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The Fear Of The Sole Arbitrator

Tue, 2018-08-07 01:45

María Angélica Burgos

During a recent conference on international arbitration, an in-house lawyer mentioned that whenever faced with the possibility of agreeing to an arbitration clause that provides for a sole arbitrator, she noted certain resistance within the company. There seemed to be a certain apprehension on placing the burden of deciding a dispute on a single person who may face greater difficulty in detecting and addressing errors and mistakes. During the discussion, an additional reason was pointed out for the general preference to select a multiple member tribunal: the possibility for a party to assert its right to select the tribunal and, in certain cases, to choose a party-appointed arbitrator.

These reasons appear convincing and create a tenable fear of the sole arbitrator: three persons can surely better spot a mistake than a single individual and a party has a better chance to influence the selection of its tribunal in a collegiate body in which it can at least nominate one of its members.

In response to this fear, parties often expressly select the number of arbitrators in the arbitration agreement,1)For example, in 2016 the ICC reported that in 91% of the cases parties chose the number of arbitrators. ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics jQuery("#footnote_plugin_tooltip_7913_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); usually opting for a sole arbitrator in cases of lower quantum and less complexity.2) White & Case and Queen Mary University School of London, 2010 International Arbitration Survey: Choices in International Arbitration. jQuery("#footnote_plugin_tooltip_7913_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

The 2010 International Arbitration Survey confirmed that there was an overwhelming preference for three arbitrators – 87% of survey respondents – mainly because of a perception of greater neutrality and balance in the award, less risk of a poor decision, the possibility of appointing one of the arbitrators and of benefiting from diversity of background and experience in the panel. The ICC caseload for 2017 shows that parties opt for a three-member tribunal in 67% of the cases. Interestingly, the Court has submitted more cases to a sole arbitrator than to a three-member arbitral tribunal3)ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics jQuery("#footnote_plugin_tooltip_7913_3").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); which suggests that arbitral institutions may fear the sole arbitrator less than parties do.

Specifically regarding quantum, a recent LCIA study on costs and time of arbitrations between 2013-2016 found that three-member tribunals tend to handle cases in which there are larger amounts in dispute (over 60% of the three-arbitrator cases refer to amounts in dispute exceeding USD 10 million) and that the median amount in dispute in a three-arbitrator case is approximately five times greater than that of a single arbitrator case.4)London Court of International Arbitration, Facts and Figures: Costs and Duration 2013-2016. jQuery("#footnote_plugin_tooltip_7913_4").tooltip({ tip: "#footnote_plugin_tooltip_text_7913_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Other factors that are weighed in to decide the number of arbitrators include the characteristics of the parties involved, the complexity of legal issues, the non-financial impact of the dispute and the budgetary concerns of the parties.

These considerations are not fixed as rules of thumb, but may lead to an excessive fear of the sole arbitrator and to overlook its advantages in certain circumstances.

Although opting for a sole arbitrator might reduce the influence the party will have on the selection of the tribunal (more so in cases in which it appoints one of the members of the tribunal), this does not necessarily imply that the party will not be able to partake in this decision (for instance, by attempting to jointly nominate the arbitrator) or that appointing authorities will select unfit individuals. In certain cases, users might even find that their preferred qualities in an arbitrator are better found in a single individual, rather than in a collegiate body. Moreover, in a single member tribunal it is not possible to distribute tasks, and arbitrators will exercise greater caution in order to avoid mistakes and errors. As one of the respondents in the 2010 International Arbitration Survey pointed out “a sole arbitrator may assess the law and facts more fully, whereas with three arbitrators the result reflects closed door bargaining”. Further, the decision-making process might be swifter for a sole arbitrator than for a multiple member tribunal in which deadlocks can arise.

All in all, the decision on the number of arbitrators can benefit from taking multiple factors into consideration, which vary from one case to the other. Limiting this decision to a single factor – for example, the amount in dispute -, might overly exaggerate the fear of the sole arbitrator and disregard the advantages that it may have in certain types of disputes.

Dispute Resolution Data (DRD)

References   [ + ]

1. ↑ For example, in 2016 the ICC reported that in 91% of the cases parties chose the number of arbitrators. ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics 2. ↑ White & Case and Queen Mary University School of London, 2010 International Arbitration Survey: Choices in International Arbitration. 3. ↑ ICC Dispute Resolution Bulletin, 2018, issue 2, 2017 ICC Dispute Resolution Statistics 4. ↑ London Court of International Arbitration, Facts and Figures: Costs and Duration 2013-2016. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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The Investor-State Dispute Settlement System: The Road To Overcoming Criticism

Mon, 2018-08-06 03:38

Justine Touzet and Marine Vienot de Vaublanc

Young ICCA

Recent events such as the NAFTA re-negotiations have drawn leading newspapers around the world to turn their attention to ISDS tribunals. Often in an effort to make their stories sensational, they speak of “obscure tribunals,” “secret trade court,” and “justice behind closed doors,” most of the time giving it an unfair and biased image.

In this context, the UN Commission on International Trade Law entrusted the Working Group III (the Working Group) with a broad mandate to work on the possible reform of the ISDS framework.  The Working Group is one of the six working groups to perform the substantive preparatory work on topics within the Commission’s program of work. Within its mandate, the Working Group is working on identifying and considering expressed concerns about ISDS (I) and desirable reforms and solutions to be recommended to the Commission (II).

1. THE ISDS SYSTEM: THE NEED FOR REFORM

Procedural criticisms

The Working Group first identified that the length and costs of arbitral proceedings are rising. Delays are mainly due to the growing complexity of cases, the fragmented nature of investor protection provisions and the multiplication of interlocutory proceedings. Both sides to a proceeding also incur higher costs as monetary awards, legal fees and related costs can often be relatively high. While some States struggle to find resources to properly defend themselves, small-claim or impecunious investors might never be able to get their “day in court.”

Other major concerns relate to the independence and impartiality of arbitrators, which focus on arbitrators’ fees, qualifications and the lack of diversity in their appointments as reports show numerous repeated appointments and an important concentration of arbitrators from a certain region, age, gender and ethnicity. The means of appointing arbitrators are also under review, including the increased use of appointing authorities or the use of rosters established by States.

 Closely related are criticisms about the lack of transparency and possibilities for third parties to participate in proceedings. Disclosure of third party funders is also highly controversial as it raises risks of conflict of interests, which may result in the removal of the arbitrator or an effective challenge of the award.

Substantive issues

Arbitral awards in the investor-state dispute context are criticized for their lack of consistency and for being contradictory. A good example is the widely different interpretations of the fair and equitable treatment standard. Some States have even modified their treaties to either include a “minimum standard of treatment” or an exhaustive definition. Another example is the lack of uniform standards for awarding damages. As a result, tribunals are free to choose their valuation methods, which often leads to the use of various methodologies and contradictory decisions.

According to the UN Secretariat, this may be the result of “the fragmented nature of existing underlying investment treaties” which, themselves, have varying standards of applicability. See A/CN.9/WG.III/WP.142, p. 7. Moreover, some treaties restrict ISDS to claims arising from breach of certain provisions or claims relating to expropriations. See Vigotop Limited v. Hungary, ICSID Case No. ARB/11/22.

Lastly, a particularly scrutinized public question turns upon State sovereignty and arbitral infringement. For example, taxation measures are generally prohibited from international arbitration claims, but significant exceptions have severely undercut this protection. Also, recent arbitral interim measures can be seen as infringing on a State’s sovereignty when, for example, judicial domestic proceedings are not only stayed but are also ordered not to be enforced. The most recent example is Puma Energy Holdings v. Benin, where Christer Söderlund, the emergency arbitrator, ordered Benin, i.e. the executive power, to immediately take all available measures to prevent its court, i.e. the judiciary, from enforcing the Court of Appeal’s judgment until the arbitral dispute before the CCJA was resolved.

2. MAIN OPTIONS TO OVERCOME CRITICISMS OF THE ISDS SYSTEM

Between 23 – 27 April 2018, the Working Group met in New York to study the reform suggestions, including: the amendment of investment treaties containing vague wording, the provision of joint interpretative statements or guidelines on interpretation of standards, the introduction of stare decisis and the adoption of a systemic approach through institutional solutions (e.g., appeal mechanisms or permanent adjudicatory bodies).

Reforming the current system

 Transparency – Some adjustments have already been implemented to overcome the criticisms on transparency. The new transparency standards have been adopted by ICSID in 2006 and UNCITRAL in 2013. Additionally, the Mauritius Convention on Transparency, which entered into force in October 2017, aims at applying the 2014 UNCITRAL Rules on Transparency in treaty-based investor-state arbitration. The Rules now apply by default to all investor-State arbitrations conducted under the UNCITRAL Arbitration Rules pursuant to treaties concluded on or after 1 April, 2014.

Appointment of arbitrators – The Working Group is considering new arbitrator-appointment procedures such as referring to a pre-established group of arbitrators under Article 37 of the ICSID Convention and its Additional Facility Rules and Article 6 of the UNCITRAL Arbitration Rules.

Aiming for consistency in arbitral awards: setting up of an appellate body – When the ICSID arbitral system was designed, despite the desirability of a consistent interpretation, proposals for the possibility to appeal on grounds such as an error of law/substantial error were rejected.

Consistency, which encompasses the coherent interpretation of applicable principles and standards of law, is fundamental to improve predictability, enhance trust in the ISDS system and to develop a homogenous international investment law. The inconsistency of the interpretation of the fair and equitable treatment standard has led not only to the modification of treaties by states to either include a “minimum standard of treatment” obligation instead or an exhaustive definition of fair and equitable treatment but it has also led to contradictory decisions about the same facts, such as in CME v Czech Republic and Lauder v Czech Republic.

 A permanent or semi-permanent appellate body might be seen as a solution, but the very idea of its creation in the existing system raises several questions.

First, filing appeals might become the norm for losing parties and, as such, there are concerns regarding the length, costs and complexity of proceedings which could prove detrimental for parties with limited resources. Another concern is the appellate body’s coexistence within the ICSID self-contained system, which excludes any appeal or other remedies, except for those provided for in the Convention itself (Article 53) and existing annulment mechanisms.

Then, the creation of such an appellate body raises questions regarding framing the grounds for appeal (broad/narrow) and the applicable standards of review to identify alleged errors of law as well as stare decisis and the scope of the decision’s binding effect. Should decisions be limited to the parties or whether a principle of law stated in its decisions could be constitutive of a precedent. The absence of a doctrine of precedent is often explained based on Article 53, according to which awards shall be binding on the parties.

Creation of a permanent dispute settlement body

 Replacing the current ad-hoc arbitration system administered, for instance, by ICSID or other centers, and where arbitral tribunals are only set up on a case by case basis, with a permanent dispute settlement body is a more radical approach strongly advocated by the European Union, in order to build public confidence. On 20 March 2018 the European Council adopted the negotiating directives authorizing the European Commission to negotiate a convention establishing a multilateral court. The Council also decided to make the negotiating directives public.

The EU’s emphasis on the systemic nature of the concerns surrounding the ISDS system and on the need for a complete reform. Creating a multilateral court would indeed be a major departure from the ISDS system and would aim at addressing the fragmentation of the current regime.

The idea was put forward in the public consultation conducted in 2014, in the context of the development of the EU’s policy on investment protection and investment dispute settlement in the Transatlantic Trade and Investment Partnership (TTIP) agreement and has recently been in the spotlight after the Achmea case. Pioneer steps have already been taken in several BITs towards the creation of permanent investment bodies with notably, Chapter 8, Section F of the EU-Canada Comprehensive Economic and Trade Agreement (CETA) or Chapter 8.II, Section 3 of the European Union-Vietnam Free Trade Agreement.

*  *  *

In conclusion, if reforming the current ISDS system is certainly needed, it seems unlikely that either the creation of an appeal mechanism or a permanent body could address all public concerns. However, in its last report regarding the work of the thirty-fifth session, dated 18 May 2018, the Working Group concluded that “while perceptions should be taken into account, they should not be the driving force for the current work.” If reforms will “deal with the public perception of ISDS,” “perceptions alone would not justify the need for reform and as a subjective concept, would need to be grounded on empirical evidence and facts.” So even if there are no “magic solutions,” reforms are underway.

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Will Mexico Lead The Next Wave of Investment Arbitration Claims?

Mon, 2018-08-06 01:06

Damián Vallejo

Young ICCA

Mexico held its general elections (including presidential election) on July 1st. The Government of the country has shifted from a center-right president, Enrique Peña Nieto from the Partido Revolucionario Institucional (Institutional Revolutionary Party), to the favorite candidate for the recent elections, the left-wing politician Andrés Manuel López Obrador (“AMLO”).

AMLO, a member of the Movimiento de Regeneración Nacional (National Regeneration Movement), achieved the presidency in his third run for the job. Although he started as a member of the PRI, he is now seen as a populist and a nationalist. There has been an increasingly growing fear in Mexico’s business community for the past few months fueled by AMLO’s lead in the polls that recently materialized with 53% of the votes. AMLO’s continuous public statements and electoral promises have intensified these fears.

Among other proposals, AMLO has suggested conducting a widespread audit of the oil sector, which includes revisiting the privatization of Mexico’s state owned oil company, Petróleos Mexicanos. He has also mentioned the cancellation or suspension of the latest wave of private contracts to develop the oil industry. Other electoral promises include suspending the construction of the new international airport of Mexico City, valued in over $11 billion. He has stated that contractors should not expect cancellation fees if the project is abandoned.

In light of the current political climate, foreign investors should review the foreign direct investment protections in place and determine whether it is time to restructure existing investments. Mexico is party to thirty plus bilateral investment treaties (“BITs”) and a handful of other international agreements granting investment protections. A large number of these international agreements are with European Union (“EU”) Member States.

Although many of the foreign investors currently operating in Mexico will probably have some degree of investment protections in place under existing BITs and free trade agreements (“FTAs”), attention should be brought to the modernization of a particular international agreement: the EU-Mexico Global Agreement. The new agreement, currently in the works, will replace the existing agreement between the EU and Mexico.

Negotiations of the EU-Mexico Global Agreement (the “Global Agreement”) kicked off in May 2016. After almost two years, on 21 April 2018, Mexico and the EU reached an agreement in principle. The latest public official draft of the agreement, still under negotiation, includes some interesting provisions in its “Investment Chapter” that foreign investors from both regions should be aware of.

The definition of “Enterprise of the EU / Enterprise of Mexico” in article 3, for example, includes a footnote whereby both parties agree that the concept of “effective and continuous link” with the economy of a European Union Member State enshrined in Article 54 of the Treaty on the Functioning of the European Union (“TFEU”) is equivalent to the notion of “substantive business operations”. Thus, under the current version of the agreement, a foreign investor would not be able to claim access to the substantive protections of the agreement simply by incorporating a shell corporation or holding company in the home state. Many BITs currently in place with EU Member States do not have this jurisdictional requirement.

Perhaps more importantly, Article 22 of the Investment Chapter on “Relationship with Other Agreements” provides that the new agreement shall replace and supersede all the existing investment treaties in force between Mexico and the European Union Member States listed in “Annex YY”. To date, no agreements have been added to “Annex YY” and the question of which specific agreements will be effectively derogated by this new treaty remains uncertain. Nevertheless, it is safe to assume that a number of BITs and FTAs in place between Mexico and EU states will fall in this category, even though many of them include sunset clauses. This likely outcome is confirmed by paragraph 3 of Article 22, which stipulates that investors may only bring investment claims under the previous treaties when two cumulative conditions are met. First, the acts triggering the claims must have been conducted before the entry into force or provisional application of the new agreement. Second, no more than three years should have elapsed since the entry into force or provisional application of the new agreement.

The foregoing should inform foreign investors’ strategies when conducting nationality planning or investment restructuring. If the current BITs/FTAs are used for investment planning, the underlying protections may not be available for the foreseeable future. This is a complex and somewhat uncertain situation as there are many variables at play that could affect the entry into force of the new agreement and its impact on foreign investment. Will Mexico sign the deal after the elections? Will the EU modify certain provisions considering the newly elected Mexican president? Both fair questions that have no clear answer at this stage.

Faced with this uncertain landscape, foreign investors may find some solace in the timeline pursuant to which other free trade agreements recently concluded by the EU have been implemented. A good example is the Comprehensive Economic and Trade Agreement between the EU and Canada (“CETA”). CETA’s negotiation began in June 2007 at the EU-Canada Summit in Berlin. A final text was adopted in August 2014. Nevertheless, CETA’s provisional application did not begin until the 21 September of 2017. There is thus a three-year gap between the adoption of CETA’s final text and its provisional application.

Taking CETA as an example, three or more years could elapse before the new Global Agreement is rolled out. Mexico and the EU are aiming to have a final text by the end of 2018, so a provisional application of the new agreement could be expected for the beginning of 2022, at the earliest. Considering this, the aforementioned provisions of the new EU-Mexico agreement would leave the ISDS provisions form all the BITs/FTAs included in “Annex YY” without effect. Claims under such treaties or agreements could only be brought against the States if the acts triggering those claims occurred before the provisional application or entry into force of the new agreement (beginning in 2022, hypothetically), provided that no more than three years have elapsed since such entry into force.

With this in mind, foreign investors in Mexico are left with three choices: (i) structuring/restructuring investments in the country through the international agreements currently in place, considering that the protections granted by these agreements will not be enforceable after the beginning of 2025 (provided the agreements are included in “Annex YY” of the new agreement and this is finalized); (ii) do nothing and therefore remain unprotected; or (iii) structure/restructure investments through international agreements entered into by parties which will not be affected by the new Global Agreement.

The later should leave the US and Canada outside of the equation, for the time being. Although these two countries will not be affected by the new EU-Mexico agreement, the current status of the NAFTA negotiations might also leave US and Canadian investors with no other choice but to structure/restructure investment through other jurisdictions.

It is also important to consider that the Mexican Constitution provides for a six-year presidential mandate, starting on the 1st of December of the electoral year. This implies that AMLO’s mandate will extend through late 2024. Bearing this in mind, structuring/restructuring investments through international agreements currently in place might seem like a good choice after all.

Mexico is not a unique example. Foreign investors should embark in the worthwhile endeavor of analyzing which are the optimal protection alternatives for their investments in jurisdictions that have recently witnessed nationalist and populist ideas.

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Consolidation of Arbitration under “Entire Agreement” Clauses

Sat, 2018-08-04 22:38

Hu Ke

YSIAC

Introduction

In many commercial transactions, there will be multiple agreements among various parties, and those agreements often contain “entire agreement” clauses to ensure that the parties are bound only by the terms of the agreement(s) they sign. However, such a clause may be invoked and interpreted in a way surprising to the parties, especially in terms of dispute resolution.

While an entire agreement clause typically reads as “this Agreement contains the entire agreement and understanding between the parties hereto and supersedes all prior negotiations, representations, undertakings and agreements on any subject matter of this Agreement”, its variation in a complex transaction with multiple instruments may provide that the agreement containing the clause and another agreement constitute the entire agreement between the parties and so on. When the former has an arbitration clause and latter does not, a party to the former may rely on the entire agreement clause, to file an arbitration consolidating claims under both contracts; to make the case more challenging, the latter may have its own disputes resolution clause providing for a different mechanism, or the claim may be pursued against a party not bound by the latter, in accordance with terms thereof.

One West vs. Greata Ranch

The issue has been emerging in M&A disputes, according to a presentation by Tunde Ogunseitan, counsel at the ICC International Court of Arbitration, and in energy disputes according to David R Haigh QC and Paul Beke of Burnet, Duckworth & Palmer LLP, often involving different dispute resolution clauses in different instruments.

So far few cases have come into public knowledge, except One West Holdings Ltd. v. Greata Ranch Holdings Corp., 2014 BCCA 67, an interesting case before the courts of British Columbia.

The case involves three agreements, a Limited Partnership Agreement (LPA) with an arbitration clause, and a Project Management Agreement (PMA) and a Purchase Agreement (PA) both without such. One West is a party to the PMA but not a party to the LPA; Greata Ranch is a party to the LPA but not to the PMA.

The “entire agreement” clause in the PMA reads as:

“This Agreement, [the LPA] and [the PA] and any documents expressly contemplated by this Agreement, constitute the entire agreement between the parties and/or affiliates of the parties and supersede all previous communications, representations and agreements, whether oral or written, between the parties with respect to the subject matter hereof.”

The arbitration clause in the LPA reads as:

“All disputes arising out of or in connection with this Agreement, or in respect of any legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration administered by the British Columbia International Commercial Arbitration Centre pursuant to its Rules. The place of arbitration shall be Vancouver, British Columbia, Canada.”

Disputes arose and Greata Ranch initiated an arbitration against other parties to the LPA and One West, relying on the arbitration clause in the LPA. One West asserted that it should not be joined to the arbitration because it did not sign the LPA and is not a party to any arbitration agreement with Greata Ranch. The arbitrator determined the issue in favor of Greata Ranch, concluding as follows:

“The intention of the parties is explicit that the LPA and PMA are to be part of one comprehensive agreement and the only reasonable interpretation of the [Arbitration Clause] is that all disputes connected with that agreement ‘shall be referred to and finally resolved by arbitration…’”

One West sought judicial review. The Supreme Court agreed to One West, holding that the entire agreement clause in the PMA does not incorporate terms of the LPA and the PA by reference, and set aside the award.

On appeal, the Court of Appeal reversed, opining that:

“[The entire agreement clause] does two things: it defines the agreement of the parties and it limits the scope of inquiry. The [Supreme Court]’s approach appears to eliminate the first part of the provision merely because it is called an ‘entire agreement’ clause.”

Comments

As one commenter said, the One West decision gave to entire agreement clauses “greater implications than expected”.

There is no dispute to the function of “limiting the scope of inquiry” of entire agreement clauses. Black’s Law Dictionary defines “entire agreement clause” (also called “integration clause”, “entire contract clause”, “merger clause” and “whole agreement clause”) as “[a] contractual provision stating that the contract represents the parties’ complete and final agreement and supersedes all informal understandings and oral agreements relating to the subject matter of the contract.” It points to “parol evidence rule”, which is described as “[t]he common law principle that a writing intended by the parties to be a final embodiment of their agreement cannot be modified by evidence earlier or contemporaneous agreements that might add to, vary, or contradict the writing.” The Court of Appeal also agreed that entire agreement clauses “set out the document or documents to which the court may refer” and “attempt to limit the scope of contractual relevance to the four corners of the specified document or documents”.

The key inquiry is whether, and how, do they “define the agreement of the parties”. In my view, the reasoning of the arbitrator and the court is doubtful in three aspects.

Firstly, the arbitrator might be wrong in concluding that “the intention of the parties is explicit that the LPA and PMA are to be part of one comprehensive agreement and the only reasonable interpretation of the ss. 13.13 is that all disputes connected with that agreement ‘shall be referred to and finally resolved by arbitration…’” (emphasis added). There is no language to create one comprehensive agreement (with the word “agreement” used as a countable noun) – the parties agreed that the three instruments should constitute the entire agreement (with “agreement” probably used as a non-countable noun), and nothing beyond. If the parties intended to make “one comprehensive agreement” explicitly, the parties would have used languages to that effect, such as “a comprehensive agreement” or “a single agreement”, but they did not. And from a linguistic perspective, it makes little sense to have “entire” describe “agreement” as a countable noun in the context, and neither the arbitrator nor the appellate judges used the counterintuitive “an entire agreement”.

Secondly, going further from the analysis, that these instruments constitute “the entire agreement between the parties” does not necessarily lead to the conclusion that all the parties are bound by each instrument within the entire agreement. It could reasonably be read as that each party is bound by the instrument(s) it signed, and nothing beyond, as a reasonable business person (and their legal advisor) would expect in entering into such agreements in a complex transaction. The use of “and/or” rather than “and” before “affiliates of the Parties”, is simply indicative that not all of them are bound by each instrument, otherwise the “or” is simply redundant. On the other end, it would cause absurdity to drag a party into a contractual relationship when the language of the instrument defines no right or duty of that party, and provides bad incentives for an opportunistic disputant.

Thirdly, the court perhaps understated the fact that in a transaction with multiple contracts many terms cannot be incorporated into each other and some terms conflict with each other. A common rationale for the parties to sign multiple contracts, instead of “one comprehensive agreement”, is to define different aspects of their relationships with different conditions and among different persons; the asserted “consolidation” of agreements would find great difficulty in reconciling these agreements in a “battle of forms”. The commercial reality is that entire agreement clause is indeed a term of legal art, and it should be interpreted as common lawyers intend it.

That said, incorporation clauses, including “integral part” clauses, which incorporate the terms of a contract into another, should be distinguished from entire agreement clauses, as in the case of Karah Bodas Co LLC v Perusahaan Pertambangan Minyak Dan Gas Bumi Negara (2004), 364 F 3d (5th Cir), where the Tribunal correctly consolidated disputes under two contracts.

Conclusion

“If there is such an ambiguity in the words used, the court should interpret them in a manner that accords with commercial reality and that avoids a commercial absurdity.” Cross-referencing other agreements in an entire agreement clause is usually not intended to incorporate other agreements or terms thereof into the agreement between the parties; the latter stays as it is. The consolidation of agreements and consequent consolidation of disputes, through entire agreement clauses, probably will go against the genuine intention of the parties and bring consequential chaos. Though it can never go wrong to ask parties to be more careful in contract drafting, the misinterpretation of “entire agreement” clauses for consolidation purpose should be, and can be, ceased.

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The ‘Professionalization’ of International Arbitrators: What Role for the Professional Arbitral Associations?

Fri, 2018-08-03 16:48

João Ilhão Moreira

The unique way arbitrators organize and regulate themselves has been increasingly an interest of mine. Being within the world of arbitration it is easy to forget how unique the arbitration ‘market’ and the arbitrators’ ‘function’ is. Undoubtably one of the most curious aspects of international arbitration is how distinctive the process of ‘professionalisation’ of arbitrators has been.

I – The concept of ‘professionalisation’                                                       

The process of ‘professionalisation’ – i.e. the way by which certain occupations have over time developed institutionally autonomous or semi-autonomous systems of regulating members of a profession – has long been a staple of sociological enquiries.

Classical studies, such as Wilensky’s influential ‘The Professionalization of Everyone?’ (1964, American Journal of Sociology), have attempted to demonstrate how many professions tend to organize, monopolize, and self-regulate through predictable steps. These studies often explained how the members of a certain number of high prestige professional occupations, most often those that required advanced and specialized education, were able to organize and extract legal protection and the right to determine who was able to join their ranks.

While specific jurisdictions and specific professions have developed their unique stories, what is clear is that often a grand bargain between the state and a profession emerges. In return for the ‘guarantee’ by the profession of developing a framework of self-regulation that ensures that the members defend public interest goals, the state often offers protection from ‘unfettered’ competition.

II – The special case of ‘professionalisation’ of international arbitrators          

The readers of this blog are well-aware that arbitrators’ organization, regulation, and function is not comparable to that of other professions. Their process of ‘professionalization’ – assuming that such a process has occurred at all – has been unique in the sense that the ‘state’ does not offer protection to arbitrators from would-be competitors.

The particularities of the arbitration market and of the arbitral function have led to the fact that arbitrators generally do not act or perceive themselves as full-time service providers. Most often being an ‘arbitrator’ is still an occupation that is combined with another legal activity, such as being a lawyer, a university professor, or less often other professions such as engineers or accountants. Differently from most other professions, no specific education or training is legally mandated. Also, differently from other professions, arbitrators are not subject to the disciplining powers of specific arbitral professional associations.

The specificities of the ‘arbitrator’ as a ‘profession’ means that the regulatory framework in which they operate is not comparable to that of any other profession. International arbitrators operate under a system of almost ‘radical’ self-regulation. With states most often establishing only an outline of the duties and obligations of the arbitrator, it has been most often the arbitral community to detail and expand ideas for regulation. Such self-regulatory rules, despite their undeniable influence, however, have rarely been more than ‘soft law’. Further, the enforcement of such rules does not involve the kind of sanctions found in other professions such as the threat of being expelled from the profession.

III – The role of professional arbitral organizations: how different are they?

Another stark difference between the arbitral landscape and that of other professional services is the characteristics of the professional associations. For most of the so called ‘learned professions’ it is often possible to identify the existence of a national, regional or local professional association that organizes the professionals working in that particular jurisdiction. Participation in these professional associations is often mandatory and a requirement to legally operate in that market. Further, these associations often have an exclusionary nature, having strict requirements for entrance: often requiring members to have a particular education and undertake training and/or examinations. Finally, in many of these professional associations it is possible to identify a dual nature in terms of their goals: i) at times they function as regulators of the profession; ii) at other times they operate as ‘defenders’ of the interests of the professionals they represent.

The situation is considerably different regarding arbitral associations. Most often arbitral associations are open to entrants, having as members not only arbitrators but also legal practitioners and others interested in arbitration. Entrance often does not demand more than paying an entrance fee and rarely demands commitment to a specific code of ethics. Perhaps most strikingly, arbitral associations do not seem to be directly interested in playing the role of ‘regulators’ of international arbitrators. While some of these institutions have played an important role in developing ethical rules, they have rarely stepped in to actually play the role of ‘enforcers’ of arbitrators’ professional obligations.

Instead, arbitral associations are mostly concentrating on advancing arbitration as a dispute resolution system. They further most often function as centres where those involved with arbitration get to know each other, exchange experiences and further their professional endeavours. While some arbitral institutions offer training, this is by no means a function that seems to be central to most arbitral associations’ goals.

IV – The future of arbitral professions associations: how are they perceived and what are they to ‘do’?

The arbitral profession has changed considerably in the last few years. Accompanying the growing number of cases, there has been an increase on the number of people acting as arbitrators. At the same time, some arbitrators appear to approach this role in a more full-time capacity. The increasing number of arbitration boutiques is a strong signal of how some are looking to this function more and more as a full-time endeavour. Further, the environment has been noted to be increasingly competitive especially at the institution level but also at the arbitrators’ level.

Altogether, there seems to be plenty of indications that arbitration and arbitrators are changing. How much these changes are welcomed by the arbitral community and how they expect their associations to change in reaction to them, if at all, is, however, still very much an open question.

Against this background, I would like to invite the readers of this blog to participate in the following survey I am conducting. Your responses will remain anonymous.

https://oxford.onlinesurveys.ac.uk/professional-associations-in-ica-wc

Your views and opinions on this topic will be welcomed.

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Oil and Gas Arbitration Involving States and State Entities: #YoungITATalks in London

Fri, 2018-08-03 02:37

Caroline Le Moullec

The first of the Young ITA Talks in London, organized by Young ITA, kicked off on 1 May 2018 at White & Case’s London offices. The theme for the evening was ‘Oil and Gas Arbitration Involving State and State Entities’, and the event featured two panel discussions, with leading practitioners offering their insights on traps and pitfalls of procedure and substantive issues in the area.

 

The first panel, chaired by Tomas Vail and composed of Margaret Clare Ryan (Shearman & Sterling LLP), Olivia Valner (Freshfields Bruckhaus Deringer) and Scott Vesel (Three Crowns) focused on procedural issues: parallel proceedings, the service of documents on a state and the search for efficiency by bifurcating proceedings.

 

Ryan opened the session by explaining that parallel proceedings are common phenomena in investment treaty disputes as investment treaties typically allow claims to be brought by foreign investors even if they have no direct loss. The direct loss is usually suffered by a local company, but investment treaties often allow shareholders to bring claims, even where those shareholders have invested through intermediary companies. This can lead to the same issue giving rise to multiple arbitrations, brought by the local company, the holding company and any number of shareholders. Drawing from her experience acting as counsel, Ryan explored how investment treaties and practice can mitigate and minimize the risk that multiple claims will lead to spiraling costs, double (or even multiple) recovery and conflicting decisions.  Thankfully it appears tribunals are becoming more alive to these risks and increasingly taking steps to address them, for instance requesting undertakings from the claimants that they are not seeking multiple recovery.

 

Olivia Valner followed-up by highlighting a procedural pitfall when using court proceedings in support of an arbitration against a state. It is common for the parties in an arbitration to require the support of the courts at some stage during an arbitration, particularly when there is a state or government entity involved, as is often the case in oil and gas disputes. Applications presented to the English Courts  are wide ranging, and may be seeking a stay of proceedings, removal of an arbitrator, injunctive relief, to challenge on a point of law, or enforcement of the arbitral award.  However valid service on a state can be expensive and time consuming. In the U.K. unless the state has specifically agreed to waive its service rights, a party must comply with requirements of statute and the Civil Procedure Rules. This includes translating all documents in the state’s official language, regardless of the language of the arbitration. Complying with that procedure will often prove tedious, is difficult to comply with at the last minute, and has clear cost implications, all factors to be taken into account when approaching the courts.

 

Scott Vesel closed the first panel by inviting the audience to re-evaluate conventional approaches to bifurcation and deciding cases in stages. Traditionally arbitration proceedings are split into to three phases, dealing with jurisdiction, liability and quantum separately. This is to allow the respondent to “get to no faster”, as defeating a claim at any one of these phases should prove fatal to the claimant’s case. This has led to issues only being decided separately if they have the potential to resolve the entire arbitration. While the conventional approach has a natural appeal (for example where a tribunal lacks jurisdiction it follows that it should not decide liability and quantum) Vesel argued there could be value in using bifurcation to look at other issues, ones that have the potential to narrow down the issues between the parties at later stages of the arbitration. This would fulfil the objective of getting to an award at a lower cost, rather than simply trying to resolve matters quickly. Absent special circumstances, cost should be the primary consideration. Vesel had brainstormed an approach where issues would be broken down into pure legal issues, mixed law and fact questions, and ‘gateway’ factual issues (which could be decided to avoid parties having to present submissions at a later stage based on several ‘alternative’ scenarios). Reframing bifurcation in this way would allow arbitrations to be decided in multiple, shorter, hearings on issues rather than one hearing with lengthy briefs, and should result in lower overall costs.

 

The second panel, moderated by Margaret Clare Ryan, covered substantive issues: how to hold a state responsible for actions of state entities, gas price arbitrations and the potential for tax measures to breach investment treaty provisions.

 

Sylvia Tonova began by looking at the legal framework for state attribution, a recurring issue in the oil and gas arbitrations. Arbitral case law provides numerous examples of claimants seeking to hold the host state responsible for the actions of state entities, whether that be the State Committee for oil and gas, thte Ministry of Energy or a national oil company with oversight over the national oil transportation network. Tonova explored some of the gateways through which an investor can establish attribution under the International Law Commission’s draft Articles on State Responsibility, as well as a selection of specific issues, such as the role of domestic law in establishing attribution and the significance of state attribution in umbrella clause disputes.

 

Next, Saadia Bhatty discussed gas price arbitrations, which arise out of the performance of long-term agreements for the supply of gas (GSAs). The seller will typically be a state entity and as GSAs tend to have a lengthy term, rather than agreeing a fixed price parties tend to negotiate a price formula, which values the gas by reference to one or more indices (historically this would be based on the indices for the price of oil or oil products). Most GSAs will also contain a price review clause allowing the parties to periodically request a review of the price formula. Due to the sums at stake,  where negotiations fail it is not rare to see the dispute be taken to an arbitral tribunal for determination. Bhatty explored some of the key features of gas price arbitrations, highlighting the important commercial considerations underlying the disputes, the arbitrators’ and experts’ key roles, recurrent issues in the interpretation of price revisions clauses and the impact of time on a price revision.

 

Vail closed the evening with a talk on tax disputes in the oil and gas sector. While the sovereign right to tax is in theory unlimited (and tends to be preserved in investment treaties), in practice this right may be limited by contracts and treaties often in the form of a stabilization clause. Different types of stabilization clauses are found in treaty practice, although they all tend to constitute explicit commitments by the host state or state entity to stabilize the tax legal regime for the investor. Other potential limitations of the right to tax can be found under general (customary) international law, as states may not enact tax measures which are either discriminatory or confiscatory towards the investor. Vail looked at the extent to which tax measures could potentially breach investment treaty standards, in particular the protections against expropriation and fair and equitable treatment standard, and in light of the investor’s legitimate expectations.

 

The event was co-sponsored by White & Case and The Center for American and International Law. Further information on Young ITA can be found here.

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Young ITA is pleased to launch the annual Young ITA Writing Competition and Award “New Voices in International Arbitration”, as a unique opportunity for young professionals to contribute actively to the research of international arbitration The Competition is open to practitioners and students who are members of Young ITA. The papers must be submitted via email to [email protected] under subject line “Young ITA Competition” by on or before January 2, 2019. For more information, please visit the webpage of Young ITA where you can find more information. Alternatively, please feel free to send an email to the Young ITA Thought Leadership Chair, Dr Crina Baltag, at [email protected]. The Competition is organized with the support of Wolters Kluwer.

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New Ruling by the Madrid High Court of Justice: Arbitration and Public Policy

Thu, 2018-08-02 02:31

Emma Morales

Linklaters

On 5 April 2018, the Civil and Criminal Chamber of the Madrid High Court of Justice (Tribunal Superior de Justicia de Madrid, TSJM) set aside an arbitral award as contrary to public policy, because the challenged award contained “an unreasonable assessment of the evidence and unreasonable failure to apply applicable rules”.1) Competent Court to deal with the challenge of awards of arbitration proceedings with seat in Madrid. The influence of the award is due to the fact that a large part of the arbitrations based in Spain have its seat in Madrid. jQuery("#footnote_plugin_tooltip_3042_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3042_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In this case, the applicable arbitration clause, which provided for arbitration with seat in Madrid2) It was a domestic arbitration for more than 10M€ in dispute and with a tribunal of three arbitrators. jQuery("#footnote_plugin_tooltip_3042_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3042_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); was valid. The parties were duly notified and were able to assert their rights. The arbitrators resolved matters that could be and were submitted to their arbitration. The arbitration clause was respected in terms of the appointment of arbitrators and in the procedure.

Despite all of the above, the Madrid court decided to invoke public policy to annul the award. The approach of the court, as discussed below, is problematic as, if followed, it risks perverting, in Spain, the process of application for annulment of an award.

How did the court end up ruling in such a way? First, the Madrid court permitted itself to get into a discussion of all the disputed matters, procedural and substantive, originally before the tribunal and within these considered the appropriateness and suitability of the legal grounds contained in the award. It also allowed itself to review all findings relating to the tribunal’s overall assessment of the evidence. In fact, in the judgment itself (fifth point of law, page 31) the court acknowledges openly, when referring to the authority it considers itself to have, that: “what it is for this court to do is to check whether the probatory assessment that was made in the arbitral award is not arbitrary because it is deviates markedly from the probatory result or by unjustifiably omitting assessment of evidence that is essential to resolve the matters discussed”.

From this starting point, the Madrid court went on to annul the award because in its view it is relevant that “in view of a singular deviation from the wording of the provisions of an agreement (…) which appear to be an expression of the parties’ intentions, drawn up after a long negotiating process as the award highlights, the content of certain emails and not others is taken as the sole basis to substantiate a transactional intention different to that stated in the agreement, without explaining in any way why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”.

Faced with this conclusion, one may ask what all this has to do with public policy. It is worth recalling that public policy is a delineated concept which, applied strictly, should be prevented from becoming a catch-all through which the Madrid court, with clearly defined authority for annulment, gives itself the prerogative for review.

The well-known Spanish Supreme Court judgment of 5 April 1966 [RJ 1966/1684] states that public policy is “the set of legal, public and private, political, economic, moral and even religious principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time”.

More recently, in its judgment of 5 February 2002(54/2002), the Supreme Court expanded on this a little further and updated the concept, to declare that public policy

“is formed by the legal, public and private, political, moral and economic principles, which are absolutely obligatory for the preservation of social order in a population and in a particular time (Supreme Court judgments of 5 April 1966 and 31 December 1979) and further, an obvious scientific approach finds it to be the principles or directives that inform legal institutions from time to time; a modern position of legal science also indicates that public order is the expression given to the function of general principles of law in the realm of private autonomy, consisting of limiting its development where it violates these principles. Essentially, what must be taken into account today, as forming part of public order, are the fundamental rights contained in the Spanish constitution”.

In the reasoning given in the judgment, there is not a single reference to this concept or to the legal principles necessary to preserve the social order that are threatened because the overturned award did not mention “why no reference is made to the emails that apparently do not support the majority thesis accepted by the arbitral tribunal”. In its fifth point of law (pages 28 to 34 of the judgment), which is the only one in the whole ruling in which annulment of the award is discussed, there is no reasoning which justifies setting aside the award on the basis of public policy.

In view of such absence of thorough legal grounds, this leads to the conclusion that the court’s decision is one whose legal basis is difficult to understand. Furthermore, it is not one which is necessarily helpful to Madrid’s status as a seat of arbitration as parties, of course, choose arbitration to be free of court interference. For both reasons, it represents an approach which seems hard to justify.

References   [ + ]

1. ↑ Competent Court to deal with the challenge of awards of arbitration proceedings with seat in Madrid. The influence of the award is due to the fact that a large part of the arbitrations based in Spain have its seat in Madrid. 2. ↑ It was a domestic arbitration for more than 10M€ in dispute and with a tribunal of three arbitrators. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: International Arbitration and the Rule of Law
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