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To Insure or Not to Insure: Should Arbitrators Be Obliged to Insure Their Civil Liability?

Fri, 2019-11-08 00:31

Tadas Varapnickas

Arbitrators’ civil liability is not a topic that everyone within the arbitration community enjoys discussing. Therefore, it is not surprising that the approach to the concept of liability differs within the arbitration community. In cases where someone may face civil liability, the possibility to insure such risk arises. This blog post, therefore, will deal with the question of whether arbitrators should mandatorily insure their civil liability and whether it should be regulated by law.1)This blog post is based on the author’s PhD thesis and is intended to provide some guidelines concerning the issue – Varapnickas, Tadas. Arbitrator‘s civil liability and its boundaries. Vilnius: Vilniaus universiteto leidykla, 2018. This PhD thesis was defended at Vilnius University on December 3, 2018. A summary of the thesis is available in English here. jQuery("#footnote_plugin_tooltip_4277_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Different Concepts Concerning Arbitrator’s Liability

There are three concepts concerning arbitrator’s liability: absolute immunity, absolute liability, and limited or qualified liability. Under the first approach, which found its place in common law countries, firstly, arbitrators should not be found liable for their acts or omissions as arbitrators because the duties they perform are closely related and similar to the ones performed by judges who enjoy absolute immunity. The absolute liability doctrine is cardinally different. Supporters of this approach claim that arbitrators should be held liable as any other service providers and their liability could only be limited by the contract, not by the arbitrator’s status.

The limited liability doctrine tries to reconcile the two other approaches. According to this doctrine, since an arbitrator is not analogous to the state judge but neither a pure service provider due to the functions performed, arbitrator’s status is somewhere in between or sui generis. Therefore, arbitrators should not be liable for ordinary negligence but could not avoid liability in case of bad faith, i.e. when they act intentionally or are grossly negligent, for example, when arbitrator intentionally fails to disclose the conflict of interest and, therefore, the award is later annulled.

It is most widely accepted that an arbitrator’s civil liability should be limited. By way of example, Section 29 of the English Arbitration Act states that an arbitrator should be found liable only in cases of bad faith. Similar provisions exist in arbitration laws in Spain (Article 21 of Arbitration Act of Spain), Portugal (Article 9(4) of Portuguese Voluntary Arbitration Law), Italy (Article 813ter of Code of Civil Procedure of Italy), New Zealand (Article 13 of New Zealand Arbitration Act 1996), Australia (Article 28 of Australia’s International Arbitration Act 1974), Hong (Article 104 of Hong Kong Arbitration Ordinance), Sri Lanka (Article 45 of Sri Lanka Arbitration Act), and others. Although regulation in these countries differs, the goal remains the same – to ensure that arbitrators would only be liable in case of their bad faith, understanding the latter as arbitrator’s intent or gross negligence. Most arbitration rules, for example, LCIA (Article 31 of LCIA Arbitration Rules), ICC (Article 41 of ICC Arbitration Rules), SCC (Article 52 of SCC Arbitration Rules), DIS (Article 4 of DIS Arbitration Rules), SCAI (Article 32 of Swiss Rules of International Arbitration), HKIAC (Article 46 of HKIAC Arbitration Rules), Vilnius Court of Commercial Arbitration (Article 47 of Arbitration Rules of Vilnius Court of Commercial Arbitration), contain the same or very similar provision, under which arbitrators are not held liable in case of ordinary negligence.

 

Status quo on Professional Liability Insurance for Arbitrators

Although not widely discussed, liability insurance is an important topic for arbitrators’ community. When the Swiss arbitration association rendered a survey in 2013, 50% of arbitration institutions claimed to have liability insurance for claims against the institution itself. As regards arbitrator’s insurance, arbitration institutions replied that they insure arbitrators rarely and mostly when they require themselves.2)HABEGGER, Philipp et al. Arbitral Institutions Under Scrutiny: ASA Special Series No. 40. New York: Juris Publishing, 2013, p. 32. jQuery("#footnote_plugin_tooltip_4277_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This seems somewhat odd knowing that earlier an ICC working group on arbitrator’s status concluded that arbitrators should enter into a contract on liability insurance.3)ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). jQuery("#footnote_plugin_tooltip_4277_3").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Hence, although the ICC Working Group concluded in 1996 that arbitrators should insure themselves, the survey rendered by Swiss arbitration association in 2013 revealed that arbitrators rarely request insurance. In other words, most arbitrators arbitrate without any liability insurance, meaning that if an arbitrator is faced with a civil liability claim, he/she alone would need to cover the damages. The amount of damages theoretically might be so large that an arbitrator would eventually risk facing bankruptcy. So, it is the parties to arbitration that should be interested in arbitrator’s liability insurance in the first place as it is designed to protect arbitrators from potential creditors. Secondly, the states should also be interested in the issue because it may lead to distrust of arbitration in general.

However, if one were to look at different arbitration laws, one would notice that there is nothing on arbitrators` liability insurance. Indeed, to the author’s knowledge, only Spain explicitly regulates arbitrator’s insurance questions. Article 21(1) of the Spanish Arbitration Act provides that arbitrators shall be required to take out insurance to cover civil liability or to make an equivalent guarantee, for the amount established by regulation. This obligation was included in the law together with the 2011 amendments of the Spanish Arbitration Act. As it was noted in another article on the Kluwer Arbitration Blog, the Spanish insurance sector reacted quickly, and Spanish insurers attempted to design a special insurance policy for arbitrators.

Although amendments in Spain were adopted eight years ago, other countries either in Europe or elsewhere in the world did not follow Spain’s example and there are no indications that any country is preparing to do that. As a result, in a situation where only Spain adopted a relevant regulation, the question arises if there is a need to discuss compulsory liability insurance at all?

It may be asked whether the professional liability insurance for lawyers would apply to arbitrators. Although it might depend on different national rules, generally the answer would be answered to the negative. Lawyers work in the field of representing clients before courts, state institutions, i.e., the main activity of lawyers is acting on behalf of someone else and this is the activity that is insured by professional liability insurance. Professional civil liability insurance of lawyers, therefore, is directed to protect lawyers for their main activities and not any activity performed by a lawyer. Arbitrating, on the other hand, is not an activity that would ipso facto be considered every lawyer’s activity. At the same time, auditors, architects, economists, lecturers and others may also be appointed as arbitrators. Therefore, even if professional insurance for lawyers applied to arbitrators, it would not be provided to all professions and the problem would not be resolved.

It might seem surprising that the issue of the insurance of arbitrator’s liability is not regulated by laws, particularly, when the ICC Working Group concluded that arbitrators should insure themselves. However, more careful analysis shows that it should not be too surprising. In fact, most of arbitration laws do not regulate arbitrator’s liability at all. For example, even the UNCITRAL Model Law does not provide any guidance on arbitrator’s liability. So, it should not be surprising that national arbitration laws do not regulate the issue of insurance if the issue of liability itself is not regulated.

 

Should Arbitrators Be Obliged to Have a Professional Liability Insurance?

There are opinions in academia suggesting that professional liability insurance for arbitrators would be useful.4)WESTON, Maureen A. Reexamining Arbitral Immunity in an Age of Mandatory and Professional Arbitration. Minnesota Law Review, 2006, vol. 88:449, p. 497. jQuery("#footnote_plugin_tooltip_4277_4").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Furthermore, insurance is required in other professions.5)YU, Hong-Lin. Who is an arbitrator? A study into the issue of immunity. International Arbitration Law Review, 2009, vol. 12(2). jQuery("#footnote_plugin_tooltip_4277_5").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

However, as mentioned above, it is most widely accepted that arbitrator’s civil liability should be limited, i.e. even without the insurance, arbitrator’s liability should be applied only when arbitrator acts conducted in bad faith (acts conducted intentionally or grossly negligently). Therefore, an obligation to insure civil liability when the liability is ipso facto limited may be treated as a redundant requirement. Indeed, arbitrators would then need to insure their liability only for acts committed in bad faith, while normally insurers only insure risks of ordinary negligence. Therefore, the issue arises as to whether liability insurance is at all possible in arbitration.

Insurance would also mean additional expenses which ultimately should be covered by the parties to arbitration paying higher arbitrators’ fees. Scholars support this conclusion.6)BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. jQuery("#footnote_plugin_tooltip_4277_6").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Also, a rather small amount of insured parties may lead to higher insurance payments for arbitrators and again, ultimately, the parties.

On the other hand, in Brown’s opinion, insurance would ensure fair process with a competent arbitrator.7)BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. jQuery("#footnote_plugin_tooltip_4277_7").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_7", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Yet, it is not explained what the correlation between insurance and competence is. On the contrary, knowing that any failure will be covered by insurance, arbitrators may start acting less prudently as they would not do without the insurance.

 

Conclusion

Therefore, the conclusion of the ICC working group that arbitrators should insure their civil liability,8)ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). jQuery("#footnote_plugin_tooltip_4277_8").tooltip({ tip: "#footnote_plugin_tooltip_text_4277_8", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); cannot be supported. Of course, if the arbitrator would feel more comfortable with insurance, the voluntary insurance can be suggested if applicable law allows for same. Yet, compulsory liability insurance would not achieve the purposes it would seek. Even if an arbitrator may be faced with the civil liability claim, those situations should be rare and most attempts to get arbitrators liable should fail because the standard of liability is high enough. Therefore, it should not be recommended for national law-makers to follow Spain’s example and to implement compulsory arbitrator’s liability insurance in national legislation.

References   [ + ]

1. ↑ This blog post is based on the author’s PhD thesis and is intended to provide some guidelines concerning the issue – Varapnickas, Tadas. Arbitrator‘s civil liability and its boundaries. Vilnius: Vilniaus universiteto leidykla, 2018. This PhD thesis was defended at Vilnius University on December 3, 2018. A summary of the thesis is available in English here. 2. ↑ HABEGGER, Philipp et al. Arbitral Institutions Under Scrutiny: ASA Special Series No. 40. New York: Juris Publishing, 2013, p. 32. 3, 8. ↑ ICC Working Group. ICC Final Report on the Status of the Arbitrator. ICC International Court of Arbitration Bulletin, 1996, vol. 7(1). 4. ↑ WESTON, Maureen A. Reexamining Arbitral Immunity in an Age of Mandatory and Professional Arbitration. Minnesota Law Review, 2006, vol. 88:449, p. 497. 5. ↑ YU, Hong-Lin. Who is an arbitrator? A study into the issue of immunity. International Arbitration Law Review, 2009, vol. 12(2). 6, 7. ↑ BROWN, Jenny. The Expansion of Arbitral Immunity: Is Absolute Immunity a Foregone Conclusion. Journal of Dispute Resolution, 2009, vol. 2009(1), p. 236. 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: The Decision-Making Process of Investor-State Arbitration Tribunals
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Sanctions vis-à-vis Blocking Measures and the Dilemma Faced by Arbitral Tribunals: Lessons Drawn From EU Blocking Regulation and U.S Extraterritorial Sanctions

Wed, 2019-11-06 21:30

Naimeh Masumy and Niyati Ahuja

Introduction

The United States announced the reinstatement of sanctions on Iran in May 2018. Following that, the EU responded by revising their Blocking Regulation (Regulation 2271/96) in August 2018. The Blocking Regulation was designed to safeguard European entities from the extraterritorial reach of the U.S. sanctions. The uncertainty surrounding the scope of application and the nature of blocking regulations, in general, has left their role in arbitration open to increasing speculation.

In Section I below, we discuss secondary sanctions, with a focus on the recent extraterritorial sanctions imposed by the U.S. In Section II, we analyze the varying nuances of blocking regulations and their implications on arbitration, considering EU Blocking Regulations as our focal point. In Section III, we address issues arising when a dispute falls both within the ambit of extraterritorial sanctions and the purview of blocking regulations. Finally, in Section IV, we provide an overview of the comprehensive analysis to be undertaken by arbitrators when confronted by a dispute that involves blocking regulations and extraterritorial sanctions.

 

I. Secondary Sanctions

Sanctions often have a wide and horizontal application prohibiting commercial activity with regards to an entire country. There are two categories of sanctions which may be imposed by a country: primary sanctions and secondary sanctions. Primary sanctions are those sanctions which are imposed on actions having a jurisdictional nexus with the country imposing them. Secondary sanctions apply to international parties without any relevant jurisdictional nexus between those parties and the country imposing such sanctions.

For the purpose of this post, we will focus on secondary sanctions which are extraterritorial in nature. In essence, these sanctions assert jurisdiction over a foreign party often without substantial nexus between the entity or the act committed and the territory of the regulating states. The extraterritoriality of sanctions is not generally accepted across all jurisdictions and hence states may develop blocking regulations to combat these sanctions. For instance, the U.S. imposed secondary sanctions and the EU developed Blocking Regulations to combat the same. This has been precisely echoed in the preamble of the EU Blocking Regulation which recalls that “by their extra-territorial application, such laws, regulations, and other legislative instrument violate international law and impede smooth international trade”.

 

II. Blocking Regulations

A. What are Blocking Regulations?

A blocking regulation is the legislation adopted to impede the sanctions imposed by a foreign jurisdiction.Blocking regulations are not a new phenomenon; Canada and Mexico implemented blocking regulations to counter the effect of U.S. sanctions in 1992 and 1996 respectively. A blocking regulation shields companies and individuals within its jurisdiction by prohibiting them from complying with sanctions, and not abiding foreign court rulings, orders and awards. These regulations can serve an important role as part of the legal measures employed by governments whose citizens will be subject to the sanction and can protect their commercial activities from the consequences of snapback.

B. Implications of EU Blocking Regulation (Regulation 2271/96)

The EU Blocking Regulation is not a standalone measure and each EU Member State ought to determine the amount of the penalty it deems appropriate to impose through their domestic legislation. For example, under German law, breach of the EU Blocking Regulation may constitute an administrative offence and can result in a fine of up to 500 Euros.

It is widely understood that the EU Blocking Regulation has neither been heavily enforced nor tested so far. At the EU level, no jurisprudence exists currently, except the one enforcement action has been heavily reported – against BAWAG PSK.

There are two major intended impacts of the EU Blocking Regulation: first, to enable foregoing compliance with any requirement of prohibition stipulated in extraterritorial sanction and, second, the nullification of foreign decisions. They both bear an important implication as they are changing the way arbitrators resolve disputes as the arbitrators are confronted with another applicable law.

 

III. The Impact of Secondary Sanctions and Blocking Regulations on International Arbitration  

A. Impact of Secondary Sanctions

The impact of sanctions with extraterritorial reach can be summarized in four distinctive categories:

  1. as a part of the governing law to the merits of the case: Parties may use sanctions as an excuse for failure to comply with contractual obligations. It may be either treated as ‘force majeure’ or ‘frustration of purpose’ depending on the jurisdiction.
  2. as a part of the domestic law of the lex arbitri or seat of the arbitration: Sanctions may form a part of the applicable law to the dispute if the seat of arbitration is situated in a sanctioning country. For example, if the parties have chosen New York as their seat of arbitration, U.S. sanctions will be applicable to the dispute.
  3. at the enforcement stage: The impact of sanctions continues even after an arbitration is concluded and an award issued, that is in the context of enforcement. Where enforcement is sought in a sanctioned state, an award may be subject to a challenge in the enforcing court if the objections raised concern a violation of sanctions regulations.
  4. external effect: Secondary sanctions usually result in impossibility of performance of a contract thereby releasing the obligation to perform. However, from a dispute resolution perspective, when a sanction regime proclaims itself applicable extraterritorially, it does not necessarily imply that arbitral tribunals, or domestic courts will give extraterritorial effect to these sanctions.

In this regard, characterization of sanctions by arbitrators has an important impact on an arbitration proceeding. There is no consensus yet as to whether sanctions should be given effect as fact or law. A factual impediment occurs whenever a sanction has the power to compel an individual or an entity to withhold performance, usually via threats of enforcement measures or penalties. The factual approach is increasingly regarded as an unsatisfactory shortcut to the extent that it compels arbitrators to give effect to sanctions almost mechanically which in reality contradicts the purpose of party autonomy. The legal approach suggests that a sanction would be given effect either only because it forms part of the applicable law or because it is applicable as a foreign overriding mandatory rule. It is important to note that the legal approach guarantees a higher degree of flexibility and allows the arbitrators to take into consideration blocking measures.

B. Impact of Blocking Regulations

A blocking regulation, in general, does not automatically apply to an arbitration proceeding, unless it aims to counter a sanction, and its application on the arbitration proceeding cannot be scrutinized in isolation.

The gradual promulgation of blocking measures into domestic law of the parties could result in a concrete body of law enabling courts to openly enforce blocking measures. By such adoption, these measures would fall within the ambit of article 9 of the Rome Regulation and constitute a part of the public policy of the seat of arbitration and be of significance at different phases of the arbitral procedure.

A major impact of the EU Blocking Regulations on international arbitration is the nullification of the effect of any foreign decision including court rulings or arbitration awards, based on the listed extraterritorial legislation or the acts and provisions adopted pursuant to them. This simply means that a European court ought to refuse to enforce an award for the reason that it contravenes EU Blocking Regulations.

 

IV. The Irreconcilable Dilemma Faced by Arbitral Tribunals

The dearth of jurisprudence with regards to blocking regulations has left many pertinent issues unanswered regarding how disputes involving sanctions and sanctioned parties vis-à-vis blocking regulation should be resolved. As previously mentioned, firstly, blocking regulations have a direct bearing on the enforcement of an arbitral award; secondly, arbitrators may engage in an excessive conflict of law analysis to determine and rationalize the applicable law; and, finally, in some particular situations, arbitrators may face certain liabilities due to breaching sanctions regime or blocking regulations.

One of the key operative provisions of EU Blocking Regulations seeks to nullify the effect of any arbitration award based on the sanction regime. Similarly, if the adoption of the blocking regulation is regarded a public policy pronouncement embedded in substantive law of a country, parties may seek to resist enforcement of such awards by arguing that the arbitration award is inconsistent with the country’s public policy. The recognition or enforcement of an arbitral award that involves sanctions may sometimes be seen as contrary to public policy in a sanctioned country. The generally restrictive view of public policy expressed in the famous case Westacre vs. Jugoimport-SDRP demonstrates that the courts, not taking into account unilateral sanctions that do not amount to public policy, will not be breaching ‘international public policy’. The judgment confirms that the prevailing trends with respect to the notion of public policy is in favor of international public policy.

The interplay of blocking regulations and sanctions calls for an extensive conflict of laws analysis while simultaneously broadening the discretion of arbitrators to apply the most appropriate law. When a disputed transaction falls within the ambit of both an extraterritorial sanction and blocking statutes, it is crucial for arbitrators to weigh the interests that are served by the sanctions against those served by the blocking statutes to determine which one should be applied to the dispute. The question that arbitrators need to consider is whether to look at a blocking regulation that has already declared the sanction unlawful or use their discretion to analyze the merits of the case. Furthermore, arbitrators must examine whether sanctions serve interests that are deemed legitimate by the international community. Thus, if a sanction is evidently based on discriminatory motives, arbitrators have the authority and a duty to disregard it.

While blocking regulations have put arbitrators in a precarious position, this post puts forward that endorsing conflict of laws analysis by arbitrators in order to rationalize applicable law could be perceived as an ideal way to maintain the predictability of the arbitration proceeding. The conflict of laws analysis may grant tribunals an objective criterion to take into consideration blocking regulation without disregarding the parties’ choice of law and exceeding its designated power. Moreover, applying conflict of law rules will play an important role in the absence of applicable law or where the parties have not chosen a law, and the result will be much more predictable.

An arbitrator may unknowingly breach sanctions and be held liable in certain cases when they are unsure of whether they can rely on blocking regulations or whether taking sanctions into account may expose them to violation liability. As the legal character of blocking regulations eventually gains uniformity, the aforementioned concerns need to be addressed by the arbitration community. If the landscape remains ambiguous, only the future will tell if arbitration remains to be the chosen form of cross-border dispute resolution.

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Does Nationality Matter in Designations to the ICSID Panel of Arbitrators?

Tue, 2019-11-05 22:20

Federico Cabona and Francesca Sepe

On September 9, 2019, the Federal Republic of Germany designated Professor Franco Ferrari to serve on the ICSID Panel of Arbitrators, pursuant to Article 13 of the ICSID Convention. Professor Ferrari is the only arbitrator designated by Germany who does not have German nationality, the exception that proves the (unwritten) rule of Contracting States predominantly selecting their own nationals for designation on ICSID Panels.

Arbitrators in ICSID-administered cases do not need to be selected from the Panel members. (Article 40(1) of the Convention) However, if the parties fail to constitute the tribunal, or if any arbitrator resigns without its tribunal’s consent, the Centre shall fill any vacancy by appointing Panel arbitrators only. (Articles 38, 56(3) and 40(1) of the Convention) Moreover, and more importantly, ad hoc annulment committees shall be entirely made of members of the Panel. (Article 53(3) of the Convention) Thus, the composition of Panels is far from inconsequential.

According to Section 4 of the Convention, each Contracting State may designate up to four persons to their Panel, providing the designee meets the following requirements:

  • high moral character;
  • recognized competence in the fields of law, commerce, industry or finance; and
  • reliability to exercise independent judgment.

Although not necessary for designation, additional “highly desirable” attributes are: knowledge of and experience with international investment law; knowledge of and experience with public international law; experience and expertise in international arbitration or conciliation; ability to conduct an arbitration or conciliation and write an arbitral award or report in one or more of the Centre’s official languages (English, French and Spanish); availability to accept appointments in cases as of the date of designation; availability and willingness to travel for case proceedings.

The above requisites aside, the process followed to identify and select a Panel designee is entirely within the discretion of the Contracting State.

In its latest phase of designations, Germany selected German arbitrators, in addition to Franco Ferrari, Patricia Nacimiento, Sabine Konrad, and Stephan Schill. Their tenure at the Panel is set to expire on September 12, 2025, barring renewal. The designation of Professor Ferrari is of particular interest. Although he has a German mother and was raised and educated in Germany, Franco Ferrari is in facts an Italian national. Article 13(1) of the Convention provides that a Contracting State’s designees “may but need not be its nationals.” Given the borderless nature of international arbitration, the often-loose links between its practitioners and their State of origin, and its relatively cohesive community, one might expect designations to result from individual reputation rather than nationality.

However, that does not appear to be the case.

Although the busiest treaty arbitrators tend to come from a small group of jurisdictions (e.g. Australia, Canada, France, Germany, Italy, Spain, Switzerland, the United Kingdom and the United States, which account for a significant number), the field of Panel members appears more levelled. Only 10.2% of the past and present Panel members are non-nationals. Half are US nationals. French, English and Italian arbitrators are the next largest minorities among those that were not appointed by their State of origin. Dual-nationals designated by one of the contracting States whose nationality they hold were excluded from this calculation.

In short, it is actually common practice for ICSID Contracting States to appoint their own nationals. The reasons for this are not obvious. The Convention precludes the appointment of arbitrators having the same nationality as the parties in the case to avoid any conflict of interest, meaning that a State could not draw any supposed direct benefit from designating its own nationals on the Panel. Of course, a domestic vetting procedure should be expected to result in a mainly domestic field of candidates. For instance, Latvian arbitrators are more likely to apply for designation with the Latvian authorities than arbitrators of any other nationality. Likewise, Malaysian arbitrators are more likely than arbitrators of any other nationality to satisfy the requirements that the Malaysian authorities may establish for the designation.

However, exceptions exist, and Professor Ferrari is one of them.

Others are:

  • Yves Derains, French national, designated by Albania;
  • Franco Ferrari himself, before being designated by Germany, had already been designated by St. Lucia.
  • Paul Friedland, US national, designated by Georgia;
  • Hamid Gharavi, Iranian/French national, designated by Cambodia;
  • George Kahale III, US national, designated by Albania;
  • Rolf Knieper, German national, designated by Georgia;
  • Carolyn Lamm, US national, designated by Uzbekistan;
  • Alexis Mourre, French national, designated by North Macedonia;
  • Jan Paulsson, Swedish/French national, designated by Bahrain;
  • William Rowley, Canadian/English national, designated by Mongolia;
  • Giorgio Sacerdoti, Italian national, designated by Seychelles;
  • Stephen Schwebel, US national, designated by Bahrain;
  • Brigitte Stern, French national, designated by Georgia;
  • Nassib Ziadé, Chilean/Lebanese national, designated by Kuwait;

Two trends can be detected from this list. First, with the exception of Germany, the above designations were all made by relatively small nations. Second, many of them stem from the same Contracting States, such as Georgia, Bahrain and Albania.

Accordingly, there seems to exist a strong inclination of most ICSID Contracting States to designate nationals only. Until Germany’s designation of Professor Ferrari, the exceptions to this practice have been attributable to a (small) contingent of (small) Contacting States, who have seized the opportunity to avail the Panel not just of their highly qualified nationals, but also of highly qualified non-nationals.

That designation may lead to other States giving serious consideration to non-nationals as well as nationals for their ICSID Panels.

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Case Management in Arbitration: A View from Poland

Tue, 2019-11-05 03:00

Maciej Zachariasiewicz and Michal Kocur

Essential Role of Effective Case Management in Arbitration

Throughout the second half of the 20th century, arbitration has become a dominant and preferred method for resolving international disputes. Its advantages are widely known. This being said, international arbitration suffers nowadays from increasing costs and duration of the proceedings. It is less efficient than it promises. Many business people express dissatisfaction. Efforts are thus made by the arbitration community to improve the existing rules and practices in order to tackle these inconveniences.1)This includes in particular guidelines and rules prepared by various international organizations such as Arbitration Committee of IBA, ICCA, UNCITRAL, the Chartered Institute of Arbitrators or international arbitration courts. jQuery("#footnote_plugin_tooltip_9302_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Management of the arbitral proceedings lays at the very center of the arbitration’s current difficulties. The issue, although immensely relevant for the whole arbitration world, has its specific Polish dimension. Many of the practices and techniques well settled in international arbitration (e.g. case management conferences, written witness statements, party-appointed experts) only gradually gain prominence in Polish practice. Whilst the world seems concerned with working out new instruments, which will render pursuit of claims in arbitration more effective (e.g. expedited procedures, emergency arbitrators), or with fine tuning the existing measures,2)See e.g. J. Risse, Ten Drastic Proposals for Saving Time and Costs in Arbitral Proceedings, Arbitration International, Vol. 29, No. 3, p. 453 et seq. jQuery("#footnote_plugin_tooltip_9302_2").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the Polish arbitral practice strives to implement instruments long known on the international level. Thus, in so far as the main challenge for international arbitration seems to be counteracting further judicialization of arbitration and restraining the surging arbitration costs, the task before Polish arbitration community is different. Namely, it is to remodel the practices of case management towards best international practices, and in particular to overcome tendencies transposed from litigation before Polish common courts.

 

The Study on the Polish Arbitral Practice

With the above in mind, a study was conducted by Kocur & Partners and Kozminski University in Warsaw that took aim at the management of arbitral proceedings in Poland. The goal of the survey was to determine what rules, techniques, and practices are used in Poland, and how they are viewed by arbitration practitioners. The survey was conducted at the turn of 2018 and 2019. Our respondents answered multiple-choice questions in an online questionnaire sent to arbitration practitioners, i.e. counsels and arbitrators. In all, 108 arbitration practitioners took part in the survey. The answers of the “counsels” and “arbitrators” were contrasted, with some interesting effects.

The study focused on a number of procedural issues that are relevant to the efficacy of dispute resolution. The questions posed to arbitration practitioners related both to their actual experiences (“how things are”), as well as to their opinions about preferred practices relating to case management (“how things should be”). The following issues were covered by the study:

  • duration of proceedings;
  • case management conferences;
  • first procedural orders and timetables of proceedings;
  • arbitrators’ competences with respect to active management of the proceedings;
  • length of the written submissions;
  • expert reports;
  • written witness statements and the examination of witness at the hearing;
  • organization of the hearings within the proceedings;
  • document production;
  • financial incentives for arbitrators to timely render an award;
  • financial sanctions for parties employing dilatory tactics.

 

Length of Arbitration Proceedings and the Reasons for Delays

The participants of the survey were first asked about the length of the arbitration proceedings they had participated in. According to participant’s experiences proceedings most often last between 12-24 months (30% of respondents indicated that this was the duration in majority of cases they dealt with), followed by 6-12 months (16% of respondents have chosen the answer “in majority of cases”). On the other hand, arbitrations in Poland seldom last longer than 24 months. Yet, they also rarely finish in a period shorter than 6 months.

Source: 2019 Polish Arbitration Survey. Case Management in Arbitration, p. 9.

The users’ experiences seem to be confirmed by the data from Polish arbitration courts. The average duration of the proceedings before the Court of Arbitration at the Polish Chamber of Commerce was 448 days in 2018, 385 days in 2017, and 413 days in 2016 (counted from the day when the request for arbitration is filed until the award). The cases before the Lewiatan Arbitration Court were, on the other hand, decided more quickly. It took on average only 3,6 months in 2017 and 5,1 month in 2016 to decide the case (although this was counted from the moment when the arbitral tribunal is constituted). However, because the Court at the Polish Chamber of Commerce decides much more cases, its relative impact on the experience of the users is proportionally greater.

More importantly, we sought to find out what – in the eyes of the respondents – are the main reasons for delays in proceedings. The most frequently chosen answer was the chaotic management of arbitration proceedings (53% of answers), followed by the complexity of the dispute (49%), dilatory tactics (34%), taking unnecessary evidence (33%), waiting for the final award after the proceedings have been completed (31%), insufficient availability of arbitrators (21%), postponing hearings without justified reasons (12%), and the inefficiency of the arbitral institution administering the dispute (8%), with some respondents pointing to difficulties with choosing experts and obtaining their reports timely.

Source: 2019 Polish Arbitration Survey. Case Management in Arbitration, pp. 10-11.

When it comes to reasons for delays there are interesting differences between answers given by arbitrators and counsels. For example, while only 22% of arbitrators consider the chaotic organization of proceedings important, 64% of the counsels underlined that this precisely was the main cause of delays. In that context, it comes as a surprise that 44% of the arbitrators consider the taking of unnecessary evidence as an important cause of delays, while only 30% of counsels pointed to that answer. This may suggest that arbitrators, although generally consider that they are responsible for the management of arbitral proceedings (and not pointing to their own mismanagement), do not feel they are responsible for the active control of taking evidence through a critical examination of the parties’ requests.

When a party provides evidence which seems unnecessary to resolve the case, the arbitrators may find themselves in a difficult position. In deciding whether to take the evidence they must balance the need to expeditiously head towards the final award with the parties’ right to fully present their case. That the given evidence is irrelevant for the case might not be clear until it is actually taken and analyzed by the tribunal. Consequently, arbitrators may be inclined to think that the admission of almost all evidence is necessary to safeguard due process and to rely on the parties’ in that they best know what evidence should be taken. Moreover, not only arbitrators have an obligation to make sure that parties are treated fairly, but also that the proceedings appear to be fair in the eyes of the reasonable third party (e.g., the court called upon to decide any challenge to the award).

 

Yearning for “Stronger” Arbitrators

On the other hand, yearning for “stronger” arbitrators seem to be on the tide in international arbitration. A “stronger” arbitrator is one who is not overly constrained by the due process paranoia, who manages the case actively and is ready to identify the contingent issues and take difficult decisions early in the proceedings.3)See e.g. Compendium of arbitration practice – IBA Arb40 Subcommittee (2017), p. 6, which note that “earlier engagement from the tribunal is essential”. jQuery("#footnote_plugin_tooltip_9302_3").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The most far-reaching of the recent initiatives are the recently adopted Prague Rules on the Efficient Conduct of Proceedings in International Arbitration (2018), which encourage this attitude, even suggesting that the arbitral tribunal is entitled to take “a proactive role in establishing the facts of the case which it considers relevant for the resolution of the dispute” (Article 3(1)). While this might be a step too far, a general longing for more active arbitrators is often heard.4)K.P. Berger, O. Jensen, Due process paranoia and the procedural judgment rule: a safe harbour for procedural  management decisions by international arbitrators, Arb. Int’l, vol. 32, 2016, s. 416; ICC Techniques for Controlling Time and Costs in Arbitration (2012), para 13. jQuery("#footnote_plugin_tooltip_9302_4").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This seems to be confirmed also by findings of the survey. Although only 22% of the users agreed with the proposition that arbitrators should always seek to identify key issues to resolve the dispute, and in the absence of the parties’ activity, should seek to clarify the issues by conducting evidentiary proceedings themselves, as much as 71% of the Polish users contended that arbitrators should be active, although not to the extent that they should conduct evidentiary proceedings at their own initiative. Conversely, only 6% of the respondents felt that the arbitrators should be mere observers of the parties’ actions during the proceedings.

That the Polish users prefer active arbitrators with strong procedural powers results also from their answers to some of the specific questions posed in the survey. 59% of respondents said that if the witness summoned to the hearing failed to appear, the arbitrators should disregard the evidence from such witness. 36% of respondents took a more flexible stance that the arbitrators may disregard such evidence, but only for important reasons.

Users seem also to prefer strong arbitrators’ powers when it comes to limiting the length of the written submissions and sanctioning dilatory tactics. With respect to the first issue, although majority (56%) of those who took part in the survey believe that arbitrators should only limit the length of the written submission when the parties have consented to it, as much as 24% believe that such restrictions should be applied in each case irrespective of parties’ consent and only 11% that there must never be limits in that regard. Interestingly, it was arbitrators who more often (23%) than counsels (8%) indicated that the length of the written submissions should never be limited. This might come as a surprise given that it is the parties’ right to fully present its case which is at stake and that it is usually suggested on international fora that parties should agree on such restrictions.5)See, for example, ICC Techniques for Controlling Time and Costs in Arbitration (2018), para 47. jQuery("#footnote_plugin_tooltip_9302_5").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The results of our survey seem to suggest that the counsels are more keen to self-limit their chances to fully present their case than it would be necessary according to the arbitrators.

Finally, Polish users want arbitrators to sanction unethical behavior of the parties and their counsels that results in prolonging the proceedings. Majority of respondents believe that such behavior should always be sanctioned by arbitrators and affect the decision on costs (54%). A minority (39%) choose a more moderate proposition, that this can only be done if the arbitrators have warned the parties in advance. Only 4% contended that arbitrators may apply cost sanctions only if the parties have actually agreed to this. Polish users thus accept more leeway in sanctioning parties that what is usually suggested in international arbitral practice.6)Where a dominant view seems to be that the parties must at least be warned that their unethical behavior may affect the decision on costs. See Compendium of arbitration practice – IBA Arb40 Subcommittee (2017), p. 11, 26; IBA Guidelines on Party Representation in International Arbitration (2013) – Guideline 26. jQuery("#footnote_plugin_tooltip_9302_6").tooltip({ tip: "#footnote_plugin_tooltip_text_9302_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Can Procedural Effectiveness Be Restored in Arbitration?

Much ink has been spilt in the recent years about the effectiveness of arbitration. Voices are heard that arbitration does not live up to its promise of being expedient, inexpensive and informal method of dispute resolution. Many are nostalgic about the good, old times when arbitration was exactly that (or is now perceived as such). Although the judicialization of arbitration may be its natural development resulting from its growth as a predominant method of settling international, often complex and large scale, business disputes, efforts aimed at increasing its usefulness for users are always worth pursuing. The survey on the case management in arbitration, although focused on Polish practices, aspires to make a modest contribution in that regard.

References   [ + ]

1. ↑ This includes in particular guidelines and rules prepared by various international organizations such as Arbitration Committee of IBA, ICCA, UNCITRAL, the Chartered Institute of Arbitrators or international arbitration courts. 2. ↑ See e.g. J. Risse, Ten Drastic Proposals for Saving Time and Costs in Arbitral Proceedings, Arbitration International, Vol. 29, No. 3, p. 453 et seq. 3. ↑ See e.g. Compendium of arbitration practice – IBA Arb40 Subcommittee (2017), p. 6, which note that “earlier engagement from the tribunal is essential”. 4. ↑ K.P. Berger, O. Jensen, Due process paranoia and the procedural judgment rule: a safe harbour for procedural  management decisions by international arbitrators, Arb. Int’l, vol. 32, 2016, s. 416; ICC Techniques for Controlling Time and Costs in Arbitration (2012), para 13. 5. ↑ See, for example, ICC Techniques for Controlling Time and Costs in Arbitration (2018), para 47. 6. ↑ Where a dominant view seems to be that the parties must at least be warned that their unethical behavior may affect the decision on costs. See Compendium of arbitration practice – IBA Arb40 Subcommittee (2017), p. 11, 26; IBA Guidelines on Party Representation in International Arbitration (2013) – Guideline 26. 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: The Decision-Making Process of Investor-State Arbitration Tribunals
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Colombia’s Constitutional Court Declares That Constitutional Injunctions (Tutela) Can Be Upheld Against Awards In International Arbitration

Sun, 2019-11-03 20:00

Eduardo Zuleta and María Camila Rincón

On August 6, 2019, the Fifth Revision Chamber of Colombia’s Constitutional Court (the “Court”) issued judgment T-354/19 resolving a constitutional injunction (tutela)1)The tutela is a constitutional injunction that aims to protect fundamental constitutional rights when they are violated or threatened by the action or omission of any public authority. This mechanism is incorporated in Article 86 of the Constitution. Tutelas proceed when: (i) fundamental constitutional rights are violated or threatened; (ii) when there are no other means to protect the right; and (iii) against action or omissions of a private individual in the event that said individual provides a public service, or exercises public functions; and (iv) when the actor is in a situation of defenselessness or subordination with respect to the individual against whom the tutela is brought. jQuery("#footnote_plugin_tooltip_8282_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8282_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); submitted by a state-owned company and its subsidiary against an international arbitral award (the “Tutela”). In its decision, the Court recognized the possibility of obtaining constitutional injunctions against awards issued in international arbitrations seated in Colombia. However, it concluded that the Tutela was not admissible in the specific case because the annulment proceedings had not been exhausted.

This is a decision of one of the Chambers of the Court, not a decision of the plenary of the Court nor a decision to unify jurisprudence, and therefore it only applies to the specific case and may be revisited.

 

Background

On December 22, 2010, Gecelca S.A E.S.P (“Gecelca”) and its subsidiary Gecelca 3 S.A.S E.S.P (“Gecelca 3”), and the Consortium CUC-DTC, constituted by China United Engineering Corporation and Dongfang Turbine Co. LTD. (the “Consortium”), executed an EPC contract to build a thermoelectric plant (the “Contract”).

During the development of the Contract certain disputes arose between the parties regarding, inter alia, the term for performance of the Contract, Gecelca 3’s alleged delay in the payment of invoices, and the alleged breach of the Contract by the Consortium.

On December 29, 2014, the Consortium submitted a request for arbitration under the arbitration clause of the Contract. The tribunal, seated in Bogota, was constituted on March 11, 2015 from the list of “international arbitrators” of Bogota’s Center of Arbitration (the “Tribunal”). The Parties disputed whether the arbitration was to be conducted as a national or an international arbitration.

On May 8, 2015, the Tribunal issued a partial award deciding that the arbitration was international because two of the three criteria set forth in Article 62 of Law 1563 of 2012 (Statute of National and International Arbitration) were applicable in the specific case. Namely, that the parties were domiciled in different States at the time of execution of the arbitral clause and that the dispute affected international trade interests (the “Partial Award”).

On December 4, 2017, the tribunal issued a final award (the “Final Award”) declaring, among other things, that Gecelca 3 had breached the Contract, and ordering it to pay over USD $40 million to the Consortium.

On January 11, 2018, Gecelca 3 filed an action to set aside the Final Award before the Third Section of the Council of State (the “Third Section”), because, among other reasons, it was inconsistent with Colombia’s international public order.

In parallel, on February 28, 2018, Gecelca and Gecelca 3 (the “Gecelca companies”) presented a constitutional injunction (tutela) against the Final Award alleging that the Tribunal had violated their fundamental rights to due process and access to justice. The Gecelca companies also requested interim measures to suspend the payment ordered by the Tribunal.

On July 26, 2018, the Fourth Section of the Council of State – the first level competent court –declared that the tutela was inadmissible considering that this mechanism could not be used to re-open a legal debate addressed during the arbitral proceedings. On September 12, 2018, the Fifth Section of the Council of State –the second level competent court– confirmed the first instance judgment and added that, since constitutional injunctions are subsidiary mechanisms, the tutela was not admissible because the decision to set aside the Final Award was still pending.

Following the first and second level decisions, Gecelca 3 filed a request before the Constitutional Court to revise the tutela. On October 29, 2018, the 10th Selection Chamber of the Court selected the tutela for revision and designated the Fifth Revision Chamber for this purpose.

 

The Constitutional Court’s decision

The Fifth Revision Chamber concluded that it is possible to obtain constitutional injunctions (tutelas) against international arbitral awards. However, it decided that, in the specific case, a constitutional injunction was not appropriate because annulment proceedings were still pending.

The court noted previous constitutional jurisprudence according to which arbitral awards issued in national arbitrations are materially equivalent to judicial decisions because arbitrators are temporarily invested with the function of administering justice according to Article 116 of the Constitution, and considering that both are issued in the exercise of jurisdictional functions and have res judicata effects. For this reason, the admissibility of constitutional injunctions against arbitral awards must be analyzed under the same requirements applicable to judicial decisions.

Nonetheless, said requisites must be more rigorously applied to arbitral awards than to judicial decisions, considering that arbitral awards derive from the express will of individuals deciding to depart from the jurisdiction of the courts.

The Court concluded that the same criteria applicable to analyze the admissibility of arbitral awards issued in national arbitrations, must be applied to awards issued in international arbitrations. Accordingly, the admissibility of constitutional injunctions against international arbitral awards must be analyzed on the basis of the following criteria: (i) the arbitral award must have violated fundamental rights directly; (ii) the applicable remedies must have been previously exhausted (according to Article 40 of Law 1563 of 2012, the only applicable remedy to arbitral awards is annulment); and (iii) compliance with “specific admissibility requirements” (as set out in Judgment T-466 of 2011), which refer to the existence of substantive, organic, procedural, or factual defects of the award or the tribunal’s constitution, also known as the doctrine of “vías de hecho”.

Additionally, the Court noted that when the substantive law applicable to the arbitration is foreign, constitutional judges shall only apply Colombia’s international public order as parameter of constitutional control. In consequence, “specific admissibility requirements” are only applicable when the award is “partially governed by Colombian law” and not when the substantive law applicable to the arbitration is foreign.

Finally, the Court noted that the possibility of obtaining constitutional injunctions against international awards is even more exceptional (“excepcionalísima”) than in the case of national awards. Yet, it is a discretional matter for the competent judge to decide.

Based on the above, the Court concluded that the Tutela filed against the Final Award was not admissible considering that the Gecelca companies had not previously exhausted the proceedings to set aside the award, which are still pending before the Third Section of the Council of State.

 

Comments

The Court’s decision leaves several questions unresolved.

First, despite the fact that Colombia is a contracting party to the New York Convention of 1958 (the “Convention”), the Court did not address the interplay between Colombia’s international obligations under the Convention and the domestic legal regime. According to Article V(1)(e) of the Convention, the recognition and enforcement of the award may be only refused if, inter alia, the “award has not yet become binding on the parties, or has been set aside or suspended by a competent authority of the country in which, or under the law of which that award was made.” In the light of this provision, one may ask how the decision of the Court that tutelas may be filed against awards issued in international arbitrations seated in Colombia interplays with an international convention to which Colombia is a signatory and which provides for the action to set aside as the sole remedy against an award. Regrettably, the Court did not address this point in its decision.

Second, the Court’s analysis regarding the relation between “the law governing the award” and the admissibility of constitutional injunctions is unclear. The Court states that when the “the law governing the award” is foreign, there is no room to analyze the admissibility of a tutela in light of criteria different than Colombia’s international public order. While it is far from clear what the Court means by with “the law governing the award”, it seems to be referring to the substantive applicable law. Accordingly, the Court seems to conclude that in those cases where “the law governing the award” is partially Colombian, the constitutional judge may apply other criteria such as the doctrine of “vías de hecho”, a catalogue of: substantive (e.g. the arbitrator interpreted or applied a rule ignoring constitutional judgments with erga omnes effects defining the scope of the rule); organic (e.g. the arbitrators have absolutely no competence to resolve the matter submitted to their consideration, either because they have manifestly acted outside the scope defined by the parties or because they have ruled on non-arbitrable matters); procedural (e.g. the arbitrators have issued the award in a manner completely contrary to the procedure established contractually or in the law); and factual defects (e.g. the arbitrators made their assessment of the evidence directly violating fundamental rights) in which the award or the tribunal may incur. If this is so, then a constitutional judge deciding a tutela against an international arbitral award, may review the merits of the case to determine if the arbitral tribunal incurred in vías de hecho.

Third, while the court states that national awards are “materially equivalent” to judicial decisions and seems to conclude that the same equivalency applies to an award issued in an international arbitration, it does not explain how it arrived to such conclusion and does not analyze the implications of such equivalency. Does it mean that the decision considers arbitrators in an international arbitration as judges?  If so, can a non-Colombian be deemed to be a judge exercising jurisdiction in Colombia, although Colombian nationality is required to be a judge in Colombia? Can arbitrators seated in an international arbitration in Colombia trigger the international responsibility of Colombia?

 

Conclusion

In its review of the case, the Court invited scholars and institutions to provide comments on several questions related to the Tutela, the key one being whether constitutional injunctions should be admitted against awards issued in international arbitrations seated in Colombia. The majority of the opinions were in the negative based on the same point of departure: arbitrators in international arbitrations seated in Colombia are not judges, public officials, or private parties exercising public functions. The Court, however, seems to have departed from this premise and based its analysis on the thesis that international arbitrators comply with public functions.

References   [ + ]

1. ↑ The tutela is a constitutional injunction that aims to protect fundamental constitutional rights when they are violated or threatened by the action or omission of any public authority. This mechanism is incorporated in Article 86 of the Constitution. Tutelas proceed when: (i) fundamental constitutional rights are violated or threatened; (ii) when there are no other means to protect the right; and (iii) against action or omissions of a private individual in the event that said individual provides a public service, or exercises public functions; and (iv) when the actor is in a situation of defenselessness or subordination with respect to the individual against whom the tutela is brought. 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: The Decision-Making Process of Investor-State Arbitration Tribunals
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Is The Future Bright For International Energy Disputes In Asia?

Sat, 2019-11-02 22:24

Gabriella Richmond

The ITA-IEL-ICC Joint Conference on International Energy Arbitration was held in Singapore in September, examining the future of international energy disputes in the region. There was a focus on the client perspective, with insights from a variety of speakers. The range of participants and speakers was impressive, with practitioners, in-house counsel and institution representatives covering a broad spectrum of topics in the lifecycle of energy disputes.

As the inaugural holding of the conference in Singapore, Edwin Tong SC (Senior Minister of State for Law) highlighted the growing importance of Asia as an energy hub, and Singapore as a dispute resolution hub for parties worldwide. As SMS Tong noted, energy demands have grown hugely in Asia in the last 15 years, driven by Asia’s development and the infrastructure required. Singapore is Asia’s leading oil trading hub, and home to more than 300 leading energy and chemical companies. Its location and position as a neutral and stable jurisdiction make it attractive for multi-party, multi-jurisdictional, high-value disputes, particularly as the industry grows.

 

Lifecycles and global reach of energy disputes. The conference covered a variety of aspects to an energy dispute, from pre-dispute responsibilities of the parties involved and early case assessment, through to awards and settlement possibilities. A panel of in-house counsel and practitioners (Jennifer L. Ferratt, Chevron; Christopher Moore, Moyes & Co; Nandakumar Ponniya, Baker McKenzie; and Liz Snodgrass, Three Crowns) also discussed “Exit” disputes at the end of a project, covering the framework for such disputes, the financial and fiscal aspect, and the commercial and investment aspect of dispute resolution.

From a region-specific angle, Professor Chester Brown delivered a presentation on difficulties encountered through boundary disputes in the Asia-Pacific region, particularly significant for energy disputes. Professor Brown considered the balance of uncertainty over making investment decisions against the demand for energy, against a background of key boundary disputes in the region. In terms of comparisons drawn from energy disputes in Europe, Mark Mangan (Dechert LLP) and Joquin Terceno (Freshfields) took part in an interesting debate considering the similarities and differences between gas price reviews in Europe and Asia. This left conference members wondering if price reviews in Asia will follow the same pattern seen in Europe, despite many market differences. The diversity of topics covered, and global experience of the speakers themselves was an overriding theme throughout the two days, encapsulated by two inspiring interviews with Laura M. Robertson (ConocoPhillips) and Loretta Malintoppi (39 Essex Chambers, Singapore).

 

Innovation in arbitration keeping the future bright. A repeated topic throughout the conference was innovation in arbitration, with both institutions and practitioners staying attuned to what parties want and developments in the field, both generally and energy dispute-specific. Senior representatives from the ICC, ICSID, SIAC and HKIA spoke on recent innovations and perspectives from the institutions, including prevalent topics such as third party funding and transparency. Throughout the conference, the rising importance of mediation and ADR also became clear, particularly with the recent signing of the Singapore Convention on Mediation.

 

Practicalities from an in-house perspective. The in-house perspective added a practical note to discussions, with engaged and interested clients with a desire for time and cost efficiency in proceedings. On a general note, the management of construction disputes was summarised by experienced practitioners (Erin Miller Rankin, Freshfields, and Chen Han Toh, Pinsent Masons MPillay), and the client perspective from Mona Katigbak (GE Renewable Energy) and Catherine McNeilly (INPEX Australia). Client interest and involvement in selecting an arbitrator was evident, as well as the need for alignment between counsel and clients in the approach to the dispute.

The influence and responsibility of the parties at the pre-arbitration stage, particularly in relation to attempted settlement and dispute assessment was emphasised, with early case assessments and proactive resolution plans. Reference was also made to the updated ICC Commission Report published in February 2019, with updates on interim measures, settlement and translations being discussed in relation to energy disputes. The proactivity of institutions in responding to what users and clients want was apparent. As a fitting end to the conference, Craig Miles (King & Spalding) delivered a concise and entertaining review of the top energy dispute cases of the year, including the very recent award in ConocoPhillips v Venezuela.

 

Key takeaways. The recurring themes, as highlighted by the conference co-chair Nicholas Lingard (Freshfields), were those of diversity, both in terms of experience, perspectives and nationalities, and the omnipresence of geopolitics in energy disputes. The importance for clients in maintaining working relationships during a dispute, and the need for cost and time efficiency, was also evident. Institutions and seats are responding to this by increased focus on areas such as third party funding, settlement, and expedited arbitrations, amongst others. ADR is gaining greater traction and rising in importance outside of formal arbitration proceedings, particularly with the recent signing of the Singapore Mediation Convention. The future for energy arbitration in Asia does look bright, bolstered by proactive institutions and engaged clients, against a backdrop of an increasingly important Asian market.

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Does Signing an International Treaty Impliedly Waive Sovereign Immunity in the U.S. under the FSIA?

Fri, 2019-11-01 22:22

J.P. Duffy IV and Daniel Avila II

The recent decision issued by the United States Court of Appeals for the District of Columbia in Pao Tatneft v. Ukraine reopened the door to whether a country waives sovereign immunity under the Foreign Sovereign Immunities Act (the “FSIA”) by signing the New York Convention or other international treaties.

In Pao Tatneft v. Ukraine, Tatneft, a Tatarstan oil company, was a primary shareholder to a Ukrainian oil company, along with Ukraine and Tatarstan (a republic of the Russian Federation). When the Ukrainian courts invalidated Tatneft’s shares, Tatneft sought arbitration against Ukraine under the Russia-Ukraine Bilateral Investment Treaty (the “Russia-Ukraine BIT”). An UNCITRAL arbitral tribunal in Paris awarded Tatneft $112,000,000 in damages plus interest against Ukraine for violating its obligations under the Russia-Ukraine BIT by failing to provide legal protection and allowing discrimination against Tatneft, an investor from Russia.

Tatneft petitioned the U.S. District Court of the District of Columbia to confirm and enforce the award under the New York Convention. Ukraine moved to dismiss the petition on the basis of sovereign immunity and other grounds. Tatneft argued that the district court had jurisdiction pursuant to 28 U.S.C. § 1605(a)(1) because Ukraine waived its sovereign immunity under the theory of implied waiver.

The district court noted that although the FSIA does not define “implied waiver,” it applied in the following circumstances: where

“(1) a foreign state has agreed to arbitration in another country; (2) a foreign state has agreed that the law of a particular country governs a contract; or (3) a foreign state has filed a responsive pleading in an action without raising the defense of sovereign immunity.”

The court found that if a foreign state agrees to arbitrate in a country that has signed the New York Convention, it waives its sovereign immunity in all of the signatory countries by virtue of the fact that “when a country becomes a signatory to the Convention, by the very provisions of the Convention, the signatory state must have contemplated enforcement actions in other signatory states.” The court found Ukraine agreed to arbitrate in the territory of a state that has signed the New York Convention (France); and thus it should have anticipated enforcement actions in signatory states like the U.S.

The D.C. Court of Appeals agreed, finding a sovereign, by signing the New York Convention, waives its immunity from arbitration-enforcement actions in other signatory states. The Court of Appeals found that signatories of the New York Convention must have contemplated arbitration-enforcement actions in other signatory countries, including the United States. The present discussion will focus on the trend of U.S. courts finding implicit waivers of sovereign immunity if the country (1) signed the New York Convention and (2) arbitrated in the territory of a state that has signed the New York Convention.

The FSIA, under 28 U.S.C. § 1605(a)(1), provides:

(a) A foreign state shall not be immune from the jurisdiction of courts of the United States or of the States in any case—

(1) in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver.

A good starting point for understanding the D.C. Court of Appeals’ approach is the Second Circuit case, Transatlantic Shiffahrskontor GmbH v. Shanghai Foreign Trade Corp., 204 F.3d 384, 391 (2d Cir. 2000). Here, the plaintiff attempted to establish jurisdiction for a suit that did not concern the enforcement of an international arbitration award. The Court of Appeals for the Second Circuit held simply signing the New York Convention alone—without an arbitration award—was not sufficient to waive sovereign immunity unless the “cause of action is so closely related to the claim for enforcement of the arbitral award.” Similarly, in Creighton Ltd. v. Government of State of Qatar, the D.C. Court of Appeals refused to find Qatar had waived sovereign immunity based on arbitrating in a signatory state to the New York Convention because Qatar had not signed the Convention.

U.S. courts have also denied finding a waiver of sovereign immunity when states sign international treaties that are not for the enforcement of arbitral awards. For example, in Reers v. Deutche Bahn AG, the U.S. District Court for the Southern District of New York held that “[b]y signing the Convention Concerning International Carriage by Rail (COTIF), a treaty that regulated litigation arising from railway transportation in signatory countries Germany and its instrumentalities did not impliedly waive sovereign immunity.”

The New York Convention by its very title (the Convention on the Recognition and Enforcement of Foreign Arbitral Awards) was created as a mechanism to enforce arbitration awards rendered in signatory states. U.S. courts have appreciated this and denied attempts from States to avoid this international obligation by invoking domestic statutes. Under the Vienna Convention, a state may not invoke its internal laws to avoid an international obligation. Thus, if (1) a party obtains an award from a signatory state and (2) the award was rendered in the territory of a signatory state, a state may not refuse enforcement in the U.S. based on sovereign immunity. This opens the door not only to states waiving sovereign immunity by signing the New York Convention, but also other enforcement treaties including the Panama Convention and the ICSID Convention.

On September 22, 2019, Ukraine filed a motion to stay issuance of mandate pending disposition of a petition for certiorari from the Supreme Court. On October 9, 2019, the D.C. Court of Appeals granted the stay until November 8, 2019.

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Procedural Orders or Challengeable Awards? The English High Court Clarifies Its Position

Fri, 2019-11-01 00:00

Craig Tevendale and Rutger Metsch

The English High Court (the Court) has recently issued two judgments clarifying its approach to determining whether a decision by an arbitral tribunal is an award or a procedural order. A few months ago in ZCCM Investment Holdings PLC v Kansanshi Holdings PLC & Anor (ZCCM), the Court identified a list of factors that it will take into account when reaching a conclusion on this issue. The Court then applied these factors in the recent case of K v S (together with the ZCCM case, the Cases) to decide whether a ruling by the tribunal should be considered an award or not.

This distinction between orders and awards is key, given that a party can apply to set aside an award (but not a procedural order) under the English Arbitration Act (the Act) on grounds set out in s.67 (substantive jurisdiction), s.68 (serious irregularity), and s.69 (appeal on a point of law). The Court’s reasoning in the Cases will therefore be relevant to arbitrators and practitioners aiming to ensure clarity in relation to the status of any ruling issued.

 

Uncertainty regarding the status of arbitral decisions

A tribunal may record a decision on an issue raised in the arbitration either in the form of an ‘award’,1)Which may be further categorised in various types of award, including ‘partial awards’, ‘interim awards’, ‘final awards’, and ‘consent awards’. jQuery("#footnote_plugin_tooltip_3841_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3841_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or as a ‘procedural order’, and the distinction is important because an award and a procedural order lead to different procedural and substantive implications. For example, procedural orders do not fall within the scope of the enforcement provisions in the New York Convention and the annulment and (non-)enforcement safeguards embedded in national arbitration laws, including the Act. The status of a particular ruling – ultimately a decision made by a domestic court in relation to an action on the decision – can therefore have significant consequences for the parties to the arbitration. Despite the importance of the question, the term ‘award’ is not defined in the Act (nor is it in other leading instruments such as the New York Convention and the UNCITRAL Model Law).

Nonetheless, it will usually be quite clear whether a decision is a procedural order or an award. For example, it is uncontroversial that a tribunal’s final decision on the substantive claims in the arbitration is usually recorded in an ‘award’ and that a decision fixing the date of the hearing is usually recorded in a ‘procedural order’. However, sometimes this determination will be less straightforward. Questions regarding the legal status of a decision may arise because of ambiguity in the terminology used by the tribunal (by referring to, for example, ‘rulings’ and ‘decisions’ rather than ‘awards’ and ‘procedural orders’). This occurred in the ZCCM case, where the tribunal issued a decision that was somewhat ambiguously described as a ‘Ruling on Claimant’s Application’ (the Ruling). The issue can also arise where the designated status of the decision is clearly stated, but a party contests that designation. This occurred in K v S, where the decision by the tribunal was recorded as Procedural Order 5 (PO5), but one of the parties submitted that the decision was in substance actually an award. In both cases, the Court had to decide the proper categorisation of the Tribunal’s decision.

 

The Court’s reasoning in the Cases: the ZCCM factors

The facts of the Cases are outside of the scope of this post and, for present purposes, it is sufficient to note that in both cases the applicant challenged a tribunal’s decision under s.68 of the Act. S.68(1) provides that a party may apply to the Court to challenge “an award in the proceedings on the grounds of serious irregularity affecting the tribunal, the proceedings or the award” (emphasis added). In each case, the Court was therefore required first to deal with the “threshold” issue of whether the arbitral ruling could be considered an ‘award’ (and in both cases, the Court eventually found on the facts that the relevant decisions could not).

The Court in ZCCM reviewed the applicable authorities and outlined the following factors relevant to the determination of whether a decision by a tribunal is an award:

  • real weight is given to the substance, and not merely the form, of the decision;
  • a decision is more likely to be an award if it finally disposes of the matters submitted to arbitration, rendering the tribunal functus officio either entirely, or in relation to the particular issue or claim;
  • the nature of the issues considered in the decision is significant, as substantive rights and liabilities of parties are likely to be dealt with in the form of an award. A decision dealing purely with procedural issues is less likely to be an award;
  • the tribunal’s description of the decision is relevant – but is not conclusive;
  • the perception of a reasonable recipient of the tribunal’s decision is relevant;
  • that reasonable recipient is likely to take into account the objective attributes of the decision, including the tribunal’s own description of the decision, the formality of the language and the level of detail in the reasoning and whether the decision complies with the formal requirements for an award under any applicable rules; and
  • the reasonable recipient must be considered to have all the information the parties and tribunal would have had when the decision was made, including the background and context of the proceedings. This may include whether the tribunal intended to make an award.

These factors may, however, not all bear equal weight in the Court’s determination. In the K v S case, the Court commented that the ZCCM factor that should be accorded most weight was the question of whether there was a final determination of a substantive point in the arbitration.

 

Awards made to order

The Cases offer a welcome clarification of the English courts’ approach to the distinction between awards and procedural orders. As noted above, the Act does not provide a definition of the term ‘award’: whilst it does address in s.52 the requirements of an award in relation to form, it is silent on any substantive requirements. The principles governing these substantive requirements have, instead, been developed through case law. The ZCCM case provides a helpful overview of the factors considered relevant by the Court and, together with the K v S case, demonstrates which factors will be accorded the most weight.

Applying these factors is, however, not an exact science. The Court recognised in ZCCM that the question arises in “a wide variety of circumstances“, and that there is no hard rule that prescribes whether a ruling is an award or a procedural order. Nonetheless, there are certain steps which arbitrators and counsel can take to reduce any uncertainty to the extent possible. The Court’s judgment indicates that the tribunal’s description of the decision, the formality of the language, the level of detail of the tribunal’s reasoning, and whether the decision complies with the formalities of an award are factors to be taken in to account. An arbitral Tribunal should therefore always consider the intended form of any decision they are producing, make that form clear on the face of the document, and avoid using any language that creates doubt as to the nature of the decision. Practitioners can limit any ‘classification risk’ by explicitly raising the issue with the tribunal at the time of the relevant application to the tribunal, and by making submissions on the nature of the decision they are seeking.

Whilst such actions by the tribunal and the parties cannot guarantee that a decision will be recognised as having the intended form by a court – because the key factor is an objective assessment as to whether a decision finally disposes of a substantive issue or claim – considering the ZCCM factors during the arbitration will minimise the chance of a surprising outcome in this regard. Given the general absence of an authoritative definition of ‘award’ in international instruments and in domestic legislation, this issue is not confined to London-seated arbitrations, and the practical approach set out above is also likely to be of interest for arbitrations seated in other jurisdictions.

References   [ + ]

1. ↑ Which may be further categorised in various types of award, including ‘partial awards’, ‘interim awards’, ‘final awards’, and ‘consent 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: The Decision-Making Process of Investor-State Arbitration Tribunals
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India’s Affair with the ‘Group of Companies’ Doctrine Continues

Wed, 2019-10-30 20:00

Juhi Gupta

Introduction

In a previous post, I had surmised whether the Indian courts’ tryst with the group of companies doctrine (“Doctrine”) in the arbitration context is a harbinger or aberration. If the Indian Supreme Court (“SC”) decisions in Reckitt Benckiser v. Reynders Label Printing, decided on 1 July 2019 (“Reynders Label), and MTNL v. Canara Bank, decided on 8 August 2019 (MTNL”) are any indication, it appears that the tryst is steadily evolving into an affair. The decisions reinforce India’s pro-arbitration outlook and at the same time clarify the parameters to employ the Doctrine to bind non-signatories to arbitration.

 

Non-Signatory Member of A Group of Companies Cannot be Ipso Facto Bound by Arbitration

Reynders Label involved a petition under Section 11 of the Arbitration and Conciliation Act, 1996 (“Act”) to appoint a sole arbitrator. The question was whether there was a clear mutual intention of the signatory parties to the agreement (“Agreement”) and the arbitration agreement contained therein to bind the non-signatory party. The signatory first respondent was a party to the Agreement and the non-signatory second respondent was a Belgian company. Both respondents were members of the same group of companies. Therefore, if the non-signatory was held bound by the arbitration agreement, the arbitration would become an international commercial arbitration as opposed to a domestic commercial arbitration, governed by different provisions of the Act.

In order to determine the existence of mutual intention, the SC examined whether it was manifest from the indisputable inter-parties correspondence, culminating in the Agreement, that the transactions between the petitioner and first respondent were essentially undertaken within the group of companies. Apart from alluding to the Doctrine as expounded in Chloro Controls and relied upon in Cheran Properties, the SC predominantly engaged with the Doctrine in the factual matrix. Therefore, it concerned itself with the inter-parties correspondence to analyse if the second respondent played a role in negotiating the Agreement and consequently, whether it was bound by the arbitration agreement by virtue of Section 7(4)(b) of the Act according to which an arbitration agreement can be concluded via exchange of correspondence.

The petitioner primarily relied upon correspondence from one Mr Frederik Reynders, who it claimed was the promoter of the second respondent and therefore, represented it in the negotiations. Since the second respondent was the disclosed principal of the first respondent, it was bound by the arbitration agreement, which was an integral component of the Agreement. On the other hand, the second respondent (i) submitted a counter-affidavit stating that Mr Reynders was an employee of the first respondent and could not represent or bind the second respondent to any legal obligation; (ii) argued that there was no privity of contract and that it was not involved in the negotiation, execution or enforcement of the Agreement; and (iii) argued that both respondents were merely members of the same group of companies sharing a common parent/holding company but otherwise were distinct legal entities operating independently. There was no relationship, such as that of a parent-subsidiary, between them.

The SC held that the second respondent was not a party to the Agreement and, consequently, the arbitration agreement:

“Thus, respondent No.2 was neither the signatory to the arbitration agreement nor did [it] have any causal connection with the process of negotiations preceding the agreement or the execution thereof, whatsoever. If the main plank of the applicant, that Mr. Frederik Reynders was acting for and on behalf of respondent No.2 and had the authority of respondent No.2, collapses, then it must necessarily follow that respondent No.2 was not a party to the stated agreement nor had it given assent to the arbitration agreement and, in absence thereof, even if respondent No.2 happens to be a constituent of the group of companies of which respondent No.1 is also a constituent, that will be of no avail. For, the burden is on the applicant to establish that respondent No.2 had an intention to consent to the arbitration agreement and be party thereto”. (paragraph 9, emphasis supplied)

Although this made the arbitration a domestic arbitration for which the SC did not have jurisdiction to appoint an arbitrator, the SC appointed the arbitrator since the first respondent had no objection to this. It is pertinent to note that the SC dismissed the review petition filed by the petitioner against this decision.

 

Parties’ Conduct and Intention to be Examined to Apply Doctrine

In MTNL, the issue was whether the non-signatory subsidiary (“CANFINA”) was bound by the arbitration agreement entered into between its parent company (“Canara Bank”) and MTNL. Interestingly, while the factual matrix was relatively straightforward to even intuitively conclude that CANFINA was bound by the arbitration agreement, the SC engaged with the Doctrine in decent depth. Briefly, the facts were that MTNL placed bonds with CANFINA under a MoU Agreement. Due to a liquidity crunch, Canara Bank purchased certain value of the bonds issued by MTNL on behalf of CANFINA. Subsequently, MTNL cancelled the bonds as a result of which disputes arose. Canara Bank objected to CANFINA being made a party to the arbitration agreement.

The SC observed that:

  • The parent or subsidiary entering into an agreement, unless acting in accord with the principles of agency or representation, will be the only entity in a group to be bound by that agreement. Similarly, an arbitration agreement is governed by the same principles.
  • However, a non-signatory can be bound by an arbitration agreement on the basis of the Doctrine, where the parties’ conduct evidences their clear mutual intention to bind the signatory and non-signatory. Such an intention can be evidenced ­via the non-signatory’s engagement in the negotiation or performance of the contract or any statements made by it indicating its intention to be bound by the agreement.
  • The SC identified three critical factors: (i) non-signatory’s direct relationship with the signatory; (ii) direct commonality of the subject matter; and (iii) composite nature of the transaction between the parties. The SC further noted that the Doctrine has also been invoked in arbitration where there is a tight group structure with strong organisational and financial links, so as to constitute a single economic unit or reality.

Applying the aforementioned principles, the SC concluded that CANFINA was bound by the arbitration agreement:

“It will be a futile effort to decide the disputes only between MTNL and Canara Bank, in the absence of CANFINA, since undisputedly, the original transaction emanated from a transaction between MTNL and CANFINA – the original purchaser of the Bonds. […] There is a clear and direct nexus between the issuance of the Bonds, its subsequent transfer by CANFINA to Canara Bank, and the cancellation by MTNL, which has led to disputes between the three parties. Therefore, CANFINA is undoubtedly a necessary and proper party to the arbitration proceedings. Given the tri-partite nature of the transaction, there can be a final resolution of the disputes, only if all three parties are joined in the arbitration proceedings […]”. (paragraph 10.9, emphasis supplied)

In addition, the SC noted that (i) a Committee of Disputes had referred all three parties to arbitration, pursuant to which a sole arbitrator was appointed; (ii) Canara Bank itself had circulated a draft arbitration agreement in which it had mentioned itself and CANFINA on one side and MTNL on the other side; and (iii) CANFINA had participated in all proceedings thus far and was represented by separate counsel. Accordingly, the SC concluded that CANFINA had given implied or tacit consent to being impleaded in the arbitral proceedings, which was evident from the parties’ conduct.

 

Implications of the Decisions

These decisions, in my opinion, are significant. They have generated or renewed discussion about the Doctrine, which will lead to more awareness and debate about its application to arbitrations, both in theory and practice. This in turn will persuade practitioners and parties to be careful about how they draft and interpret arbitration clauses where entities of a same group of companies are involved or could be potentially involved in the underlying transaction/contract.

MTNL in particular is significant because it engages with the Doctrine at a jurisprudential level and expressly predicates its decision on it: “We invoke the Group of Companies doctrine, to join Respondent No. 2 – CANFINA i.e. the wholly owned subsidiary of Respondent No. 1 – Canara Bank, in the arbitration proceedings pending before the Sole Arbitrator” (paragraph 11). It does not cite Cheran Properties, which is unfortunate as discussing and/or applying it would have aided the larger goal of cultivating jurisprudence on the Doctrine. This, however, does not dilute MTNL’s importance.

Both decisions reinforce fundamental factors that are to be considered in applying the Doctrine, such as mutual intention, direct commonality of subject matter and composite transaction. They also provide greater clarity about different factual scenarios in which the Doctrine could potentially be attracted and applied. This is particularly important given the Doctrine’s application is heavily predicated on the underlying facts and circumstances. Accordingly, they reinforce India’s dynamic and commercially pragmatic approach to arbitration and to binding non-signatories to arbitration. Internationally, uptake of the Doctrine to bind non-signatories is rare, with the exception of civil law courts to a certain extent, as compared to “traditional” devices such as piercing the corporate veil, agency and estoppel (see previous posts on this blog here and here). Therefore, India’s affair with the Doctrine could prove instructive for other jurisdictions.

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