most part worked as the drafters intended. The drafters knew that by permitting courts to refuse to enforce foreign arbitral awards based on public policy, they were opening the possibility that courts might use idiosyncratic local rules to undermine the broad enforcement goals of the Convention. Nonetheless, they believed this exception to enforcement was a necessary safety valve that would prevent intrusion on state sovereignty if a foreign award was irreconcilable with the enforcing country’s legal structure. Today, although there are some idiosyncratic decisions where foreign arbitral awards are not enforced because of local rules, the trend is toward a more international and even transnational understanding of the proper application of the public policy exception.

 

The language of Article V(2)(b) of the Convention, redrafted several times by the Working Group, ultimately provided that the enforcing court could refuse enforcement if it found that

(b) The recognition or enforcement of the award would be contrary to the public policy of that country.1) The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), 330 United NationsTreaty Series 38, no. 4739, Art. V(2)(b)  (emphasis added). jQuery("#footnote_plugin_tooltip_8473_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8473_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

“That country” refers unequivocally to the country where recognition and enforcement is sought. The plain language of the clause and the drafters’ intent indicate that public policy means national public policy, the public policy or ordre public of the state of the enforcing court. This interpretation is warranted because the purpose behind the exception was to permit a country to refuse to enforce an award that was contrary to its own system.

 

However, in practice, courts have varyingly used national, international and even transnational interpretations of the public policy exception. The Convention itself does not define public policy. So the public policy of one country will not be exactly same as that of another country. Different countries have different standards undergirding their national public policy, and these can result in quite different interpretations of the term.  In addition, public policy is not necessarily static, and over time may continue to evolve.

 

But there are some similar understandings and common principles that have, for the most part, prevented the public policy exception from creating a large loophole undermining Convention enforcement, and have encouraged courts not to refuse enforcement based on local, parochial standards.

 

There are two main reasons why, for the most part, courts do not often refuse enforcement of a foreign arbitral award. First, domestic public policy has traditionally been interpreted narrowly. Second, a number of countries have both a domestic public policy and an international public policy, and they have tended to apply their own states’ international public policy with respect to foreign awards.

 

In a case in Colombia, Tampico Beverages Inc. v. Productos Naturales,2) Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. jQuery("#footnote_plugin_tooltip_8473_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8473_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); for example, the Supreme Court of Colombia was asked to enforce an ICC award that had been challenged as a violation of public policy because of an arbitrator’s conflicts of interest. Although the court acknowledged that enforcement under these particular circumstances might violate Colombia’s domestic public policy, it concluded that the country’s international public policy was different, and that the court should look to international authorities to determine if there was a violation. It then turned to the 2014 IBA Guidelines on Conflicts of Interest as representative of international practices. Thus, the court looked outwardly, toward international practices, relying on an international soft law instrument to help it determine that its country’s international public policy was not violated.

 

A state’s international public policy tends to be interpreted more narrowly than its domestic public policy, such that a foreign arbitral award is less likely than a domestic one to be refused enforcement. But a state’s international public policy is not what commentators call a “truly international public policy,” or a transnational public policy. Rather, it is a policy viewed through the lens of the state’s own laws or standards for dealing with a foreign arbitral award. Thus, even though it is an international public policy, it is defined at the state level. It is still the public policy of that country, that is, the country of the enforcing court.  But it is the international public policy of that country.

 

“Truly international” is how commentators view transnational as opposed to international public policy. Transnational public policy is not the public policy of any one state, but rather involves public policy that transcends state boundaries. Such public policy is defined as arising out of an international consensus regarding universal standards as to norms of conduct that are generally recognized and agreed upon as unacceptable in most civilized countries, such as slavery, bribery, piracy, murder, terrorism, and corruption. It is generally agreed that transnational public policy has an even more restrictive scope than international public policy.

 

Commentators note that support has been steadily growing for the development of a body of transnational public policy. Most nations these days find that an award fundamentally tainted by fraud or corruption should not be enforced. To the extent that there is a general, widely held perception among nations that this is the case, there are likely to be fewer outliers among courts who may proceed to enforce an award tainted by fraud or bribery.

 

Thus, it may be that transnational public policy, with its carefully defined terms representing “fundamental moral or legal principles recognized in all civilized countries,” may have some influence on a court’s perspective in enforcing arbitral awards. But probably more influential than transnational public policy is simply a transnational perspective that could influence a court’s conception of what the scope of its state’s international public policy should be.

 

A transnational perspective can substantially broaden a court’s approach to its state’s international public policy. Rather than simply viewing the policy through the lens of the state’s own laws or standards for dealing with a foreign arbitral award, a transnational focus can encourage courts to adopt broader perspectives which, although not recognized in all civilized countries, tend to be accepted as best practices in the international arbitration community. By incorporating into their conception of international public policy this more transnational, best practices perspective, courts can help to unify the international framework for deciding on enforcement of foreign arbitral awards.

 

Incorporating a transnational perspective into this framework could encourage courts to become less parochial. For example, India has recently moved away from a position of refusing to enforce a foreign award that violated Indian law. At least part of India’s reason for changing its approach was likely that its decisions were out of step with what other countries were doing. Thus, an incentive to incorporate a more transnational perspective may come from a pragmatic perception that when a country is an outlier with respect to what other countries are doing, there are economic costs. The Indian government has expressed a desire to make India a hub for international arbitration. It understands that to do this, it must change its reputation as a country unfriendly to arbitration.

 

Countries interested in change should understand that a transnational perspective is one that embraces the practices of the international community of nations.  For the arbitration community, when courts treat enforcement of foreign arbitral awards with some consistency across borders, international awards can become more predictable and more likely to be enforced.

 

At this time of the 60th Anniversary of the New York Convention, the public policy exception appears to have worked well. However, it could be better. Although it is not realistic to expect uniform cross-border application of the public policy exception, nonetheless, today better communication and technology make it possible to know both how courts in different countries are dealing with the public policy exception, and also what the international arbitration community views as best practices with respect to enforcement of foreign arbitral awards. Thus, courts in different jurisdictions are more able to understand and meet expectations in the arbitration community with respect to enforcement of foreign arbitral awards.

 

A transnational public policy, defined as “norms agreed upon by all civilized nations,” was not envisioned by those who drafted the language of Article V(2)(b) of the Convention.  Such a policy, however, can inform court decisions dealing with issues of bribery and corruption.  A transnational perspective, on the other hand, is different. It is a perspective that encourages the application of public policy in a way that is reasonably congruent with the international public policy of a broad community of nations. A transnational perspective can thus strengthen both the pro-enforcement bias of the Convention, and the safety valve for ensuring that only meritorious awards are enforced.3) An expanded version of this topic can be found in Fach Gómez K, Lopez Rodriguez AM (eds), 60 Years of the New York Convention: Key Issues and Future Challenges, Wolters Kluwer, forthcoming, 2019. jQuery("#footnote_plugin_tooltip_8473_3").tooltip({ tip: "#footnote_plugin_tooltip_text_8473_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

References   [ + ]

1. ↑ The Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958), 330 United NationsTreaty Series 38, no. 4739, Art. V(2)(b)  (emphasis added). 2. ↑ Tampico Beverages Inc. v. Productos Naturales de la Sabans S.Z. Alqueria, SC9909-2017, Case N° 11001-02-03-000-2014-01927-00. 3. ↑ An expanded version of this topic can be found in Fach Gómez K, Lopez Rodriguez AM (eds), 60 Years of the New York Convention: Key Issues and Future Challenges, Wolters Kluwer, forthcoming, 2019. 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: Arbitration in Belgium: A Practitioner’s Guide
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The Marriage of Artificial Intelligence & Blockchain in International Arbitration: A Peak into the Near Future!!!

Mon, 2018-11-12 00:26

Ibrahim Mohamed Nour Shehata

Introduction:

Two of the most frequent buzz words in our world right now are without doubt: Blockchain & Artificial Intelligence (“AI”). Both technologies have definitely grabbed the attention of the international arbitration community, however, most of the current literature contemplates far-fetched scenarios and how these technologies can revolutionize the world of international arbitration. These articles definitely provide a snapshot of what the future of international arbitration might look like in 10 or 20 years. I would like to take a step back and see how these technologies can benefit the international arbitration community in the next 5 years. Further, no one has yet envisaged the potential impact of a marriage between both blockchain and AI in international arbitration. I would like to look also into the possibility of such a marriage and whether it can be considered as a match made in heaven.

 

(A) AI & International Arbitration:

Three Potential Imminent Benefits of AI in International Arbitration:

AI has undergone some recent outbreaks especially with respect to human language processing inspiring a whole array of legal tech solutions in the areas of legal research, access to justice, and predicting cases’ outcomes. In fact, some US courts already use AI-powered algorithms to assist the judges with setting bail-outs and sentencing decisions. As for international arbitration, most of the discussion has been centered around the possibility of having robotic arbitrators. Unfortunately, this discussion is more of an unknown unknown. The international arbitration community would be better off focusing its efforts upon the known knowns. AI has several use cases that are perfectly positioned to enhance international arbitration both in terms of efficiency as well as quality.

First, AI can review extremely long and detailed contracts and be able to recommend the most compatible arbitration agreement, and especially the most well-suited seat of arbitration and arbitral institution. This could be extremely helpful especially in transactions with tight deadlines as usually the arbitration clause is left till the end and hence dubbed as the “Midnight Clause.” For example, if the parties want to use a unilateral arbitration agreement, AI could direct them to choose London as the arbitral seat instead of Paris as the latter considers such an agreement as invalid.

Second, as the saying goes, arbitration is as good as the arbitrators. In this regard, AI can help the parties with choosing the best well-matched arbitrator for their disputes in terms of quality and availability. Further, in light of the ongoing discussion regarding party-appointed arbitrators and their inherent bias as was evidenced by a recent study, AI can help with the brand new methodology of appointment advocated by the CPR: the so-called screened appointment of arbitrators. In this regard, AI can help with the success of this new methodology through following these three steps:

Accordingly, AI will help achieving 4 main goals:

  1. Eliminate the Unconscious Bias of Party-Appointed Arbitrators;
  2. Diversify the Pool of Arbitrators in line with the Equal Representation in Arbitration Pledge;
  3. Reduce the Challenges to Arbitrators;
  4. Find the most Suitable & Available Arbitrator for the prospective dispute.

Third & Finally, AI can scrutinize arbitral award in a timely manner to maximize its chances of recognition and enforcement. For example, AI can ensure that the arbitral tribunal has complied with the procedural format required for the award. AI can also ascertain that the arbitral tribunal has answered every issue raised by the parties in their submissions. Additionally, AI can help the arbitrators with assessing the compliance of the award with mandatory rules and public policy of the seat of arbitration or potential places of enforcement of the award to comply with their duty to render an enforceable award. This can be done especially with respect to international public policy (i.e., Anti-Corruption International Regulations) as advocated recently by Sophie Nappert who asked an intriguing question: “What about drawing assistance from an algorithm programmed to recognise red flags in a given set of factual circumstances, and to determine the percentage chance of corruption being, or not being, present?”

 

(B) Blockchain & International Arbitration:

Private Permissioned Blockchain v. Public Permissionless Blockchain:

A blockchain can be defined as: “A database that stores digital information in a highly secure manner through (1) using cryptographic functions to encrypt such information and (2) distributing the database across a number of networks.” This definition tries to highlight the most important feature about blockchain; its extraordinary level of cybersecurity. Blockchain can be categorized in 4 types as follows:

Therefore, a private permissioned blockchain would be the optimal type of blockchains to be used in international arbitration for the following reasons:

  1. Private: To ensure the confidentiality that is usually highly regarded by participants in the arbitral process.
  2. Permissioned: To ensure that only pre-designated participants have control over the arbitral process (i.e., the arbitral institution before the constitution of the arbitral tribunal, and then the arbitral institution itself.)

 Is there even a need for Blockchain in International Arbitration?

An arbitration practitioner has claimed in a recent Kluwer Arbitration Blog that: “there are cogent technological reasons which will make it difficult for the management of an arbitration reference to be conducted in a blockchain platform in the foreseeable future.” He relied upon an unsubstantiated claim that it is “quite slow and expensive to store massive volumes of data on a blockchain ledger.” The arbitration practitioner was relying in his assessment upon the low scalability of public permissionless blockchains such as bitcoin and did not take into consideration the very high scalable private permissioned blockchain that can allow for thousands of transactions per second at a very low cost. This article goes on – and rightly so – to advocate that cloud computing might not have “adequate security protocols which can prevent major cyberattacks in the future.” Then, the article advocates for the use of decentralized cloud storage systems and suggests that companies such as Storj, Sia and Filecoin are currently commercializing the use of such systems. This is quite ironic because if you are in the blockchain space, you would know that all three companies are in fact blockchain companies. In a way or another, a blockchain-sophisticated reader would see such an article as rather advocating for the use of blockchain in international arbitration. Therefore, blockchain (a private permissioned type) would be beneficial for international arbitration for the following reasons:1) For a full detailed account of the potential imminent benefits of blockchain for international arbitration, please see my forthcoming article “Three Potential Imminent Benefits of Blockchain for International Arbitration: Cybersecurity, Confidentiality and Efficiency” to be published in the next edition of Young Arbitration Review (YAR). jQuery("#footnote_plugin_tooltip_1807_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1807_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  1. Cybersecurity: Blockchain could potentially improve cybersecurity as it can impede fraudulent activities, and detect data tampering based on its underlying characteristics of immutability, data encryption and operational resilience.
  2. Confidentiality: Private permissioned blockchains could be compared to “organizations intranet pages, where information is only shared and exchanged internally with those who have been authorized to access the site.” Therefore, a private permissioned blockchain would provide international arbitration with an extremely confidential platform minimizing the risk of the leakage of sensitive data to any participant in the arbitral process.
  3. Efficiency: IBM signifies that smart contracts build on the blockchain might have the ability to reduce the time consumed in dispute resolution by 75%. Therefore, blockchain-based smart contracts might speed up the arbitral process to a great extent.

 

(C) Marriage of AI and Blockchain in International Arbitration: A Match made in Heaven between Confidentiality & Transparency?

Confidentiality and Transparency are usually seen as two opposites. However, with the marriage of AI and Blockchain, we can finally achieve both goals equally. As we already know, parties appreciate the fact that arbitration can provide a confidential platform for resolving their disputes.

In fact, 87% of respondents believe that confidentiality in international commercial arbitration is important. However, in international commercial arbitration, the lack of a transparent body of arbitral awards lessens the degree of legal certainty and predictability for both parties and makes life difficult for all participants in the arbitral process to have a reference point to which they can anchor their expectations. Further, the lack of transparency has left a dent to the legitimacy of international commercial arbitration which prompted many scholars to advocate for the publication of arbitral awards. As we have already pointed out, private permissioned blockchain promises a better platform for ensuring confidentiality of arbitral disputes. Accordingly, if we manage to train an AI software on spotting the identifying facts of arbitral awards (lets’ say investment arbitration awards as most of them are already publicly available), then we can have such AI software have an exclusive access to the body of arbitral awards on the private permissioned blockchain and then redact the identifying facts of such arbitral awards. Such a marriage will help us as an arbitration community achieve both virtues: Confidentiality and Transparency, which will reinforce the legitimacy of arbitration as a better platform for adjudicating disputes in the business community.

 

References   [ + ]

1. ↑ For a full detailed account of the potential imminent benefits of blockchain for international arbitration, please see my forthcoming article “Three Potential Imminent Benefits of Blockchain for International Arbitration: Cybersecurity, Confidentiality and Efficiency” to be published in the next edition of Young Arbitration Review (YAR). 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: Arbitration in Belgium: A Practitioner’s Guide
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ICSID Arbitration Reform: Mapping Concerns of Users and How to Address Them

Sun, 2018-11-11 02:16

Yarik Kryvoi

On 13 November 2018, ICSID will present its new proposed amendments at a major conference in London. This round of amendments aims, among other things, to modernize the ICSID procedure based on case experience, simplify the rules, and make the process increasingly time and cost effective while maintaining due process and a balance between investors and States.

On the basis of surveying members of the Investment Treaty Forum and the broader community of investment lawyers, this blog post makes suggestions for further improvement. A comparison of the ICSID Arbitration Rules with UNCITRAL Arbitration Rules and the Arbitration Institute of the Stockholm Chamber of Commerce Arbitration Rules (SCC Rules) shows that the amended rules will allow ICSID to catch up with those institutions in some areas and lead on introducing progressive developments in other areas.

How changes of ICSID procedure can be achieved?

The ICSID Convention itself contains several procedural rules which regulate the conduct of arbitral proceedings. Amendment of these rules is, however, difficult as a matter of public international law. However, ICSID Rules of Procedure for Arbitration Proceedings, which are incorporated by parties into their arbitration clauses by reference, can be amended more easily, upon the approval of a majority of two-thirds of the Member States. This seems to be the approach preferred by the ICSID Secretariat.

Other options, which ICSID may consider include adopting agreed the State Parties interpretation of certain provisions of the ICSID Convention, publishing guidance or best practice notes on various procedural aspects of proceedings. Any of the State Parties to the ICSID Convention can make a unilateral interpretative statement. Such statement would then be binding on the State making the declaration, as well as on the States that have clearly accepted such a declaration.

Key concerns, raised in a survey of the members of the investment community relate to timely appointment of arbitrators and its challenges, over-committed arbitrators and their conflicts of interest.  Also, some hope to see access to emergency arbitrators and fast-track arbitration procedure, as well as a procedure for summary rejection of claims. The current rules and practice of the ICSID Secretariat can do more to facilitate amicable settlement of disputes, consolidation of proceedings, allocation of costs and security for costs, timely rendering of awards and consistency of ICSID annulment decisions. The proposed amendments help to address most of these issues, but there is still room for further improvement as discussed in more detail below.

Timely appointment of arbitrators and challenges

The timeframe currently laid out in ICSID rules is longer than what envisaged in arbitration rules of other leading arbitral institutions. Moreover, currently the ICSID Arbitration Rules and Institution Rules do not require the nomination of arbitrators in the absence of an agreement or the proposition of a method for nomination. This lacuna causes additional delays and costs to the detriment of the parties.

ICSID Rules can be amended so as to require the claimant to nominate an arbitrator in the Request for Arbitration and to propose a method for constituting the Tribunal in the absence of a previous agreement.  In addition, the Rules can be amended to include specific timelines for the nomination of arbitrators by the parties. This could be a process whereby nomination by the requesting party must be within 10 days of the notice of registration; the other party must then make their nomination proposal within 20 days of receipt of the requesting party’s proposal; and the requesting party must then make any counter-proposal within 20 days of receipt of the other party’s proposal.

Tribunals should also be encouraged to reflect the costs of the delay incurred by a challenge in the costs awards, so that the costs of delay can be borne by the party making an unsuccessful challenge. The standards of challenges should be aligned with those adopted by other leading arbitration institutions. Moreover, ICSID can publish its own guidelines or best practices in this area.

Over-committed arbitrators

Highly qualified arbitrators may find it difficult to deal with their responsibilities in a timely fashion because they may have committed themselves to too many proceedings within a limited timeframe. The ICSID can require arbitrators to confirm under the Arbitrator Declaration the days or weeks that the arbitrator has already committed to his/her other undertakings over the next two years. The ICSID can also require tribunals to provide the parties and the ICSID with regular reports on progress towards an award, for instance, in every three months after the end of the hearing or, if any, following the submission of post-hearing briefs.

Arbitrators’ conflicts of interest

Neither the ICSID Convention nor the Arbitration Rules in their current form help in addressing potential conflicts of interest among arbitrators. This might cause an issue particularly in cases where arbitrators act as counsel in other cases which touch upon related issues that they may decide or take a position on. This also leads to a higher number of challenges which slow down arbitration proceedings and increase the costs.

Arbitrators can also be required to routinely disclose in the Arbitrator Declaration all other cases in which they are sitting. In addition, ICSID Arbitration Rules should include an explicit provision that would allow the parties to modify by agreement the test under Article 57 of the ICSID Convention which deals with disqualification of arbitrators. For example, the parties can agree that challenges will be decided in accordance with the International Bar Association’s Guidelines. ICSID can also provide further guidance on the interpretation of Article 57 by publishing a summary of decisions or best practices to achieve the development of a uniform and consistent application of principles.

Amicable settlement of disputes

A significant number of investor-State disputes result in settlement. This helps the parties reduce unnecessary costs and delays as well as preserve their relations. Yet, the ICSID Convention Conciliation Rules are not used very often. This may be because parties fail to see the benefits of the procedure specifically tailored to their needs in seeking an amicable settlement.

ICSID tribunals and the ICSID Secretariat should actively promote the use of ICSID Conciliation Rules. Although the current Arbitration Rules provide for the consideration of issues in dispute with a view to reaching an amicable settlement at the pre-hearing conference, it would make sense to urge tribunals to encourage parties to resolve their disputes amicably. The parties should be asked to express their views on the possibility of an amicable settlement.

Allocation of costs

Current ICSID Arbitration Rules do not provide guidance on allocation of costs, thereby incentivizing parties to file challenges based on weak merits. ICSID proceedings remain notoriously expensive. This is partly due to the lack of effective mechanisms that would discourage parties from adopting procedural tactics to delay proceedings and from putting financial pressure on the opposing party.

The Tribunals could be encouraged by an express provision to include a breakdown of costs for various procedural steps. This would not only help in raising the parties’ cost awareness, but also enhance the transparency and quality of the reasoning of decisions on costs.

In order to maximise effectiveness and minimise the costs of proceedings, tribunals can be encouraged explicitly to consider bifurcation between the phases of merits and quantum, which would save the parties from making detailed pleadings on the quantum before liability is established.

Moreover, the proposed amendments could introduce a rule that would require the parties to prepare short summaries of the main submissions to be included in the award. This would reduce the time and cost of rendering awards.

Consistency of ICSID annulment decisions

The ICSID Secretariat has complete responsibility for the appointment of annulment committees, constituted for each case. As a result, the approach of annulment committees is not always consistent. ICSID ad hoc Committees deciding on annulment applications find it difficult at times to distinguish between the appeal of awards and the application of the ICSID Convention’s provisions on annulment. Inconsistent decisions and confusion with respect to the role of ICSID ad hoc Committees create incentives for unsuccessful parties to launch annulment proceedings as a delaying tactic.

To address the concerns about the current annulment mechanism, one solution to consider would be the introduction of a standing annulment committee. The Chairman of the Administrative Council would seek to appoint three persons from a selected pool of arbitrators from the Panel of Arbitrators (e.g. the same twelve individuals) to form ad hoc committees to decide on annulment applications. This would not require making changes in the ICSID Convention and would help ensure the coherency and predictability of the decision-making process at the annulment stage.

The ICSID may consider convening informal meetings with members of the Panel of Arbitrators to discuss select controversial issues, and to see if there is a consensus in favour of a particular solution, or to better understand the different views on these issues. That could be followed by publication of guidance or best practice notes.

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Claims for Losses Caused by Criminal Offences not to be Arbitrated, Say Lithuanian Courts

Sat, 2018-11-10 03:23

Stasys Zelenekas

Young ICCA

The Court of Appeal of Lithuania (“Court of Appeal”) in Prosecutor v. Public Entity “Pramogų sala”,1) Ruling of the Court of Appeal of Lithuania in case No. 1S-183-307/2018 dated 9 August 2018. jQuery("#footnote_plugin_tooltip_6372_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6372_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); has ruled on 9 August 2018 that claims for damages are not arbitrable in cases where the (disputable) loss is caused by a criminal act. It must be noted, though, that the Law on Commercial Arbitration of the Republic of Lithuania (2012) does not contain this prohibition. However, it establishes that disputes arising from family legal relations and disputes concerning registration of patents, trademarks and design may not be submitted to arbitration. Moreover, disputes arising from employment and consumer contracts may not be referred to arbitration only where an arbitration agreement is concluded after the dispute has arisen.

The list of non-arbitrable subject matter does not include claims when loss is caused by a criminal act. Therefore, the position of the Court of Appeal clarifies the limits of arbitrability of certain types of disputes under Lithuanian law. What remains in doubt, however, is whether the ruling of the Court of Appeal fully complies with the parties’ freedom to arbitrate any disputes (including tort disputes).

Facts of the case

The dispute in question concerned a concession contract concluded between the municipality of Šiauliai (“Municipality”) and a public enterprise (incorporated by the Municipality). The contract included a standard arbitration clause stating that any disputes arising about the performance of the contract shall be decided by an arbitral tribunal. Eventually, the manager of the public enterprise was accused of abuse of powers resulting in failure to perform the contract and an associated loss suffered by the Municipality. The Lithuanian court (which heard the criminal case) has recognised the Municipality’s right to damages arising from the manager’s criminal act and determined damages to be recoverable from both the enterprise and the manager.

At the onset of the civil proceedings, the manager and the enterprise challenged the court’s jurisdiction claiming that the dispute is subject to arbitration in accordance with the contract’s arbitration clause, which provided that any disputes shall be settled by an arbitral tribunal. The Lithuanian court of first instance supported this position. The Court of Appeal, however, reversed the decision.

Court of Appeal’s ruling

The Court of Appeal has ruled that “the private nature [emphasis added] of arbitration determines that only disputes arising from private (commercial) legal relationships might be arbitrable. Meanwhile, disputes arising in relationships regulated by public law (e. g., criminal law) cannot be arbitrable”. On the basis of this, the Court of Appeal found that claims for losses arising from criminal offences should be heard by courts and not by an arbitral tribunal.

The Court of Appeal also noted that if the claims for damages were filed against one of the joint debtors, all associated claims must be dealt with jointly by the court and not by an arbitral tribunal, despite an arbitration agreement in the contract between the creditor and one of the debtors. The reason – the connection between the private contractual relationship and the criminal conduct that caused the loss.

Comment

Lithuanian arbitration law does not explicitly state that disputes for damages caused by criminal activities are non-arbitrable. Neither is such a restriction established by other Lithuanian legislation. Therefore, the recent ruling of the Court of Appeal is of great importance as it limits the parties’ right to refer these disputes to arbitration.

It must be noted that in this case, the Court of Appeal also pointed out that such disputes may be dealt with by two different bodies (the court or an arbitral tribunal) if the claims can be separated on the basis of both fact and law. The Court of Appeal emphasised the necessity of the claims being inextricably linked to be heard by the same adjudicatory authority (i.e., by the court). However, the Court of Appeal did not provide any specific guidelines that enable parties to identify when the claims might be seen as inextricably linked. To that extent, the reasoning of the Court of Appeal might be considered to have some shortcomings.

In this case, the claimant had sought joint and several liability of both defendants (i.e., the manager and the enterprise). Moreover, the claims were based on the same factual circumstances. Therefore, in opinion of the Court of Appeal, both criteria (factual and legal) were satisfied: the Court of Appeal held that the claims being “inextricably linked” meant that they could not be resolved by arbitration.

There is no doubt that portions of the claim (to some extent) might have been based on provisions of public (i.e., criminal) law. Nevertheless, there do not appear to be any obvious reasons under Lithuanian law for the Court of Appeal to have held that the claim could not be heard by an arbitral tribunal, as the arbitration clause stipulated in the contract covered any disputes, including contractual claims and tort claims. Therefore, despite the fact that both claims were “inextricably linked”, the Court of Appeal could still have held the dispute with the enterprise to be arbitrable. This position might also have been supported by the fact that the court (which found the manager guilty) recognised, inter alia, the Municipality’s right to reimbursement of damages.

Moreover, the manager of the enterprise had already been convicted. Therefore, no element of public law remained in the civil case that was to be heard. The only question to be resolved was whether (and to what extent) the loss caused by the manager and the enterprise (incurred because of criminal activity) should be recovered from them (i.e., a question only of civil law). The Court of Appeal, however, gave no justification for how this situation differed from a regular civil claim (i.e., where the enterprise is held liable for the loss, but no criminal activity is involved) subject to hearing by an arbitral tribunal. Indeed, the presence of this difference was uncertain and, therefore, the Court of Appeal had no reasonable grounds to give preference to the jurisdiction of courts.

Courts of certain other countries maintain a similar position. For instance, the courts of England & Wales have noted that even when a criminal act gives rise to a claim for damages, the case might be arbitrable.2) For example, the decision of the High Court of England in The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and the French State [2013] EWHC 3188. jQuery("#footnote_plugin_tooltip_6372_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6372_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The courts have also admitted that in some cases an arbitral tribunal itself might “find facts that constitute a criminal offence and even find that a criminal offence has been committed”. Thus, an arbitral tribunal could have jurisdiction over claims for damages arising from criminal activities.

The ruling of the Court of Appeal, however, reveals that Lithuanian courts tend to limit opportunities to arbitrate disputes involving elements of public (in this case – criminal) law. Unfortunately, this position may adversely affect the development of Lithuanian arbitration law.

References   [ + ]

1. ↑ Ruling of the Court of Appeal of Lithuania in case No. 1S-183-307/2018 dated 9 August 2018. 2. ↑ For example, the decision of the High Court of England in The London Steam-Ship Owners’ Mutual Insurance Association Ltd v The Kingdom of Spain and the French State [2013] EWHC 3188. 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: Arbitration in Belgium: A Practitioner’s Guide
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Should Political Risk Insurance Payment Be Deducted From Investment Treaty Award Compensation?

Sat, 2018-11-10 02:59

Yashasvi Tripathi

Introduction

Political Risk Insurance (PRI) was discussed as a concept here. In fact, an earlier post discussed PRI as an alternative to investment treaty arbitration (ITA) for investors. The interaction between PRI and ITA is a germane field of study as both are risk mitigation strategies for investors and in some instances an investor can initiate claims under ITA and under PRI, such as, in cases of expropriation, government changes, political violence etc.

This post seeks to answer the topical conundrum: whether the insurance payment received by an investor (insured) under a PRI policy should be deducted from the compensation to be awarded to the investor (claimant) in an ITA if the grounds of claim under PRI and ITA are the same.

Conundrum

The two recent awards of ICSID tribunals, viz., Hochtief AG v. Argentine Republic (ICSID Case No. ARB/07/31, Award dated 19 December 2016) and Ickale Insaat Ltd Sirketi v. Turkmenistan (ICSID Case No. ARB/10/24, Award dated 8 March 2016) have answered the conundrum differently. The conundrum is again in front of an ITA Tribunal in Glencore Finance (Bermuda) Ltd v. The Plurinational State of Bolivia.1) PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). jQuery("#footnote_plugin_tooltip_2920_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });      

In the Hochtief AG award, the tribunal held the respondent state, Argentina, liable for breach of FET obligation and awarded compensation to the claimant. The claimant had received PRI payment prior to the ITA award. Notably, the grounds for initiating both were the same. An issue of contention between the parties was the deduction of claimant’s PRI receipts from the ITA compensation.

The tribunal held the claimant’s PRI receipts would not be deducted from the compensation. The tribunal reasoned that the claimant arranged for the insurance payment on its own by paying for it. It is separate from the ICSID claim. The tribunal espoused that the respondent’s liability shouldn’t be reduced by an arrangement to which the latter was not a party. It agreed that due to such insurance policies the claimant might be obliged to pay some part of the compensation to the insurer.

Some practitioners agree with the principle of non-deduction.

Remarks on the case: Article 6 of the applicable Argentina – Germany BIT 2) Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. jQuery("#footnote_plugin_tooltip_2920_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); mentions that if either contracting party makes a payment to its nationals because of a guarantee it has assumed regarding  investments, then the other contracting party shall recognize the assignment, of any right or claim from such national to the paying contracting party. Notably, the article mentions assignment, which means complete transfer of ownership.

Further, the tribunal had a problem with reduced liability of the respondent. However, unequivocally the respondent’s liability is not reduced, as it will have to pay Germany, the paying contracting party as per the agreement. Rather, the respondent will have to pay twice for the same cause of action.

In the case of Ickale Insaat, the tribunal had dismissed the claims of the claimant. The claimant (investor/insured) had a PRI policy for the leased equipment and machinery. However, the tribunal decided to deduct the claimant’s PRI receipts in calculating the compensation, if to be awarded, given the evidence and non-rebuttal by the claimant.

The tribunal reasoned that the compensation should be equivalent to the real value of the expropriated investment. It was on the assumption that the claimant might have been paid and would have recovered the value of the insured investment.

Notably, the dissenting arbitrator, and even the claimant, agreed on deduction principally, which is evident from the claimant’s request for rectification of the award. The parties only differed with respect to the sufficiency of evidence if the claimants actually got the PRI payment.

Way out and why

The following points indicate that PRI and ITA should be alternative, and not simultaneous means of redress for the investors:

i) The wording of treaties and insurance policies and the principles of insurance law: The language in the treaties for incentivizing agreements, like the article 6 above; and in the contracts of insurance, like the one concluded by the U.S. PRI provider, Overseas Private Investment Corporation (OPIC), mention the assignment of the relevant rights of the investor to the paying contracting party or to OPIC, so that the latter then proceeds against the host governments.

The request for arbitration by OPIC also uses assignment: that on making the payment to the insured, the insurer (OPIC) received in return, assignment of certain rights and interests to pursue recovery against the host government under the applicable agreement.

Assignment has specific legal connotations. Black’s Law Dictionary defines assignment as an act by which one-person transfers to another, the whole of the right or interest. It is complete transfer of rights, enabling the insurer to claim on its own without the name of the insured. 3) E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed jQuery("#footnote_plugin_tooltip_2920_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

When the whole of the right is transferred from the insured to the insurer, then the same right ought not be exercised by the insured at an ITA.

The request for arbitration by OPIC also states: by subrogation the host government is liable to reimburse the OPIC for payments it made to the investors and to compensate the OPIC to the fullest extent of rights and interests transferred to OPIC from the investors.

Subrogation is a product of equity, which prevents unjust enrichment. Generally, an insurer has the right of subrogation and not the insured. Further, insurer gets rights of subrogation as soon as the payment is made.4) Id. jQuery("#footnote_plugin_tooltip_2920_4").tooltip({ tip: "#footnote_plugin_tooltip_text_2920_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As a common law principle, an insurer does not have rights of subrogation against its own insured for the claims arising from the same risk for which the insured was covered. Hence, if an investor is being compensated by a host government, after being paid by the insurer, then too the insurer doesn’t get the right of subrogation against the insured (the investor), as was claimed by a few practitioners agreeing with the non-deduction principle.

ii) Behavior of PRI providers: Some PRI providers, like Multilateral Investment Guarantee Agency, mandate for the insured to engage in arbitration as a precondition for the grant of PRI compensation. They grant PRI payment if the arbitration process has failed. Meaning thereby, the PRI providers deem compensations from PRI and ITA as an alternative to each other and definitely not something to be awarded simultaneously.

Further, after making the payments, the PRI providers initiate arbitration against host governments for the same cause of action. The authority with which PRI providers proceed against the host governments speaks about their understanding of the transferred rights, which is of ownership and complete.

iii) Phenomenon of moral hazards: Morally hazardous behavior of the investors in presence of PRI coverage (as detailed in a study) signifies that investors at times solely rely on PRI payments for their losses and do not care about the outcomes in ITAs. The investors deem their damages to be sufficiently covered by the PRI itself. Investors view PRI as an easy way out of a country in which they do not want to continue. The CalEnergy case in Indonesia is illustrative of this phenomenon.

This moral hazard is also observed in host governments. In the presence of PRI coverage, they have lesser incentive to reform their markets and economy for foreign investments (noted in an OECD policy paper). This illustrates that host governments don’t deem themselves primarily liable to compensate the investor in presence of PRI.

Thus, behavioral understanding of investors and host governments contradicts the non-deduction principle whereby PRI and ITA compensation are paid in addition to each other.

iv) PRI itself as a Dispute Resolution Mechanism: It is possible to equate PRI as one of the dispute resolution mechanisms, like an ITA. The dominance of public PRI providers, eventually changing the dispute to an inter-state dispute, supports this interpretation. For example, the dispute over the Dabhol power plant between an American Company and GOI turned into a state-state dispute between the US and India. It too signifies that PRI is an alternative to ITAs.

v) PRI v. ITA: At times, they have non-intersecting operating spheres. For example, PRI is essential for investors in host countries which haven’t entered into BITs or which are pulling out of the ITA regime. For instance, Venezuela and Ecuador denounced the ICSID Convention. PRI and ITA, as remedies, provide comparable but distinct advantages and remedies. Hence, one can be chosen over another depending on the preference of investors for certainty, speed, amount of compensation, cost etc.

vi) Equity: Making the host governments pay to the investor (the insured) for the same cause of action, as has been paid by the PRI provider (the insurer) is not equitable as the insured is getting compensated twice. If not leading to double compensation of the insured, it will lead to unjust enrichment of the insured, or at least liquidity benefits to the insured for a certain period.

Further, it amounts to the host government compensating twice for the same cause of action. This is equivalent to double jeopardy for the host governments, which is inequitable.

vii) Miscellaneous reasons: The prevailing conditions give rise to confusion as to who should proceed against the host governments regarding the insured investments, the insured or the PRI provider.

The non-deduction practice increases the transaction cost, as then the insured, who has been compensated by the insurer, will have to pay the insurer, as espoused by few practitioners agreeing with the principle. It leads to the same result of compensating the insurer circuitously.

Further, non-deduction leads to seeing the two fields of law: investment arbitration and insurance as mutually exclusive fields and non-integral. This doesn’t bode well for the future of the ITA regime, which already has few disgruntled opinions.

Conclusion 

PRI and ITA should co-exist as alternative ways and not as simultaneous sources of compensation for the same cause. Both provide distinct and comparable remedies in their distinct ways. If the PRI provider has paid an investor, then the PRI payment should be deducted from the compensation out of ITA awards. This will lead to a coherent and equitable system.

References   [ + ]

1. ↑ PCA Case No. 2016-39/AA641, Bolivia’s Preliminary Objections, Statement of Defence, and Reply on Bifurcation (18 December 2017). 2. ↑ Treaty between the Federal Republic of Germany and the Argentine Republic on the Encouragement and Reciprocal Protection of investments, 1991. 3. ↑ E.J. Macgillivray, MacGillivray & Parkington on Insurance Law, 8th ed 4. ↑ Id. 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: Arbitration in Belgium: A Practitioner’s Guide
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