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Interviews with Our Editors: 360-Degree Discussion with Chiann Bao

Sun, 2020-10-18 20:00

Chiann Bao has been with Arbitration Chambers since 2018. She is currently Vice President of the ICC International Court of Arbitration. She previously acted as Secretary General of the HKIAC between 2010 and 2016, during which HKIAC was recognized in a 2015 International Arbitration Survey as the most preferred arbitral institution outside of Europe and was ranked the 3rd best arbitral institution worldwide in the same survey. We are pleased to kick off our Blog’s live coverage of HK Arbitration Week this year with our wide-ranging discussion with her.

 

Thank you Chiann for joining us!  

 

  1. Could you please share with us how you started your arbitration career?

 

It all began with a blank sheet of paper. On this page, I had to draw up a proposal as to my study plans in Hong Kong that would fit with the purpose of Fulbright scholarship – to promote international good will through the exchange of students in the fields of education, culture and science. With such a broad remit, I had difficulty narrowing my topic. With Google’s help, my searches including “dispute resolution” and “east and west”, resulted in arbitration and mediation. Seeing as I was drawn to the idea of resolving problems and was intrigued by the influence of culture on arbitration, it was certainly worth exploring, I thought. It turned out to be the perfect fit.

 

  1. How has your Chinese-American heritage shaped your perspectives? How did you feel you were received when you first moved to and led an Asian arbitral institution in HKIAC?

 

The way in which one sees the world is always influenced by their experiences. As a Chinese-American growing up outside of Washington DC and spending my summers in Asia, I was lucky to be gifted a dual-culture and dual-language upbringing. Immersed in both environments, I realized early on that there would not be one place where I would belong. Many years later, when I stumbled upon international arbitration, and eventually met colleagues and now friends in the field, I took great comfort in finding a space where the majority of arbitration practitioners had colorful backgrounds and were inherently curious about the world.

When I first moved to Hong Kong to lead HKIAC, I knew that I had little relevant experience. What I did know was that it was important to respect the blood and sweat of the community that had dedicated significant efforts over the years to building the institution. And while I may have looked the part, I knew that I was an outsider to the local communities who would be given no deference as a result of my age, my experience, and my cultural identity. Experience by experience, I learned, with loyal support and friendship working alongside me, I think I earned the trust of the community and felt great pride in being able to serve the needs of both the local and international communities.

 

  1. A great number of arbitral institutions and law firms have pledged support for equal representation of women in arbitration. Do you think gender blindness is the true test of gender equality in arbitration?

 

I can understand why the idea of gender blindness could be a good test of gender equality in arbitration as it neutralizes the impact of gender on decisions as to arbitrator or counsel. However, I think that what it also does at the same time is that, it avoids the underlying issue that there are certain fundamental biases that people have in relation to gender. To get to the root of the problem would be better: raising awareness of gender-related issues and recognizing unconscious bias would help eliminate the unwarranted biases and eventually reframe the discussion.

 

  1. In November 2016 Neil Kaplan commented in a lecture titled “Winter of Discontent that “every criticism of the present system can somehow be traced back to speed and cost”, and made suggestions on how the arbitral process can be improved so as to achieve more time and cost efficiency. What are your thoughts on that?

 

I think there is a lot of truth in that thought. When the process is slow or over-costly, the system is not working. The flexibility of process is intended to create efficiencies in the system, not permit frivolous tactics to stall or otherwise cause trouble for the arbitration. The idea is not to see how close the arbitral process can be to national court litigation or see how clever counsel can tie knots around the arbitral process, but rather to find the straightest line from commencement of an arbitration to its completion with an arbitral award.

 

  1. How do you envisage the unprecedented global challenges, such as the COVID-19 pandemic and the social unrest resulting from the injustices of the world, would impact on the development of international arbitration in the next 10 years?

 

With such global challenges pushing for changes to our status quo, I see massive disruption on the development of international arbitration. I imagine we will see technology taking the center stage in innovation of institutional case administration, online dispute resolution platforms, AI-related decision making, and predictive justice. With courts already pushing in this direction, arbitration must keep pace and in fact move ahead of courtroom developments. The challenges will also put the arbitration and dispute resolution community in the “front lines”, and we will have the responsibility of resolving them quickly and efficiently in order to move disputes off the books and allow companies to get back to business.

 

As part of our 360-degree interview, we would like to invite you to ask us a couple of questions in turn.

 

  1. Chiann: Mohamed Abdel Waheb has said that one of the most challenging things about entering arbitration practice was: “being liberated from the shackles of profiling, as an African and Arab practitioner, to be able to break through into the world of international arbitration.” What are your thoughts on that comment?

 

Theresa: Versatility is key to the functioning of international arbitration. As I view it, one of the most fascinating aspects of international arbitration is that it is a transnational legal field that presents transnational opportunities to social, economic and political progress worldwide. It is a field that develops along with and also responds to, the varied challenges arising from the ever-changing global realities, which in turn would continuously call for diverse perspectives and talents.

Profiling entails biases and generalization that could lead to overlooking human potential and impede the nurture of diverse talents that the field of international arbitration demands. Echoing your comments earlier, enhanced awareness and recognition of unconscious bias would help eliminate unwarranted biases. As jurisdictions across the globe are eagerly building up their arbitration capabilities, I am hopeful that limitations on entering arbitration practice, as a result of established national and cultural categories, will be progressively moderated.

 

  1. Chiann: Do you think the impact of COVID-19 pandemic on case management will bring more efficient arbitrations?

 

Benson: My personal experience was the government restrictions imposed globally due to the pandemic initially created a lot of uncertainty amongst institutions, tribunals, and counsel as to the case management process. But the subsequent speed and ease in which institutions and tribunals addressed the new circumstances in managing cases reflects the inherent nature of international arbitration as a flexible and adaptable dispute resolution mechanism. Whilst having an entirely virtual arbitration including virtual hearings may not be the answer for all cases, the longer-term impact of this pandemic on case management is that we have tested and enhanced the virtual hearing protocols during this pandemic. I think our knowledge can now be applied to manage smaller value, less complex cases more effectively and efficiently.

 

Thank you Chiann for taking time out to join us in our 360-degree interview! We hope our readers enjoy this interview as much as we did. We also look forward to our readers following our live coverage of Hong Kong Arbitration Week 2020.

 

More coverage from Hong Kong Arbitration Week is available here.

 

This interview is part of Kluwer Arbitration Blog’s “Interviews with our Editors” series.  Past interviews are available here.

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Singapore’s Amendment to Its International Arbitration Act Pledges Its Leadership in the Asia-Pacific Region

Sun, 2020-10-18 03:18

Singapore has emerged as one of the leading international arbitration centers not only in Asia but also in the world. To keep this title, the Singapore Ministry of Law (“Ministry of Law”) played a major role by keeping track on international and commercial legislative developments, and, adapting and framing innovative legislations to promote international arbitration.

Recent amendment by the Ministry of Law in September 2020 of the International Arbitration Act (“IAA”) pledged to enhance Singapore’s status as an arbitration hub in Asia and improve the legal regime for international arbitration. The recent amendment was proposed for the first time in 2019 at Singapore government’s public consultations. Inputs were taken from businesses, arbitrators, professional bodies, academic and practitioners in both local and offshore law practices, academics and international dispute resolution institutions. Only two of the four propositions pertaining to ‘Default Mode of Appointment of Arbitrators in Multi-Party Situations’ and ‘Recognise that an arbitral tribunal and the High Court have powers to enforce obligations of confidentiality in an arbitration’ are adopted by the Ministry of Law and the other two pertaining to ‘Arbitrator(s) Decide on Jurisdiction at the Preliminary Stage if Requested by All Parties’ and ‘Provision for Parties to Opt-In to an Appellate Procedure on Questions of Law’ are still under consideration. The amendment clearly demonstrates Singapore’s intention to secure the position of top international arbitration seat in the competitive arbitration world. Furthermore, these reforms also indicate Singapore’s accomplishments in adapting to arbitration legislations and institutional rules.

 

Key features of the amendment

1. Default Mode of Appointment of Arbitrators in Multi-Party Situations

The International Arbitration (Amendment) Bill first proposes to amend Section 9A and insertion of Section 9B of the IAA. A default mode for appointment of arbitrators in multi-party situations is mentioned in Section 9B. To apply this provision, the agreement of parties must not specify any appointment procedure in a situation where there are more than two parties to a dispute. The new amendment also puts forward Section 9B with the default procedure for the appointment of a three-member tribunal as well as for the appointment of the presiding arbitrator in case of multi-party situations.

The new amendment brings Singapore’s IAA in line with the current procedures set out in leading arbitral institutions, such as Article 12(8) of ICC, Article 8.1 of LCIA, Article 8.2(c) of HKIAC. These institutions, more or less, state that the appointing authority will have the power to select all the three arbitrators where the parties, i.e. respondents or claimants, fail to select a co-arbitrator among themselves. This practice has been adopted by most arbitral institutions e.g. the ICC and DIAC did so under the influence of the famous Dutco Case.

The introduction of the default procedure in multi-party situations cures the deficiency in the IAA and shows Singapore’s steadfastness in adapting to recent trends and best practices of international arbitration. However the effect of this amendment would be restricted because it requires the parties not to adopt institution rules containing their own default multi-party nomination procedures.

 

2. Recognition of the powers of arbitral tribunal and the High Court to enforce confidentiality obligations

The presence of an express provision under the IAA on confidentiality obligations in arbitral proceedings and/or of the award would strengthen the legal framework and parties’ ability to enforce such obligations. Presently, the parties only had an implied default duty under the law of Singapore to keep the arbitration confidential on the parties in respect to all Singapore seated arbitrations under common law principles. Inserting Section 12(1)(j) to the IAA would not result in autonomous imposition of confidentiality obligation. Rather, it authorizes the arbitral tribunal to enforce confidentiality obligations. Section 12(1)(j) explicitly recognized the power of  arbitral tribunal and provided them with confidence while responding to breaches of confidentiality obligations. Furthermore, court-ordered interim measures provisions are also amended. Section 12A(2) is amended to empower both the arbitral tribunal and the High Court to make orders for enforcing confidentiality obligations when parties agree to such obligations in writing by virtue of arbitration agreement and/or applicable law and procedural rules.

This amendment aims to provide the arbitral tribunals with confidence to react to any violation of confidentiality appropriately by strengthening parties’ ability to enforce existing obligations rather than codifying confidentiality obligations. By way of comparison, Section 17 of Cap. 9 Hong Kong Arbitration Ordinance (“HKAO”) adopts a different approach by imposing express confidentiality obligations on parties in Hong Kong seated arbitrations. Nevertheless, the express power to enforce  confidentiality obligations by way of an order is absent in the HKAO. The Ministry of Law’s approach towards this part of the amendment could have been better if they would have further extended the scope by codifying further confidentiality obligations.  As of now, the approach adopted by the HKAO fares better as Hong Kong Courts often recognise arbitral awards in which  injunctions are used to prevent confidentiality.

 

Further areas where the IAA needs to be amended

Two propositions are still being considered by the Ministry of Law. These propositions are: Requirement That Arbitrator(s) Decide on Jurisdiction at the Preliminary Stage if Requested by All Parties (“first proposition”); and Provision for Parties to Opt-In to an Appellate Procedure on Questions of Law (“second proposition”).

Currently, Section 10(2) of the IAA which regulates power of the arbitral tribunal’s power to rule on jurisdictional issues on the basis of parties’ requests  appears to be underestimated. The first proposition seeks to amend this section to give due regard to parties’ requests for the arbitral tribunal to decide on jurisdictional issues at  preliminary stage of the arbitral proceedings. This proposition has the potential to encourage party autonomy and rapidly resolve jurisdictional issues. At the same time, it also encourages time and cost efficiencies of the arbitral proceedings. On the other hand, a downfall attached to this proposition is that it prioritizes party autonomy over the arbitral tribunal’s discretion over case management and sometimes the tribunal are in better position to determine the timing of such proceeding rather than the parties.

The second proposition seeks to permit parties to approach the appellate body in Singapore, i.e. Singapore High Court, to decide on questions of law that arises out of the final award. The proposition states the requirement of leave of court, which under Section 24A, would only be granted if there is a question of “general public importance and the decision of the arbitral tribunal is at least open to serious doubt,” or if the decision is “obviously wrong.” The latter is limited to truly egregious errors and described as ‘a major intellectual aberration’ by Justice Akenhead. Similarly, other arbitration laws such as the English Arbitration Act 1996 and the New Zealand Arbitration Act also provide for a limited right of appeal on a point of law arising out of an arbitral award. It is worth noting that a few arbitral institutions such as the AAA and the ICDR also adopted new appellate rules in 2013 which allow appeal in matters relating to errors of law and clearly erroneous fact. The bright side of the second proposition is that it reduces the risk of mistakes in the application of law. Parties with preference for minimum curial intervention would welcome this proposition as this limits the ground for annulling an award. However, to some extent, the proposition might erode the quick and efficient resolution of the disputes in arbitration. Though the consequences are limited as the parties are required to opt-in to the appellate procedure.

 

Conclusion

This amendment by the Ministry of Law reflects the fast pace of innovation, and shows Singapore’s adaptability in an increasingly competitive arbitration world. It further demonstrates Singapore’s capacity to enhance the framework of arbitration and reiterates the Singapore’s intention to strengthen the efficiency of arbitrations seated in Singapore with the likely consequence that it will remain the leading arbitral seat in the region.

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Limitation Period for Enforcement of Foreign Award: Supreme Court of India Finally Answers

Sat, 2020-10-17 23:34

The issue of limitation period applicable to the enforcement of a foreign award in India has been a vexed question for a long time because of various conflicting and diametrically opposite decisions rendered by different High Courts in India. The issue has finally been settled recently by the Supreme Court of India on 16 September 2020 in the case of Government of India v. Vedanta Ltd. (‘Vedanta Judgment’). This post briefly discusses the judicial trend on this issue and analyses the consequences of the Vedanta judgment.

New York Convention awards are enforced in India under Part II of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’). Section 47 to Section 49 of the Arbitration Act are of significance: Section 47 sets out the procedure for filing of a petition for enforcement of foreign award; Section 48 replicates Article V of the New York Convention and sets out the limited conditions on which enforcement of a foreign award may be refused; Section 49 states that a foreign award, enforceable under Section 48, would be deemed to be a decree of that court for the limited purpose of enforcement. The limitation period for instituting legal actions in India is governed by the Limitation Act, 1963 (‘Limitation Act’).

Neither the Limitation Act nor Part II of the Arbitration Act contains any specific provision prescribing a period of limitation for filing an application for enforcement of a foreign award. Articles 136 and 137 of the Schedule to Limitation Act are relevant for this purpose. This is in contrast with the legal position in China and Hong Kong where the domestic legislation specifically provides for a limitation period of two years and six years respectively for enforcement of a foreign award in Mainland China (as noted in this post).

Application Period of limitation Time from which it runs 136. For the execution of any decree or order of any civil court Twelve years When the decree or order becomes enforceable 137. Any other application for which no period of limitation is provided in this division Three years When the right to apply accrues

The recurring question before the courts has been whether the limitation period for enforcement of a foreign award is 3 years (Article 137 of the Limitation Act) or 12 years (Article 136 of the Limitation Act).

 

Judicial Trend

The Bombay High Court in Noy Vallesina Engineering SPA v. Jindal Drugs Ltd (‘Noy Vallesina’) held that the enforcement of a foreign award takes place in two stages. The first stage of determining the enforceability of a foreign award under Section 48 of the Arbitration Act would be governed by Article 137 of the Limitation Act which provides for 3 years from when the right to apply accrues. Upon determination of enforceability, the foreign award is deemed to be a decree and its execution would thus be governed by Article 136 of the Limitation Act which provides for a period of 12 years.

The Madras High Court in M/s Bharat Salt Refineries Ltd. v. M/s Compania Naviera “SODNAC” & Anr (‘Bharat Salt’) took a contrary view where it held that the limitation period of 12 years as provided under Article 136 of the Limitation Act is applicable both for enforcement as well as execution of the foreign award. For this, the Madras High Court relied on the decision of the Supreme Court of India in Fuerest Day Lawson v. Jindal Exports (‘Fuerest Day’) where it was held that a foreign award is already stamped as a decree and can be enforced and executed in one composite proceeding. The decision in Bharat Salt was subsequently followed by Bombay High Court in Imax Corporation v. E-City Entertainment where, departing from its earlier ruling in Noy Vallesina, it held that the phrase ‘foreign award is already stamped as a decree’ as used in the case of Fuerest Day should be construed as ‘foreign award is to be regarded as a decree’ and in that event Article 136 of Limitation Act would be the applicable provision, providing a limitation period of 12 years.

  

Vedanta Judgment

The Supreme Court in the Vedanta Judgment has taken a completely divergent approach and the ruling of the Court on this issue is encapsulated as follows:

  1. The enforcement of a foreign award under Part II of the Arbitration Act would be covered by Article 137 of the Limitation Act which provides a period of three years, starting from when the right to apply accrues.
  2. Article 136 of the Limitation Act would not be applicable for enforcement of a foreign award under Part II of the Arbitration Act since it is not a decree of a civil court in India.
  3. Section 5 of the Limitation Act permits condonation of delay if the court in its discretion is satisfied that there was a sufficient cause for not making the application within the relevant limitation period. Holder of a foreign award under Part II of the Arbitration Act may file an application under Section 5 of the Limitation for condonation of delay if required.
  4. The holder of a foreign award is entitled to apply for recognition and enforcement of the foreign award by way of a composite petition under Part II of the Arbitration Act. If the enforcing court is satisfied that the foreign award is enforceable, then under Section 49 of the Arbitration Act, the award shall be deemed to be a decree of that court and the court would then execute the award by taking recourse to Indian Law applicable to the execution of decrees.

 

Analysis

By resolving the confusion created due to the inconsistent decisions of various High Courts, the Vedanta Judgment provides the long due clarity on the issue. The Vedanta Judgment needs to be seen in the context of the pro-enforcement stance of Indian courts with respect to the execution of foreign awards in India (as noted in this post).

The Supreme Court in the Vedanta Judgment, in the context of a separate issue, has reiterated the legal position that the courts should be reluctant to review the foreign award on merits and should give a narrow interpretation to grounds of refusal for enforcement of foreign award as enumerated under Section 48 of the Arbitration Act. With the enforcing courts unlikely to foray into the substance of the arbitration, losing parties in most cases have no option but to raise a sole objection on the ground of limitation to resist and delay enforcement of the foreign award. The enforcement proceeding in such cases where the losing party pleads the defence of limitation, cause the award holder to face an inordinate delay in their disposal due to the earlier prevailing lack of clarity on the applicable limitation period. The Vedanta Judgment, by settling the law on limitation period applicable to the enforcement of a foreign award, will lead to expeditious disposal of enforcement applications which are pending merely because of the issue of limitation is raised by the losing party.

The Supreme Court in the Vedanta Judgment has observed that the previously prevailing confusion regarding limitation period applicable to the enforcement of a foreign award would be a sufficient ground to condone the delay under Section 5 of the Limitation Act. This observation would ensure that all the foreign award holders who have not commenced enforcement proceedings in India within 3 years from when the right to apply has accrued are not left remediless. At least for the foreseeable future, such foreign award holders can seek condonation of delay under Section 5 of the Limitation Act on the basis of previous lack of clarity in the law.

It is pertinent to note that the Court has not delved deeper into the issue as to when the ‘right to apply accrues’ in terms of Article 137 of the Limitation Act in the context of enforcing a foreign award. The Court has not clarified when exactly the Limitation period commences for enforcement of a foreign award. It need not necessarily be the date of the foreign award and would ideally depend upon the facts of each individual case. Given the complex nature of commercial relationships between the parties and the stakes involved in international commercial arbitrations, it is conceivable that an award holder, who senses a better possibility for the satisfaction of his entire claim, might spend some time in negotiating payment terms with the losing party instead of opting for a long drawn enforcement proceeding in India where the assets of the losing party might be insufficient to cover the entire claim. In the event that the negotiation fails, it may be difficult for the courts to determine when exactly the cause of action arises for commencing the enforcement proceeding. The courts would have to adjudicate it depending upon the facts of each case.

The Vedanta Judgment does away with a lot of confusion and obscurity by pronouncing a definite position of law on the limitation period for enforcement of a foreign award. A conclusive all-encompassing judgment of the Supreme Court relating to ‘right to apply’ in the context of determining limitation for enforcement of foreign awards would be welcome.

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Uber v. Heller: Can Third-Party Funding Limit Unconscionable Arbitration Agreements?

Sat, 2020-10-17 00:20

Uber Technologies Inc. v. Heller raises questions on the possibility of third-party funding limiting unconscionable arbitration agreements. This post examines (I) how third-party funding could reduce the amount of unconscionable arbitration clauses and (II) how it could promote more specific criteria for the doctrine of unconscionability. Finally, this post offers some concluding remarks.

 

I. Third-Party Funding Relationship with the Doctrine of Unconscionability

Some parties use arbitration agreements to implement standard terms or one-sided arbitration clauses to disincentive the other party from initiating a dispute. It has been considered that such clauses “tilt the scales of justice in their favor”. Usually, this is the case because these agreements are too troublesome or demanding for the other party to initiate arbitral proceedings. Under this thought, the doctrine of unconscionability has flourished.

When it is too unfair for a party to access justice, the arbitration agreement is deemed invalid. The latter is the conception in the recent judgment in Uber v. Heller, where the Supreme Court of Canada (“SCC”) held that Uber’s arbitration clause in its delivery services agreement was unconscionable after Heller started a class proceeding. The SCC concluded that the arbitration agreement must be affected by two factors to be unconscionable: first, the inequality of bargaining power between the parties and, second, the improvident cost of the arbitration. (Prior posts on the blog have analysed the decision from different perspectives.)

As noted by the ICCA-Queen Mary Task Force on Third-Party Funding, third-party funding has developed gradually but steadily in international arbitration. While the doctrine of unconscionability rests under the idea that an arbitration clause is profligate, third-party funding has been endorsed for its pro-access to arbitration capacity. Third-party funding does not promote frivolous lawsuits. On the contrary, its modern conception is that it “enables claimants to proceed with their arbitration claims while delaying payment until the issuance of any resulting arbitration award.”

In Uber v. Heller, the arbitration clause required arbitration under the ICC rules, with the seat of the arbitration in Amsterdam, and an administrative fee to commence the proceedings of $14,500.00 USD. Heller’s annual income was close to this amount, excluding the costs of traveling to Amsterdam and attorney fees. Notwithstanding, Heller’s case could have been an attractive investment for a third-party funder because he claimed $400 million in damages. For comparison, DeepNines, a Texas-based security company, obtained an $8 million loan from a third-party funder, which resulted in a $25 million settlement. The third-party funder for DeepNines received more than $10 million in return. While third-party funders do not routinely invest in disputes with low potential for damage awards, Heller’s case, due to the amount claimed, could have been attractive because it represented a possible high return on investment.

However, the merits of the case – which are pertinent when a third-party funder values an investment – would not have favored Heller. The SCC determined that the “agreement expressly states that it does not create an employment relationship.” Thus, Heller’s contention that the Ontario Employment Standards Act grants benefits to Uber’s delivery service drivers might not provide good prospects of success for potential investors.

The analysis that follows considers whether third-party funding can eradicate  impediments of access to justice, on the one hand, and improvident costs of arbitration (such as conditions or criteria to declare an unconscionable arbitration agreement), on the other.

 

Third-party funding as a means to promote access to justice

The argument  that investors “do not seem to invest in the types of cases where plaintiffs need access to justice” focuses on one main idea. That parties only seek third-party funding because they might prefer to use their existing assets to further their investment activities but not in arbitration per se. The industry should reject the latter argument. While it is true that funders invest in cases with “the most likely to be successful scenarios” and high potential damage awards, these criteria do not correlate with cases in need of access to justice. Lack of access to justice is not equivalent to low damage awards or meritless claims. A more probable explanation for less investment in access to justice-related cases would be the potential claimant’s lack of knowledge to request such funding.

 

Third-party funding inclusion to reduce improvident arbitration clauses

The SCC declared it unreasonable to impose the burden of improvident costs as a condition for arbitration on a party that cannot finance its share of the proceedings (¶ 47). However, how would this analysis change if the claimant could obtain third-party funding? Would the clause still be unconscionable? The relevant factor in releasing the claimant from an improvident arbitration clause is whether the claimant could not have acknowledged such an agreement’s implications. In this sense, the SCC determined that this is appropriate when it “could not be expected a person in Heller’s position to appreciate the financial and legal implications of the arbitration clause” (¶ 3).  Thereby, there must be a lack of knowledge of the consequences of the arbitration agreement by one side before it is rendered invalid.

As an example, to prevent this outcome, in AT&T Mobility v. Concepcion, the Supreme Court of the United States (SCOTUS) partially declared invalid an arbitration agreement, only up to the characteristics that were improvident. In that case, the arbitration agreement stated that any party who brings a claim against AT&T would have had to pay AT&T the costs of their attorney fees, regardless of the outcome of the arbitration. SCOTUS noted the unfairness of such condition and determined it was inoperative, while still maintaining arbitration as the proper procedure on the merits. Gary Born pointed out that it might not have been declared unconscionable at all if AT&T had been more careful in the drafting of their arbitration clause. Similarly, in Uber v. Heller, some drafting modifications, such as a more notorious arbitration clause in a standard agreement, could have saved the arbitration clause.

If Heller’s arbitration clause had required arbitration in Canada instead of the Netherlands, the outcome could have been different. Canada is known for being a third-party funding friendly jurisdiction, particularly with class proceedings such as Heller’s claim. Therefore, Heller could have had access to multiple international litigations funders, reducing the arbitration clause’s possibility of being classified as improvident.

Suppose the arbitration clause had required that any party unable to pay for the arbitration had first to attempt to obtain funding. In that case, the arbitration clause might have been upheld as valid, regardless that Amsterdam was the seat of the arbitration. As Justice Coté stated in a dissenting opinion in the case, the arbitration seat is not synonymous with the place of the hearings. Moreover, today more than ever, we understand the usefulness of online hearings in arbitration.

 

II. Developing the Criteria for the Doctrine of Unconscionability

The inclusion of third-party funding before determining its legitimacy in an arbitration clause would develop the doctrine of unconscionability into a more concrete concept, have pro-arbitration effects, and prevent dilatory tactics.

Third-party funding could clarify the role of “bargaining power” in unconscionable clauses. To assume that all arbitration clauses which are not negotiable are unconscionable would conclude that all adhesion and most concession contracts are not arbitrable. The latter should not be the case.

Third-party funding in this context would advocate the usage of litigation investments while encouraging parties to enroll in arbitral procedures. The fact-sensitive character of unconscionability would give room for third-party funding to be included on a case-by-case basis. Only the particular position of a claimant would trigger unconscionability and not an ambiguous perception that all unilaterally burdensome clauses are automatically invalid.

To this point, we should lastly bear in mind the following questions:

  • What if the arbitration clause had reflected the costs of the administrative and filing fees?
  • What if the arbitration clause required or suggested that parties unable to commence the arbitration should seek a third-party funder before attending local courts?
  • Consequently, would Heller have been forced to seek funding for his claim?
  • Would Heller still be able to argue a lack of knowledge of the implications of such an arbitration agreement?

 

Conclusion

In conclusion, for an arbitration agreement to be unconscionable, it must be: (i) too onerous to exercise, (ii) the party must not have acknowledged the implications of the clause, and (iii) if there existed a possibility to bargain, there must have been inequality of bargaining power. However, third-party funding would give room for parties to steer clear of these conditions.

The relationship between third-party funding and the doctrine of unconscionability can be mutually beneficial. While third-party funding will not automatically bypass unconscionability, it could help rebalance the scale of justice by serving as an empowering instrument that facilitates access to arbitration (and thereby justice) for all users of arbitration.

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One Size Does Not Fit All: US Circuit Court Declines To Apply Domestic FAA Vacatur Clause to International Award

Thu, 2020-10-15 23:12

In a recent opinion, the Eleventh Circuit Court of Appeals confirmed its prior decisions that the Federal Arbitration Act’s domestic provision on vacatur does not apply to international awards. In Earth Science Tech Inc. v. Impact UA, No. 19-10118, 2020 WL 1861402 (11th Cir. April 14, 2020) (unpublished), the Court specifically held that an international arbitration award fell within the Panama Convention and was subject to its purview. Notably, similarities between the Panama and New York Conventions (“the Conventions”) allowed for application of legal authorities decided under either Convention.1)See also, Productos Roche S.A., v. IUTUM Services Corp., No. 20-20059-Civ-Scola, 2020 WL 1821385 at * 1 (S.D. Fla. April 10, 2020) (the New York and Panama Conventions “are substantially identical. Thus the case law interpreting provisions of the New York Convention are largely applicable to the Panama Convention and vice versa.”). jQuery("#footnote_plugin_tooltip_7746_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7746_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Earth Science involved a commercial dispute between a Florida-based CBD company and a Salvadoran biotechnology supplier regarding the quality of product provided pursuant to a distribution agreement. The parties’ agreement provided for arbitration before JAMS International pursuant to the UNCITRAL rules with a New York seat. The arbitration demand asserted claims for breach of contract along with conversion and tortious interference with contract. The tribunal ultimately ruled in favor of the Salvadoran company which then sought to confirm the award in a Florida district court. In response, Earth Science sought vacatur on the grounds that the tort claims were not arbitrable and the damages awarded excessive. The Eleventh Circuit affirmed the district court’s decision confirming the arbitral award.

The Court held that the seven exceptions to enforcement of an international award pursuant to the Conventions were the exclusive means of any challenge to an arbitral award. None of those exceptions had been invoked in Earth Science’s petition to vacate the award which instead relied on 9 U.S.C. § 10(a)(4) of the FAA. That provision provides for vacatur or rehearing “where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.” The Court held that FAA Section 10(a)(4) was limited to challenges to domestic awards and held it inapplicable.

The Court dispensed with several challenges. First, Respondent Earth Science challenged the tribunal’s jurisdiction to address tort related claims. The Court held the broad arbitration clause which invoked the UNCITRAL Rules specifically provided the tribunal with broad authority enabling it to do so.

Next, Earth Science challenged the amount of the award contending it was excessive and subject to modification pursuant to pursuant to 9 U.S.C. § 11 of the FAA. The Court again held the domestic provision inapplicable and determined it lacked the power to substantively amend or modify the award. While the claimant put forth ample evidence supporting the claim including an expert report and substantiating evidence, Earth Science failed to introduce any report or counter-veiling evidence. As such, the claim was not only procedurally improper but also lacked merit.

The Eleventh Circuit applied a similar stance in Inversiones y Procesadora Tropical INPROTSA, S.A. v. Del Monte Int’l GMBH, 921 F.3d 1291, 1301-02 (11th Cir. 2019). There, the Court affirmed the dismissal of a petition to vacate an international award where respondent INPROTSA also failed to raise any New York Convention defenses. In so holding, the Court specifically rejected INTPROTSA’s contention that the U.S. Supreme Court had abrogated its holding in Industrial Risk Insurers v. M.A.N. Gutehoffnungshutte GmbH, 141 F.3d 1434, 1446 (11th Cir. 1998) that “the defenses enumerated by the Convention provide the exclusive grounds for vacating an award subject to the Convention:”

The Court’s reasoning in refusing to vacate the award – that an asserted ground for vacatur under the FAA did not apply on the merits – does not directly conflict with Industrial Risk’s holding that such a ground would not have warranted vacatur because the ground is not enumerated in the Convention.

At most, the Supreme Court’s analysis indirectly suggests that the Convention does not supply the exclusive grounds for vacating an international arbitral award. (cites omitted). But that is not enough under our precedent to conclude Industrial Risk has been overruled.

Nonetheless, the Court held the arguments presented in support of vacatur (that the tribunal exceeded its authority pursuant to 9 U.S.C. § 10(a)(4) of the FAA) lacked merit and granted claimant’s petition to confirm the award. In doing so, the Court also rejected a public policy defense premised on fraud advanced in opposition to the petition to confirm; a topic addressed broadly by Professor Margaret Moses here, and, in particular as to fraud, here. Id. at 1306.

In short, in these two recent decisions, the Eleventh Circuit has clearly reaffirmed its holding in Industrial Risk that any challenge to an international arbitration award must travel exclusively under the terms of the Conventions and not the domestic FAA provisions.

References   [ + ]

1. ↑ See also, Productos Roche S.A., v. IUTUM Services Corp., No. 20-20059-Civ-Scola, 2020 WL 1821385 at * 1 (S.D. Fla. April 10, 2020) (the New York and Panama Conventions “are substantially identical. Thus the case law interpreting provisions of the New York Convention are largely applicable to the Panama Convention and vice versa.”). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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‘International Arbitration and the COVID-19 Revolution’ (Part 2 of 2)

Wed, 2020-10-14 23:57

This is the second of a two-part blog post series for an upcoming publication titled International Arbitration and the COVID-19 Revolution edited by us. As detailed in Part 1 of this series, the book contains 17 chapters from 31 leading international arbitration practitioners. The focus of the contributions range from procedural topics in international arbitration emerging during and due to the COVID-19 pandemic addressed in Chapters 1 through 11, which are covered in Part 1 of this series, and industry-sector specific contributions addressed in Chapters 12 through 17 covering construction, energy, aviation, TMT, finance, and insurance, which are covered in this post.

COVID-19 has detrimentally impacted every country worldwide, affecting many sectors. However, it has also incentivised new thinking on how to improve business continuity and efficiency. Chapters 12 through 17 address relevant points in this regard, from government-imposed sanctions to the benefit of remote hearings in collective action lawsuits and the capacity for dealing with added complexity and novel issues in different sectors, as well as the efficacy of international arbitration in times of economic strain. Although some major arbitrations have already surfaced due to COVID-19, many more disputes with increasing complexity will likely arise, rendering the importance of the points discussed in the below contributions even more fundamental for timely, sustainable, and business-oriented solutions.

In ‘COVID-19 and Construction Disputes’, Todd Wetmore and Simon Elliot of Three Crowns LLP explore the effects of COVID-19 on construction disputes. They analyse the impact that the imposition of social distancing measures has had on the procurement and execution of construction projects, thus exploring the domino effects of such measures across operations, from work site attendance and development timelines to financial and supply sustainability.

The authors of this chapter also explore the different types of claims that are expected to be triggered by the COVID-19 pandemic in civil and common law systems, including requests for extensions of time and prolongation costs. The expected increased reliance on the doctrines of hardship, force majeure, and contractual change of law doctrines, as well as on the doctrines of frustration, impossibility, and other non-contractual doctrines, are thoroughly assessed in this chapter. The authors posit that the complexity of disputes will continue to increase, with contestation in areas such as concurrency and causation becoming more frequent.

In ‘COVID-19 and Energy Disputes’, Samaa Haridi and Samuel Zimmerman of Hogan Lovells LLP explore the effects of COVID-19 on energy disputes. They explore how project development has been affected across the entire global supply chain, also analysing the adoption by many States around the world of ‘green recovery’ aid packages focussed on investments in green energy projects.

The authors consider the types of disputes that will arise, covering contract terminations, disrupted supply chains due to manufacturing concentration (as in the case of solar panels in China), and non-performance, expecting that many of these disputes will turn on the applicable law and the specific language of the contract. The expected reliance on force majeure as well as hardship is also analysed. The chapter further provides an exploration of the different types of investor-state disputes, with focus on cases such as Philip Morris, Marfin, and CMS, which provide a framework for the analysis of the types of disputes that are expected. The enforcement of arbitral awards is also becoming more difficult during the pandemic, due to restricted mobility and backlogged courts, or because the award debtor is forced into insolvency, thus rendering the decision to commence arbitral proceedings one of paramount commercial importance.

In ‘COVID-19 and Aviation Disputes’, Johnny Champion, Rupali Sharma, and Patrick Bettle of Stephenson Harwood LLP explore the effects of COVID-19 on aviation disputes. With international passenger demand reduced dramatically, thus triggering revenue losses for airlines that precipitate across the global supply chain, the aviation industry has had one of the most severe downturns caused by the pandemic. The authors discuss that much of the future performance of the industry depends on the severity of further waves of the pandemic. Diverse supply chain stages of the industry, such as jet fuel costs, are also explored, along with the significant liabilities accrued due to previously sold flight tickets that were cancelled because of government-imposed restrictions.

The nature of the industry and the symbiotic relationship between airlines, aircraft manufacturers, and aircraft lessors is also analysed in this chapter, in combination with the reduced availability of resources amongst stakeholders that are considering disputes to move to arbitration or litigation. The types of disputes that are explored include those relating to aircraft leases and aircraft purchase agreements, with the doctrines of hardship, force majeure, and frustration anticipated to feature significantly in this context.

In ‘COVID-19 and Technology, Media and Telecommunication Disputes’, Olga Hamama of V29 Legal and Danielle Herrmann of Neuland Legal explore the effects of COVID-19 on technology, media, and telecommunications (TMT). With TMT being a broad sector that includes manufacturers of mobile devices and semiconductors, enterprise software providers, as well as broadcast and media firms, the impact of the pandemic has been varied, from remote work leading to variations in the demand and production time for certain software applications (such as online streaming and video-conferencing tools) and hardware (such as laptops).

The authors explore the changing nature of the TMT industry and the way competitors are working together, and also the spur in digital innovation that the COVID-19 Revolution has brought. Although many disputes relating to TMT have traditionally been subject to litigation, the efficiency of arbitration through the build-up of remote hearings and e-filings has made it acutely catered to address the current commercial needs of TMT stakeholders.

In ‘Finance Disputes and a Pandemic: The Eye of a Perfect Storm?’ Philippa Charles of Stewarts Law LLP explores the effects of COVID-19 on disputes in the financial sector. The contribution explores different types of government responses in the form of aid to drive liquidity and economic activity to keep businesses active within the financial sector. However, because of travel, work, and other government-imposed restrictions, meaningful economic activity has been lax. The author contends that the range of disputes will continue to grow, increasing in complexity and type, but that engaging in ‘breathing space’ from disputes is critical for the future functioning of the sector.

Many of the disputes will seek to use, as with other sectors, the doctrines of force majeure, frustration, adverse change, as well as business interruption policies touched upon in ‘COVID-19 and Insurance Disputes’. However, COVID-19 has also brought with it additional spurs of innovation within the financial services sector, particularly in relation to fintech, blockchain, and cryptocurrency projects whose tools lend themselves to arbitration to help augment the level of security, automation, and efficiency. There has been significant progress in each area with new disputes that clarify outstanding issues and pave the way for future applications.

In ‘COVID-19 and Insurance Disputes’, Alexander Oddy and Chris Parker of Herbert Smith Freehills LLP explore the effects of COVID-19 on insurance and reinsurance disputes. With many, if not most, disputes having been and being anticipated to continue to be resolved by arbitration, the authors unpack the types of disputes that may arise with a focus on England and Wales and on liability, trade credit, and business interruption policies aiming to recoup costs for business continuity after having suffered reduced profits due to government lockdowns. The contribution also discusses the most recent test case the UK Financial Conduct Authority (FCA) brought in the English High Court against a number of insurers, namely The Financial Conduct Authority v. Arch Insurance (UK) Limited and others [2020] EWHC 2448 (Comm), which was handed down on 15 September 2020 largely in favour of policyholders.

Chapters 12 through 17 address the repercussions of the COVID-19 pandemic on diverse industries and sectors. While it is indisputable that the COVID-19 pandemic has had an unparalleled impact on the economy and businesses across every sector, industry, and country, rendering it a truly global crisis, it has also triggered a revolution in many fields, international disputes being no exception. Although the pandemic is giving rise to more complex arbitrations that are conducted differently with respect to both procedure and substance, it also brings novel ways of addressing disputes in international arbitration through cooperation, creativity, commercial awareness, and technology.

 

The authors wish to thank Hazem Nakib and Sicen Hu, WilmerHale, for their help in preparing this blog post.

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Investigating Allegations Of Corruption In International Arbitration: Practical Considerations

Tue, 2020-10-13 23:04

Corruption has been a hot topic in investor-state arbitration in recent years. This is particularly the case in situations where Claimant investors are alleged to have procured their original investment through bribery, which, if proven, may lead to tribunals denying their claims, especially under ICSID.

Many commentators have focused on legal aspects such as the burden of proof (a party’s right and duty to support its claims through the introduction of evidence) and the standard of proof, a concept more familiar to common law practitioners. In April 2019, the Basel Institute on Governance published a toolkit for arbitrators summarising the thinking and current practice on corruption in international arbitration. A dedicated ICC Task Force aims to explore existing approaches to allegations or signs of corruption in disputes, and articulate guidance for arbitral tribunals on how to deal with such occurrences.

This article focuses on a practical question: how can one go about proving (or disproving) that the initial investment was obtained through corrupt means?

Potential Claimants and their legal teams may wish to carry out their due diligence before launching a claim to assess to what extent the original investment complied with applicable laws and the Claimant’s anti-bribery policies and processes. Arbitrators may also consider investigating allegations of corruption sua ponte. In that case, we assume that the Claimant would agree to providing access to their staff and their books and records to enable a forensic accountant to carry out their work.

Whilst corruption can take several forms, this article focuses on bribery, which can be defined as giving or receiving a financial or other advantage in connection with the improper performance of their duties by someone in a position of authority (often a public official). We outline below the approach that forensic accountants typically adopt to shed light on the circumstances surrounding an investment. After formulating a working hypothesis, investigators typically carry out interviews with key individuals of the Claimant’s corporation or key individuals involved in the transaction, search available financial data, contracts, books and records and review email correspondence. The aim is to identify potentially relevant transactions and gather evidence of their intended or actual beneficiary and documented purpose. We provide more detail on each of these steps below.

 

Formulating a hypothesis. The first step of a bribery investigation is to formulate one or several working hypothesis(es): if bribery occurred in this particular case, how would it have manifested itself?

Bribery can involve direct payments of cash, such as gifts or commissions paid to intermediaries in a tender process. These are the type of schemes envisaged by the Basel Institute. However, bribery can also manifest itself more indirectly. For example, a company can provide goods or services for free or provide expensive and/or repeated entertaining and hospitality to people in a position of authority to qualify or be selected for a bid. In those cases, the Claimant may have paid its regular suppliers (e.g. hotels, restaurants) which (absent large one-off amounts or a “tip”) may not raise suspicion.

In the context of due diligence, it is important to discuss with the potential Claimant and their lawyers what possible bribery scenarios could have taken place, which will constitute the starting point of the investigation. It is also important to understand the applicable framework (laws, internal anti-bribery policies and procedures) and the potential Claimant’s usual business practices. This will help assess to what extent any transactions identified depart from acceptable standards.

 

Interviewing key individuals. Human intelligence is key to increasing the chances of identifying relevant transactions and key evidence.

In our experience, there is no replacement to being ‘on the ground’ and speaking directly to the company’s staff, including junior people who may have a better/different/alternative view of past events and may help refine the working hypothesis.

Staff insight is often key to understanding how transactions were recorded. For example, payments to consultants, agents and intermediaries may have been made through a small subsidiary that is not material at group level and recharged as a management charge. Without a “tip” pointing in that direction, such a payment may be easily missed, in particular if the subsidiary’s books are held outside the group’s core finance systems. Similarly, the company’s staff may have recollection of specific hospitality events or deliveries of goods and services around the relevant time.

The quality of human intelligence that can be obtained in that way will depend heavily on the company’s culture, its policies and processes for speaking up, the geography(ies) and the networks of people involved. There is immense value here in bringing in local expertise – people well versed in the local language and local culture – to increase the chances of building a relationship of trust on the ground.

 

Analysing financial data and documentation

Where bribery involves direct cash payments, the well-known mantra is: ‘Follow the money’. Forensic accountants typically aim to:

  • identify outgoing payments made by the party suspected of having obtained a contract or business advantage from bribery, and
  • assuming a payment of cash, follow the funds through to its ultimate beneficiary(ies).

Identifying any outgoing payments made by the investor is typically based on bank statements and/or cash books, supported by other accounting records such as invoices, goods receipt notes or proof of acceptance of service delivery. If a list of all outgoing payments made in a certain period can be extracted from a finance system (e.g. a cash book), advanced data analytics techniques can be used to try and identify outliers and relevant transactions based on patterns, amounts, beneficiaries or keywords in narrative descriptions. However, books and records can be incomplete or patchy, for example due to the size of certain subsidiaries (which may warrant a less sophisticated finance system) or the standard of record-keeping prevalent in a certain geography. In that case, identifying outgoing payments can become a more manual exercise, and one where the assistance of the potential Claimant’s staff will be all the more valuable.

Following the funds through to its ultimate beneficiary(ies) can be an arduous task. Bribery schemes often involve intermediaries, offshore entities and circular payments, which make them inherently difficult to trace, track and evidence. The main sources of information here are often what can be found in the public domain. It may be useful to involve corporate intelligence and asset tracing professionals who will search publicly available information, such as databases, company registers, internet and social media sites. Often, though, the trail of evidence will go cold very quickly without cooperation from the Claimant, present or former employees and key third parties such as banks. The involvement of offshore entities in a bribery scheme often proves insurmountable as financial data and the identity of directors and ultimate beneficiaries may not be easily obtainable (if at all).

 

Evidencing the purpose of transactions: Once relevant transactions have been identified, the next step is to gather evidence on the recorded purpose of such payments and how they compare to what was commercially expected, what happens in the normal course of business and the potential Claimant’s policies and usual business practices.

The extent of documentation available will be key. Emails and documents saved on the company servers will typically be gathered and searched using document review platforms. In certain jurisdictions and for older investments, it may be necessary to search through paper files on site. In many cases, though, the best available evidence of the purpose of transactions will be the recollections of key individuals.

 

Reporting on findings

In a due diligence context, findings are typically reported to the potential Claimant in an advisory report (which may be privileged depending on the jurisdiction). Should an arbitration be initiated, findings can be introduced either by way of a witness statement or via an expert report. In the latter case experts may be asked for example to provide an opinion on the extent to which any identified transactions appear to be within the entity’s business purpose, policies and usual business practices.

Defining the scope of an investigator’s work is key. Conclusions are necessarily constrained by the intelligence and available data. Often it will be difficult to conclusively say that bribery did or did not take place. Conclusions may well be limited to flagging a series of transactions, clues and reported events, leaving their interpretation to the tribunal.

 

Conclusion

In summary, proving bribery is a challenging task: many years may have passed, key staff may have left or be unwilling to assist, financial and other data may be patchy and proactive steps may have been taken to conceal evidence of transactions. Disproving corruption is even more challenging as a lack of evidence does not necessarily mean that the transactions did not occur. The outcome of an investigation depends heavily on the availability of adequate, sufficient and complete data and the cooperation of key individuals.

 

The views expressed in this article are the authors’ and do not necessarily represent EY’s position.

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Balasore v. Medima: Providing Clarity or Creating a Mist Around the Grant of Injunctions in Foreign Seated Arbitrations?

Mon, 2020-10-12 21:44

A single-judge bench of the Calcutta High Court (Calcutta HC) recently delivered a judgement in Balasore Alloys Ltd. v. Medima LLC which revived the debate regarding whether a ‘civil court has jurisdiction to grant anti-arbitration injunctions in foreign seated arbitrations?’ This decision requires a careful examination because of its impact on 1) the arbitration-friendly reputation that India has slowly gained and, 2) the larger and important question of whether civil courts have the jurisdiction to grant an anti-arbitration injunction in foreign seated arbitrations.

 

Background of the dispute

The case before the Calcutta HC concerned agreements between India-based Balasore Alloys Ltd. (Balasore) and US-based Medima LLC (Medima). The Agreement entered into in 2018 provided for an International Chamber of Commerce (ICC) Arbitration in London. Further, the purchase orders that were issued regularly provided for the application of the Arbitration and Conciliation Act, 1996 (the Act), and for the venue of arbitration to be Kolkata, India.

A dispute arose between the two entities, and Medima commenced arbitration under the ICC rules in London. At the same time, Balasore also initiated arbitral proceedings under the Act in Kolkata. In Medima’s arbitration, Balasore raised objections regarding the validity of the arbitration agreement and urged the ICC Court to decide the matter as a preliminary issue before the constitution of the tribunal. In turn, the ICC Court confirmed that a 3-member tribunal would be constituted and it would decide all objections. Hence, Balasore approached the Calcutta HC to grant an anti-arbitration injunction against the ICC Arbitration. The primary question before the Calcutta HC was whether a civil court has the jurisdiction to grant anti-arbitration injunctions in foreign seated arbitrations?

 

The decision of the Court

The Calcutta HC, while ruling that a civil court has the power to grant an anti-arbitration injunction in a foreign seated arbitration, held that this power has to be exercised sparingly and only under the circumstances listed in paragraph 24 of the Supreme Court’s (SC) judgement in Modi Entertainment Network v. WSG Cricket PTE Ltd. Further, the Calcutta HC while rendering this decision, rejected the Delhi High Court’s decision in Bina Modi & Ors. v. Lalit Modi & Ors which had held that a civil court lacks the power to grant anti-arbitration injunctions.

On facts, it held that Balasore is not entitled to an anti-arbitration injunction since it has failed to display how their case falls under any of the categories provided in para 24 of the judgment in Modi Entertainment Network. Therefore, the Calcutta HC ruled that there is no reason which merits the grant of an injunction against the ICC arbitration seated in London.

 

Applicability of principles governing anti-suit injunctions to anti-arbitration injunction

Although on facts, the Calcutta HC held that Balasore was not entitled to an anti-arbitration injunction, the basis on which it was decided that a civil court in India has the power to grant an anti-arbitration injunction in foreign seated arbitrations merits discussion. As mentioned above, the Calcutta HC while arriving at this conclusion, relied on the principles provided in para 24 of the SC judgment in Modi Entertainment which govern the grant of anti-suit injunctions.

As per the above decision, an anti-suit injunction can be granted if: (i) the proceedings are oppressive, vexatious or in a forum non-conveniens; (ii) in case the proceedings are to be allowed, then the ends of justice would be defeated; (iii) the proceedings in the foreign court (decided by the parties based on an exclusive-jurisdiction clause) would result in injustice to the parties. Therefore, looking at the decision rendered in Balasore a question arises that whether the principles governing an anti-suit injunction can also govern the grant of an anti-arbitration injunction.

A two-judge bench of the Delhi HC in Mcdonald’s India Pvt. Ltd. v. Vikram Bakshi & Ors. has considered this question before, where it held that in a case involving an anti-arbitration injunction, the governing principles could not be the same as that of an anti-suit injunction. The reason being that the Act being a complete code in itself, empowers an arbitral tribunal itself to rule on its own jurisdiction. Further, it held that the governing principles of a civil suit and that of arbitration are different. Therefore, the principles applicable to govern an anti-suit injunction could not be applied to a suit concerning anti-arbitration injunctions.

Even recently in the Bina Modi judgement, the Delhi HC held that principles of anti-suit injunction cannot be used in a dispute concerning an anti-arbitration injunction, the reason being, under the Act, arbitrations are based on the principles of party autonomy and Kompetenz-Kompetenz. A tribunal has sufficient power to rule on its own jurisdiction, and the courts should sparingly interfere when the parties have displayed a strong intention to refer their disputes to arbitration.

 

The legal position for grant of anti-arbitration injunctions in foreign seated arbitrations

A two-judge bench of the SC in Chatterjee Petrochem v Haldia Petrochemicals held that civil courts in India have the power to grant anti-arbitration injunctions in foreign seated arbitrations. The SC held that the grant of such injunctions should be based on the parameters mentioned in Section 45 of the Act i.e. if the arbitration agreement is “null and void, inoperative, or incapable of being performed”.

In World Sport Group (Mauritius) Ltd v MSM Satellite (Singapore) Pte Ltd, a two-judge bench of the SC upheld Chatterjee Petrochem. The SC relied on Redfern and Hunter to explain that an arbitration clause is “inoperative” and “incapable of being performed” when “it has ceased to have effect as a result, for example, of a failure of the parties to comply with a time-limit, or where the parties by their conduct impliedly revoked the arbitration agreement”.1)Page 148, 5th Edition, Redfern and Hunter on International Arbitration (OUP). jQuery("#footnote_plugin_tooltip_1229_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1229_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Kvaerner Cementation v. SBP

A three-judge bench of the SC in Kvaerner Cementation India Ltd. v. Bajranglal Agarwal & Anrheld that by virtue of Section 16 of the Act, a civil court lacks the power to look into matters related to the existence or validity of an arbitration clause (jurisdictional issues). However, the Calcutta HC made an interesting observation by noting that Kvaerner stood implicitly overruled by a seven-judge bench decision of the SC in SBP & Co. v. Patel Engineering Ltd. & Ors. The reason behind this was that the majority opinion of the SC in SBP had conclusively rejected the argument that an arbitral tribunal solely has competence, to the complete exclusion of civil courts, to determine its own jurisdiction. Therefore, the Court held that in light of the majority opinion in SBP, it may be interpreted that the dictum in Kvaerner stood implicitly overruled. However, a careful analysis of both Kvaerner and SBP reveals that both these judgements operate in totally different planes.

The main issue referred to a seven-judge bench in SBP was to decide whether the power exercised by a Chief Justice or his/her designate under Section 11 of the Act was an administrative function or a judicial function. With a majority of 6-1, the SC decided this function to be a judicial function. Further, the SC ruled that a civil court has the power to rule on a tribunal’s jurisdictional issues. However, this power of a civil court was decided only in relation to Section 11 of the Act.

The SC in SBP dealt with the powers of a civil court to rule on the tribunal’s jurisdiction. No where did the SC in SBP deal with the issue regarding the exclusion of powers of a civil court to grant an anti-arbitration injunction by virtue of Section 16. However, this was exactly the question that the SC was concerned about in Kvaerner i.e., exclusion of powers of a civil court. Therefore, both these judgments apply to whole together different aspects, and there cannot be any kind of overlap between them. Hence, Kvaerner very well stands firm and cannot be rejected on the ground that it stands implicitly overruled by virtue of SBP.

 

Applicability of Kvaerner to foreign seated arbitrations

The Calcutta HC in Balasore rejected Kvaerner by giving an invalid reason as explained above. However, the HC was right in rejecting Kvaerner but should have done so with a different reason i.e., by holding that Kvaerner applies to domestic arbitrations and not to foreign seated arbitrations.

Kvaerner reached the SC through Article 136 of the Constitution. It was an appeal against an order of the Bombay HC wherein the Bombay HC had upheld the district court’s decision which rejected Kvaerner’s plea to grant an anti-arbitration injunction. Hence, it can be seen that Kvaerner was a case that dealt with anti-arbitration injunctions in a domestic seated arbitration because it is only in cases of domestic arbitrations that a district court has the power to entertain a suit for grant of anti-arbitration injunctions. If it were to be a foreign seated arbitration then the jurisdiction would lie with an appropriate high court.

Kvaerner’s decision in holding that civil courts lack the power to grant such injunctions still holds ground, but this is only in context to domestic arbitrations. Therefore, the Delhi HC in Bina Modi erred in holding that a civil court lacks the power to grant an anti-arbitration injunction in a foreign seated arbitration, by relying on Kvaerner. Instead, it should have upheld the power of civil courts to grant such injunctions by relying on Section 45 of the Act and Chatterjee Petrochem. Further, while the Calcutta HC was right in rejecting Kvaerner, its reasoning behind the same seems to be flawed (as explained above).

 

Conclusion

The single-judge bench decision in Balasore has been appealed to a division bench. However, the division bench is yet to re-examine the question as to whether civil courts have the jurisdiction to grant anti-arbitration injunctions in foreign seated arbitrations. Therefore, the Calcutta HC still has an opportunity to rectify the errors committed by the single-judge bench. Hence, it is high time the HC 1) clarifies the applicability of Kvaerner to foreign seated arbitrations, lay to rest the apparent conflict between Kvaerner & SBP and, 2) firmly establishes the grounds on which an injunction can be granted against a foreign seated arbitration.

References   [ + ]

1. ↑ Page 148, 5th Edition, Redfern and Hunter on International Arbitration (OUP). function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Arbitrations in China Administered by Foreign Institutions: No Longer a No Man’s Land? – Part I

Mon, 2020-10-12 00:05

In any arbitration, the parties’ choice of seat normally determines the legal regime under which an arbitration is conducted and any award is enforced.1)At the beginning of her career, Tereza was a tribunal secretary to Dr. Jane Willems in her role as sole arbitrator in the arbitration case at hand: Brentwood Industries, Inc. v. Guangdong Fa’anlong Machinery Complete Set Equipment Engineering Co., Ltd. and Others, ICC Case No. 18929/CYK. The views expressed herein are the authors’ own. jQuery("#footnote_plugin_tooltip_1463_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1463_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Accustomed to the international “seat standard,” one might think that an ICC arbitration award rendered in China, for example, would be subject to confirmation or set aside in Chinese court pursuant to Chinese law because the arbitration was seated in China. Support for this can be found in the New York Convention, Articles V(1)(a), V(1)(d), and V(1)(e), where recognition may be refused upon proof of (i) certain enumerated defects arising under “the law of the country where the award was made” (or “where the arbitration took place”) or (ii) vacatur by a competent authority of such country. One holding that expectation, however, may be surprised by the existing Chinese legal regime as interpreted and applied by the Chinese judiciary.

A recent ruling rendered by the Guangzhou Intermediate People’s Court (“Guangzhou Court”) may have significantly altered the legal landscape of Chinese arbitration law. Our analysis consists of two parts. In Part I here, we discuss the longstanding uncertainties regarding the standard adopted by Chinese courts to determine the legal regime governing arbitrations administered by foreign arbitral institutions, as well as the novel development in Brentwood Industries, Inc. v. Guangdong Fa’anlong Machinery Complete Set Equipment Engineering Co., Ltd. and Others (2015) (“Brentwood v. Guangdong Fa’anlong”). In Part II, we further elaborate on the relevant practical considerations arising from Brentwood v. Guangdong Fa’anlong, and how this decision may further shape the trajectory of Chinese legal reform on the treatment of arbitrations in China administered by foreign arbitral institutions.

 

Longstanding uncertainties under Chinese law in determining the legal regime governing an arbitration administered by foreign arbitral institutions

In Mainland China, the governing law of the arbitration procedure and the nationality of the resulting award are not necessarily determined by the country in which the arbitration takes place. Having refused to follow the “seat standard,” Chinese courts have previously determined the nationality of an award in accordance with the nationality of the arbitration institution that administered the underlying arbitration — often known as the “institution standard” — or categorized the award as “non-domestic” under Article I(1) of the New York Convention.

Chinese courts that have adopted the “institution standard” cite to Article 283 of the Chinese Civil Procedure Law, which provides that a party seeking the recognition and enforcement of an award rendered “by a foreign arbitral institution” should apply to recognize and enforce the award “under international treaties to which China has entered into or joined, or in accordance with the principle of reciprocity.” This rule could be read to imply that a foreign arbitral institution-administered arbitration would not be subject to Chinese domestic arbitration law even if the place of arbitration was within Mainland China. The following Chinese court cases have adopted this approach:

That leaves a question mark with regard to arbitrations seated in China but conducted under the auspices of non-Chinese arbitral institutions. Will Chinese courts exercise supervisory jurisdiction over such arbitrations? Will Chinese arbitration and civil procedure law apply? With recent measures allowing foreign arbitral institutions to administer arbitrations in the Shanghai Free Trade Zone entering into force this year (discussed in a previous blog), parties and practitioners considering this option must now squarely face these questions.

Subject to clarifications and guidance, there appears to be a fundamental risk of a poor outcome. If the nationality of a resulting award is considered to be that of the arbitral institution which administers the arbitration, a Chinese court would refer the parties to the national court of the chosen arbitral institution’s headquarters for court supervision and annulment proceedings. The foreign court may in turn adopt the internationally-accepted “seat standard” and determine that the parties’ China-seated arbitration should be supervised by the relevant Chinese court instead. Parties in this scenario could be left in a “no-man’s land” with no judicial recourse in relation to their arbitration.

For example, in BNA v. BNB and Another (2019), the parties entered into a contract whose arbitration clause provided that “any and all disputes arising out of or relating to this Agreement […] shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai […].” Applying a “three-stage” analysis, the Singapore Court of Appeals found PRC law, as the law of the seat, to be the implied proper law of the arbitration agreement and therefore the validity of arbitration agreement “should rightly be decided by the relevant PRC court as the seat court applying PRC law.”

 

Impact of the Guangzhou Court’s recent ruling in Brentwood v. Guangdong Fa’anlong

In Brentwood v. Guangdong Fa’anlong, Brentwood, a U.S. company, entered into a sales agreement with Guangdong Fa’anlong and Guangzhou Zhengqi, two Chinese companies (“Sales Agreement”). The Sales Agreement included an arbitration clause that stated, “Any dispute arising from or in connection with this Contract shall be […] submitted to arbitration by the International Court of Arbitration of the International Chamber of Commerce (ICC), […] and shall take place at the place of project.” The “project” in dispute was located in Guangzhou, China. In 2011, Brentwood applied to the Guangzhou Court to invalidate the arbitration clause in the Sales Agreement. Under Article 20 of the Chinese Arbitration Law, a Chinese court may rule, prior to arbitration, on the issue of “validity of an arbitration agreement” (see previous blog on how Chinese courts deal with challenges to the validity of arbitration agreements). The Guangzhou Court affirmed the validity of the arbitration clause in the Sales Agreement on February 22, 2012.2)The ruling itself does not appear to be available on public record. jQuery("#footnote_plugin_tooltip_1463_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1463_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The parties then conducted an arbitration in Guangzhou, administered by ICC-Hong Kong, following which Brentwood obtained a favorable award against Guangdong Fa’anlong.

In 2015, Brentwood applied to the Guangzhou Court to enforce the award under the New York Convention. Brentwood also alternatively requested enforcement under the Arrangements of the Supreme People’s Court on the Reciprocal Enforcement of Arbitration Awards by Mainland China and the Hong Kong Special Administrative Region, arguing that the award was administered by ICC-Hong Kong and was therefore a Hong Kong-award. On August 6, 2020, the Guangzhou Court issued its decision dismissing Brentwood’s request without prejudice, on the basis that the ICC award rendered in Guangzhou “should be considered a foreign-related Chinese arbitral award” (emphasis added) and thus subject to the enforcement regime under Chinese Civil Procedure Law, instead of the regime governing enforcement of foreign and Hong Kong awards.

For the first time in history, a Chinese court applied the “seat standard” to treat an arbitral award rendered in Mainland China under the auspices of a foreign arbitral institution as a Chinese award. While Chinese courts have previously affirmed the validity of those agreements choosing foreign arbitral institutions to administer arbitrations in China, e.g. Deasung (Guangzhou) Gases Co., Ltd. v. Praxair (China) Investment Co., Ltd. (2020)3)The court validated an arbitration clause that provides, “any and all disputes arising out of or relating to this Agreement […] shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai.” jQuery("#footnote_plugin_tooltip_1463_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1463_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); or Longlide Packaging v. BP Agnati Srl (2013),4)The court validated an arbitration clause that provides, “any dispute arising from or in connection with the contract shall be submitted to arbitration by the International Chamber of Commerce (‘ICC’) Court of Arbitration, according to its arbitration rules, by one or more arbitrators. The place of jurisdiction shall be Shanghai, China. The arbitration shall be conducted in English.” jQuery("#footnote_plugin_tooltip_1463_4").tooltip({ tip: "#footnote_plugin_tooltip_text_1463_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); no Chinese court has ever exercised supervisory jurisdiction over an arbitration conducted pursuant to such agreements. By encouraging Brentwood to “apply for enforcement under Chinese Civil Procedure Law,” the Guangzhou Court demonstrated its willingness and readiness to exercise its jurisdiction as the supervisory court at the seat, despite the fact that the ICC is a French-headquartered arbitral institution. This result directly contradicts several prior court decisions categorizing awards as made in the place where the foreign arbitration institution is located (see cases cited in prior section above).

To what extent can parties concerned rely on Brentwood v. Guangdong Fa’anlong to discern a trend in Chinese judicial practice? What are the implications for parties when negotiating arbitration agreements and choosing the seat of arbitration for their potential China-related disputes? Are there resulting challenges likely to be faced by parties, practitioners, and arbitrators when dealing with cases currently under way? We discuss these in Part II.

References   [ + ]

1. ↑ At the beginning of her career, Tereza was a tribunal secretary to Dr. Jane Willems in her role as sole arbitrator in the arbitration case at hand: Brentwood Industries, Inc. v. Guangdong Fa’anlong Machinery Complete Set Equipment Engineering Co., Ltd. and Others, ICC Case No. 18929/CYK. The views expressed herein are the authors’ own. 2. ↑ The ruling itself does not appear to be available on public record. 3. ↑ The court validated an arbitration clause that provides, “any and all disputes arising out of or relating to this Agreement […] shall be finally submitted to the Singapore International Arbitration Centre (SIAC) for arbitration in Shanghai.” 4. ↑ The court validated an arbitration clause that provides, “any dispute arising from or in connection with the contract shall be submitted to arbitration by the International Chamber of Commerce (‘ICC’) Court of Arbitration, according to its arbitration rules, by one or more arbitrators. The place of jurisdiction shall be Shanghai, China. The arbitration shall be conducted in English.” function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Arbitrations in China Administered by Foreign Institutions: No Longer a No Man’s Land? – Part II

Mon, 2020-10-12 00:00

In Part I of our post, we discussed the long-standing uncertainties existing in China about what legal regime governs arbitrations administered by foreign arbitral institutions.1)At the beginning of her career, Tereza was a tribunal secretary to Dr. Jane Willems in her role as sole arbitrator in the arbitration case at hand: Brentwood Industries, Inc. v. Guangdong Fa’anlong Machinery Complete Set Equipment Engineering Co., Ltd. and Others, ICC Case No. 18929/CYK. The views expressed herein are the authors’ own. jQuery("#footnote_plugin_tooltip_7304_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7304_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); We also introduced the recent, groundbreaking ruling by the Guangzhou Court in Brentwood v. Guangdong Fa’anlong. Here in Part II, we further discuss whether China might adopt the internationally-accepted “seat standard,” as well as the implications and considerations arising from the Brentwood case.

 

The “seat standard” in China — a new reality?

The Guangzhou Court’s ruling in Brentwood v. Guangdong Fa’anlong has thus far been welcomed by the international arbitration community (see recent blog discussing the case). Despite the lack of precedent-setting effect of the decision itself, there are several reasons to favor viewing Brentwood v. Guangdong Fa’anlong as an important indication of the Chinese judiciary’s attempt to align its position with the internationally-recognized “seat standard.”

First, developments in recent years within and around the Chinese legal system have been gathering momentum towards a departure from the “institution standard” and application of the “seat standard” instead. The “institution standard,” whenever applied by a Chinese court, has been widely questioned and even criticized by scholars and practitioners (see previous blog). Relatedly, one Chinese Supreme People’s Court (“SPC”) judge openly expressed her “personal preference” for the adoption of the “seat standard.” While, prior to Brentwood v. Guangdong Fa’anlong, no Chinese court had ever recognized a China-seated arbitration administered by a foreign arbitral institution as Chinese, a number of Chinese courts nevertheless have looked at the flip side of the issue and categorized foreign-seated awards as “foreign” on the basis that they were “seated” outside Mainland China:

Second, the Guangzhou Court’s decision came just at a time when there is special urgency to clarify the legal regime governing arbitrations administered by foreign arbitral institutions in China. Recent measures that purport to open the Lingang Free Trade Zone (in Shanghai) and designated areas in Beijing to foreign arbitral institutions have been welcomed as positive developments bringing China’s arbitration practice one step closer to international practice. However, the same developments have also given pause for thought, as parties have recognized the potential of ending up in the limbo of a “no man’s land.” This resulted in increased calls for clarity regarding the standard to determine the nationality of an award rendered under these measures. In these discussions, the “institution standard” has been disfavored as a practice deviating from the international standard. The Guangzhou Court directly answered those calls for clarity by confirming, at least on the facts of this case, that a China-seated arbitration administered by a foreign arbitral institution should be supervised by the lex arbitri (law of the seat): Chinese law.

Third, particularly given the unusually long duration of the Guangzhou Court’s deliberation (i.e., five years), Brentwood v. Guangdong Fa’anlong potentially carries more weight than a single non-binding decision. Because the Court’s decision does not amount to a refusal of enforcement of the award, which would fall within the decisions required to be reported to the Chinese SPC for approval (see previous blog on the SPC Prior Reporting System), Brentwood v. Guangdong Fa’anlong is not blessed with a Chinese SPC reply, which is generally considered to have quasi-binding or more persuasive effect. Nevertheless, Chinese courts have been known to sometimes consult with courts of higher levels before rendering decisions on important and controversial matters, even in the absence of a formal reporting requirement. Thus, while the unusually long period of deliberation may be attributable in part to the Guangzhou Court’s attempts to request Brentwood to reconsider and revise the legal basis for its enforcement request (see previous blog discussing the judges’ right of clarification in China), it may also reflect the involvement of courts at a higher level, possibly even the Chinese SPC.

Despite its positive implications, Brentwood v. Guangdong Fa’anlong remains an Intermediate Court decision lacking binding effect on future cases and on other courts (see Provisions of the SPC on Citation of Such Normative Legal Documents as Laws and Regulations in the Judgments, Article 1). Notably, the Guangzhou Court itself did not confirm or enforce the parties’ award. Because the Court’s decision only dismissed Brentwood’s request to enforce the award under the legal regime governing foreign arbitral awards without prejudice to its right to enforce the award under the Chinese Civil Procedure Law in Chinese court, Brentwood must initiate another enforcement proceeding if it intends to pursue its case. If it does so, there would be an opportunity for the enforcement court to further solidify the Guangzhou Court’s holding by applying Chinese law to the enforcement proceeding. (Moreover, if the enforcement court were to refuse enforcement, the Chinese SPC would then have an opportunity to take a position on this case upon receiving the lower court’s report.) For now, it remains to be seen how this dispute will unfold in Chinese court. There is another complication on how this case may play out: any attempt to set aside the award may already be time-barred under Article 59 of the Chinese Arbitration Law, which requires parties to make their set-aside applications “within six months from the date of receipt of the award.” It is also arguable that the clock should be stayed due to the lack of clarity on which court governs any set-aside proceedings.

Unless and until the Guangzhou Court’s decision is blessed with a final result or the direct involvement of the Chinese SPC, the recent trend in Chinese judicial practice and among Chinese arbitration practitioners towards favoring the “seat standard” over the “institution standard” shall remain just that — an unconfirmed trend.

 

Additional uncertainties: a potential new can of worms?

Regardless of the final outcome in this particular case, decisions by the Chinese judiciary do not carry the full force of law except under limited circumstances involving judicial interpretations by the Chinese SPC (see Provisions of the SPC on the Judicial Interpretation Work, Article 6). Thus, the uncertainties regarding the nationality of an award rendered in China under the auspices of a foreign arbitral institution may ultimately only be solved by amending the Chinese Arbitration Law and Civil Procedure Law. Pending such an amendment, there are a further host of difficult issues that, as yet, have no clear answers.

For instance, even if the “seat standard” is eventually confirmed, a procedural question arises as to which specific court should exercise supervisory jurisdiction over a given arbitration. In light of the newly-effective measures allowing foreign arbitral institutions to administer arbitrations seated in China, if a foreign-institution-administered arbitration is seated in the Lingang Free Trade Zone, which court should the parties go to for a potential set-aside proceeding of the resulting award? Will Chinese Civil Procedure Law apply to determine the proper venue of the supervisory court? To avoid sowing confusion, any change codifying the “seat standard” needs to be accompanied by clear rules regarding its procedural implementation.

In the meantime, parties that have chosen to arbitrate within China under the auspices of foreign arbitral institutions may be surprised to find certain peculiar procedures required in their arbitration under Chinese law. In addition, arbitrators who have already accepted appointments in such arbitration proceedings may face similar challenges when dealing with ongoing cases. A few of these challenges are set out below, which require careful consideration and analysis to ensure that legal rights are not unwittingly forfeited and to ensure that an otherwise valid arbitral award will not be set aside or refused enforcement on procedural grounds:

  • Chinese law allows losing parties a period of six months to set aside an award. This is considerably longer than the 28-day limitation imposed on any challenges to an English award and the three-month time limit for setting-aside applications stipulated under the UNCITRAL Model Law (adopted in places such as Singapore and Hong Kong).
  • Enforcement applications are subject to very particular formality requirements under Chinese law, including the requirement that “documents in a foreign language submitted by the parties concerned shall be accompanied by a Chinese translation” (see Provisions of the SPC on Several Issues Concerning the Trial of Judicial Review of Arbitration Cases, Article 6). In Brentwood v. Guangdong Fa’anlong, this requirement had arguably been met because the award was in both Chinese and English per the parties’ arbitration agreement. By contrast, in Hong Kong, for example, an award to be enforced under the New York Convention written in English need not be translated into Chinese.
  • Chinese law imposes a unique authenticity requirement for any documentary evidence submitted in an arbitration, which mandates notarization “by a notary organ of the country where it is formed, or the procedures for certification shall be completed according to the relevant treaty concluded between the People’s Republic of China and the country” (see Several Provisions of the SPC on Evidence for Civil Actions, Article 16). It is unclear, though, to what extent this requirement may be applied to a China-seated arbitration proceeding and any enforcement / set aside proceeding in Chinese court. CIETAC Guidelines on Evidence (2015) seem to recognize this issue, and they explicitly exclude the application of the notarization and certification requirement, among other rules of evidence under Chinese law. However, such a specific exclusion does not appear to exist in other arbitral institution rules.
  • There is no right to appeal if a Chinese award is set aside or is refused enforcement. By contrast, in Hong Kong, for instance, a party may appeal against a decision to set aside an award, or a decision to grant or refuse leave to enforce an award, subject to the leave of the court.
  • Only disputes that are considered to be “foreign-related” can be referred to non-Chinese arbitration institutions for arbitration under the existing Chinese legal framework. There are questions on what constitutes “foreign-related” disputes under Chinese law, particularly given that this area of law continues to evolve and change. Significant uncertainty remains as to whether the “foreign-related” requirement is satisfied if the dispute is between a multinational company’s subsidiary incorporated in China and a Chinese party (including another local subsidiary of a multinational company).

It remains to be seen how Brentwood v. Guangdong Fa’anlong will play out and whether the long-standing uncertainties surrounding the “institution standard” versus the “seat standard” will be further clarified either by the courts or by codification in law. It suffices to say that change is warranted. Parties, practitioners, and arbitrators all must stay abreast of future developments in this arena in order to make well-informed strategies and decisions regarding their China-seated arbitration proceedings.

References   [ + ]

1. ↑ At the beginning of her career, Tereza was a tribunal secretary to Dr. Jane Willems in her role as sole arbitrator in the arbitration case at hand: Brentwood Industries, Inc. v. Guangdong Fa’anlong Machinery Complete Set Equipment Engineering Co., Ltd. and Others, ICC Case No. 18929/CYK. The views expressed herein are the authors’ own. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Enka v Chubb Revisited: The Choice of Governing Law of the Contract and the Law of the Arbitration Agreement

Sun, 2020-10-11 01:00

In its recent decision of 9 October 2020 in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] UKSC 38 (Enka), the UK Supreme Court upheld the decision of the England and Wales Court of Appeal earlier this year restraining Chubb Russia from proceeding with parallel court proceedings in Russia, but disagreed with the approach taken by the Court of Appeal to determine the applicable law of the arbitration agreement. In the absence of an express agreement of the parties on the law applicable to the arbitration agreement and where the law of main contract differs from the law of the seat, the Supreme Court gave prevalence as a matter of principle to the parties’ intention when agreeing on the law of the main contract. Where the parties have (expressly or impliedly) chosen the law applicable to the main agreement, it would normally govern the arbitration agreement; in the absent of such choice, the arbitration agreement would be governed by the law of the seat as the default rule.

 

Background

The dispute concerns the request of Enka for anti-suit injunctions to prevent Chubb Russia from pursuing its claim initiated with the Russian courts in alleged breach of an ICC arbitration agreement, providing for London as the seat of arbitration. The underlying dispute arose out of payment by Chubb Russia of aprox. US$400 million to the beneficiary of the works in respect of damages caused by a fire at a power plant, subsequent to which Chubb Russia moved against the subcontractors, Enka included, to recover the amount paid for the insured event.

Enka filed a motion with the Russian courts seeking dismissal without consideration of the claim against it on the basis of the arbitration agreement and also sought anti-suit injunctions before the Commercial Court of London. The Russian court rejected Chubb’s claim on the merits and Enka’s request for dismissal without considering the merits. In the London proceedings, the Commercial Court declined to grant the injunction on forum non conveniens grounds.

The Court of Appeal disagreed and issued anti-suit injunction restraining Chubb Russia from continuing the Russian proceedings. As further developed in an earlier post, the Court determined that the arbitration agreement is governed by the English law and established that under English law there is a wider approach to what amounts to a dispute falling within an arbitration clause, hence the Russian claim was brought and pursued by Chubb Russia in breach of the arbitration agreement. The Court of Appeal also held that the main contract was governed by Russian law, but not by express choice.

When deciding on the proper law of the arbitration agreement, the Court of Appeal applied the English common law rules for resolving conflicts of law and established at the second stage of the inquiry that there is an implied choice for the seat, and this would be the general rule, subject only to any particular features of the case demonstrating powerful reasons to the contrary. The previous post touches upon reasons why the arguments of the Court and departure from Sulamérica were far-fetched.

On 5 June 2020, the Supreme Court stayed the anti-suit injunction pending the outcome of the appeal, which allowed Chubb Russia to file an appeal against the decision of the Russian court dismissing its claim on the merits.

 

UK Supreme Court’s decision and comments

The UK Supreme Court reached the same outcome as the Court of Appeal via a different route. In a judgment of 114 pages, with a close call of majority of three out of five, the Supreme Court overturned the decision of the Court of Appeal on the proper law, the main principles being summarised by the Court in para. 170. Essentially:

  • the law applicable to the arbitration agreement will be (a) the law chosen by the parties to govern it (Kabab-Ji alike cases included, as discussed by the Supreme Court in paras. 43, 52, 60) or (b) in the absence of such a choice, the system of law with which the arbitration agreement is most closely connected;
  • where the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to the arbitration agreement. This would be true except in cases where any provision of the law of the seat indicates that, where an arbitration agreement is subject to that law, the arbitration will also be treated as governed by that country’s law, or where there is a significant risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective;
  • in the absence of any choice of law to govern the arbitration agreement, it is governed by the law with which it is most closely connected, generally the seat, if chosen by the parties, even if this differs from the law applicable to the main contract.

The majority considered the position of an implied choice for the law governing the main contract (if the latter was agreed by the parties) to provide certainty, to achieve consistency, to avoid complexities and uncertainties, and avoid artificiality (paras. 53-54). The commercial approach of the majority, that, for the commercial parties, a contract is a contract, and that they would reasonably expect a choice of law to apply to the whole of that contract, is sensible. It is also consistent with the principle affirmed by the House of Lords in Fiona Trust & Holding Corpn v Privalov [2007] UKHL 40, that the “construction of an arbitration clause should start from the assumption that the parties, as rational businessmen, are likely to have intended any dispute arising out of their relationship into which they have entered or purported to enter to be decided by the same tribunal”. The majority did not agree with the Court of Appeal argument that the principle of separability is relevant in the assessment. The majority also disagreed with the Court of Appeal that relied inter alia on XL Insurance Limited v Owens Corning [2001] in what is referred to as the “overlap argument”, that, by stipulating for arbitration in London under the provisions of the Arbitration Act 1996, the parties had impliedly chosen English law to govern the validity of the arbitration agreement despite the choice of another law as the governing law of the main contract. The court held that the provisions of the Arbitration Act 1996 do not justify any general inference that parties who chose an English seat of arbitration thereby intend their arbitration agreement to be governed by English law (paras. 73-94).

The Supreme Court took this opportunity to expressly confirm the existence of the validation principle under English law in those cases where the arbitration agreement would be deemed invalid (para. 97). So far the English courts have only alluded to the validation principle (e.g. Sulamérica at [30, 31], XL, also Hamlyn & Co v Talisker Distillery [1984], Enka at [71]). The Supreme Court relied on the principle of contractual interpretation that the contract should be interpreted so that it is valid rather than ineffective, “verba ita sunt intelligenda ut res magis valeat quam pereat”, and on the need to ensure the commercial purpose of the arbitration clause (as commercial parties are generally unlikely to have intended a choice of governing law for the contract to apply to an arbitration agreement if there is “at least a serious risk” that a choice of that law would “significantly undermine” that agreement (Sulamérica, at [31]), which should be interpreted on a case-by-case basis. This issue was not decided in the case at hand, as Chubb did not challenge the enforceability or the validity of the arbitration agreement, rather the only question was as to its scope and whether the dispute fell within it. However, this is an important point relevant for future cases.

At the third stage of the inquiry, if there is no choice of the parties (expressly or implied) of the law applicable to the arbitration agreement, the court must objectively determine with which system of law the arbitration agreement has its closest connection. The majority held that the arbitration agreement is most closely connected with the law of the seat if the parties had chosen one. This is so because the seat is where the arbitration agreement is to be performed and this is the most used connecting factor. Also, this is consistent with international law and legislative policy, such as the New York Convention, and it gives effect to commercial purpose.

The arguments referring to the New York Convention, that the majority found compelling reason for treating an arbitration agreement as governed by the law of the seat of arbitration in the absence of choice, will probably be considered a welcome development by those advocating that English courts ought to realign with the New York Convention (according to which absent an agreement of the parties, the applicable law of the arbitration agreement is the law of the seat, Article V1(a) of the New York Convention; the same in Article 34 2a(i) of the UNCITRAL Model Law).

The argument of the majority, that a reason for applying the law of the seat as a default rule in the absence of a(n express or implied) choice is giving effect to commercial purpose, is an important argument as well, as ultimately parties chose a neutral seat of arbitration that is expected to be supportive of arbitration. When parties chose London as the seat of arbitration, like in Enka, they might consider inter alia that English courts are known for adopting a pro-arbitration approach and are most likely to grant anti-suit injunctions in support of arbitration by precluding the enjoined party to continue court proceedings in breach of the arbitration agreement. The ultimate purpose is for the parties’ commercial agreement to arbitrate to be upheld and parallel litigation prevented.

At the second stage of the inquiry there is an implied choice of the law applicable to the arbitration agreement in favour of the law applicable to the main contract (as opposed to the seat, favoured by the Court of Appeal at this stage). The approach of the Supreme Court is sensible, as it gives prevalence to the intention and choice of the parties, in a process of contractual interpretation. On the other hand, the process of determining at the third stage which is the system of law with which the arbitration agreement has its closest connection is different in nature, as it involves the application of a rule of law in an objective process applied irrespective of the parties’ intention.

Applying the above principles to the case at hand, the majority first held, contrary to the Court of Appeal, that the parties have not expressly or impliedly chosen a law to govern the main agreement. Given this, the Supreme Court moved to the third stage of the inquiry and applying the default rule it concluded that the arbitration agreement is governed by the English law, as this is the system of law with which the arbitration agreement is most closely connected, the seat being London.

The analysis of the proper law of the arbitration agreement, even if theoretically fascinating by itself, carries practical consequences, which, in this case refer to the inquiry of whether there has been a breach of the arbitration agreement and whether it is just and convenient to restrain that breach by the grant of anti-suit injunction. As concluded by the Supreme Court, this is to be done under English law. If the Russian law would have governed the arbitration agreement, the English court would have had to determine if under the laws of Russia the arbitration agreement is valid and if the claim by Chubb Russia falls within its scope.

It appears that the parties engaged in extensive submissions on the principles and authorities guiding the determination of the proper law of the arbitration agreement and lost sight of the purpose of these submissions which ultimately was whether the Russian court proceedings were initiated by Chubb Russia in breach of the arbitration agreement and if so, whether anti-suit injunction was warranted to prevent it from pursuing the court proceedings allegedly in breach of the arbitration agreement or not. Chubb Russia did put forward that the arbitration agreement is governed by the Russian law hence the Russian courts are best placed to decide whether or not the arbitration agreement applies to the court claim in Russia, and, as a matter of comity or discretion, the English courts ought not to interfere with the proceedings by granting the requested injunction. However, it did not put forward an alternative case for the English law governing the arbitration agreement and hence it did not dispute that it was legitimate for the Court of Appeal to exercise discretion whether to grant anti-suit injunction.

The practical take, with the risk of stating the obvious, is that the parties should treat the dispute resolution clause carefully and make an informed decision as to the consequences of choosing or not an applicable law of the arbitration agreement. This also includes a weighted choice of the seat of arbitration, in particular when the law governing the contract and the law at the seat do not converge.

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The Interplay of Insolvency Law and Arbitration in Thailand

Sat, 2020-10-10 23:00

The economic downturn in Thailand has resulted in increased pressure on Thai debtors. Several banks have forecasted Thailand’s gross domestic product (GDP) to contract 8.1 percent in 2020 due to a more severe than expected COVID-19 pandemic and the containment measures implemented by governments in many countries including Thailand.

Creditors who are party to an arbitration agreement with a Thai debtor will need to consider the financial status of the Thai debtor and determine whether to pursue their claims by way of arbitration or insolvency proceedings in the local courts – or whether both options can be pursued in parallel – to maximise their chances of recovery.

 

Insolvency Proceedings in Thailand

Thailand’s Bankruptcy Act allows a creditor to initiate a bankruptcy action when the debtor is (a) insolvent; (b) indebted to one or several plaintiffs for a total of at least THB 1 million (if the debtor is a natural person) or THB 2 million (if the debtor is a juristic person); or (c) unable to meet current or future payment obligations.1)Bankruptcy Act, Section 9. jQuery("#footnote_plugin_tooltip_5921_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5921_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Where the debtor is a juristic person (e.g. a company), the insolvency petition seeks the debtor’s liquidation—that is, to bring its business to an end and distribute its assets to the relevant claimants. Because the debtor’s assets will be distributed among all creditors, the creditor who files the insolvency petition is deemed to be acting not only on its behalf, but on behalf of the other creditors as well.

 

Interaction Between Arbitration and Insolvency Proceedings

Unlike the creditor who files an insolvency petition in court, a claimant in arbitration seeks to protect and secure only its own interests.

Arbitration and local insolvency proceedings are not mutually exclusive. However, when a creditor has moved ahead with arbitral proceedings (whether in Thailand or otherwise), after which an insolvency petition is filed against the Thai debtor locally, a number of questions are raised:

  • Must the creditor who commenced arbitration stop the arbitral proceedings and join the insolvency proceedings or business rehabilitation process?
  • Should the creditor submit a debt repayment application in the insolvency process while the arbitral proceedings are ongoing?
  • Would the arbitral award be enforceable during the debtor’s business rehabilitation process?

To answer these questions, and explain the proper application of insolvency legislation in the context of arbitration, I discuss two judgments of the Thai Supreme Court below.

 

PTT PLC. v. Nacap Asia Pacific Thailand Co., Ltd.

In PTT PLC. v. Nacap Asia Pacific Thailand Co., Ltd. (case no. 7082-70832558), Nacap Asia Pacific Thailand Co. Ltd (“Nacap“) was placed in official receivership while PTT PLC (“PTT“) was pursuing arbitration against Nacap outside Thailand. PTT submitted a debt repayment application but also requested the official receiver to delay examination of PTT’s debt repayment application until the arbitration award had been granted.

In its ruling, the Supreme Court stated that section 12 of the Arbitration Act stipulates that an arbitration agreement and the appointment of an arbitral tribunal remain valid even if one of the parties is under official receivership. However, the Supreme Court ruled that there is no exception to the requirement that a creditor has to submit a debt repayment application in the insolvency process; rather, the official receiver has a duty under section 105 of the Bankruptcy Act to call any creditor, debtor, or other person for interviews or to order them to turn over documents evidencing the debt. The Supreme Court therefore did not accept PTT’s argument that the ongoing arbitration prevented examination of its debt. In its view, the official receiver had a statutory duty to examine the debts and report them to the court, and there was no need to delay the examination until the arbitral proceedings were concluded since the examination would not cause any disadvantage to PTT as a creditor.

This ruling means that the usual time limits for the submission of debt repayment applications would apply to all creditors, including those who have a pending arbitration against the debtor at the time the debtor is placed into official receivership:2)Bankruptcy Act, Section 91. jQuery("#footnote_plugin_tooltip_5921_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5921_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

  • Local creditors must submit their debt repayment application to the official receiver within two months from the date of dissemination of the court order for the debtor to be placed into official receivership.
  • Foreign creditors living outside Thailand will be given an additional two months (i.e. a total of four months) to submit their debt repayment application.

It is important for creditors to note the above timelines – the failure to submit a debt repayment application within the prescribed period will prevent a creditor from sharing in the distribution of the debtor’s assets and from voting at the creditors’ meeting.

 

TPI Polene PLC. v. HC Trading International Inc. 

In TPI Polene PLC. v. HC Trading International Inc. (case no. 13535-135362556), TPI Polene PLC (“TPI Polene“) was in business rehabilitation when the company entered into an agreement for the sale and purchase of goods with HC Trading International Inc (“HC Trading“). A dispute arose over the agreement, and since there was an arbitration clause, HC Trading (the creditor) pursued an arbitration against TPI Polene (the debtor) in Singapore. Although the creditor knew that the debtor’s business was under rehabilitation, the creditor failed to petition the court for approval to proceed with the arbitration.

The Supreme Court ruled that section 90/12 (4) of the Bankruptcy Act3)The law on business rehabilitation is also contained in the Bankruptcy Act. The Bankruptcy Court has jurisdiction over both business rehabilitation and bankruptcy matters in Thailand. jQuery("#footnote_plugin_tooltip_5921_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5921_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); stipulates that any court or arbitration proceedings must be suspended during business rehabilitation, unless the court orders otherwise. This means that a creditor cannot pursue other court or arbitration proceedings unless the court which has oversight of the business rehabilitation case agrees. Section 90/12 also states that any court judgment or arbitration award that is obtained contrary to that requirement, i.e. pursuant to court or arbitration proceedings that were continued without the approval of the court, will not be enforceable.

The Supreme Court noted that while the foreign arbitral award could not be revoked, the enforcement of the award against the debtor in Thailand must comply with the business rehabilitation sections in the Bankruptcy Act to be fair to all creditors. Since HC Trading failed to obtain the court’s permission to proceed with arbitration during the debtor’s business rehabilitation, enforcement of the arbitral award against the debtor’s assets would be contrary to public policy. Hence, the Supreme Court refused to enforce the award under sections 43 and 44 of the Arbitration Act.4)Section 43 of Thailand’s Arbitration Act states that the court can refuse to enforce the arbitral award under six different conditions. Section 44 states that an arbitral award that is contrary to Thailand’s public policy is not enforceable. jQuery("#footnote_plugin_tooltip_5921_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5921_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

This case highlights that during the process of business rehabilitation, the commencement or continuation of arbitral proceedings needs to be permitted by the court in the business rehabilitation case if the creditor plans to enforce the arbitral award against the debtor’s assets in Thailand. Thus, Thailand’s insolvency legislation should be taken into account and complied with when a creditor proceeds with such an arbitral case, even if outside Thailand.

 

Conclusion

In times of economic downturn such as the present, the interaction between insolvency law and arbitration proceedings is crucial to note, particularly for creditors pursuing arbitration proceedings against financially troubled debtors that have assets in Thailand. Local insolvency law—including business rehabilitation regulations—merit the creditor’s close attention, especially the law on the submission of debt repayment applications, petitions to commence or continue arbitration proceedings, and the enforcement of arbitral awards in the Thai Bankruptcy Court. Focusing solely on the arbitration would be a big mistake, as the creditor may overlook the important role of local insolvency law and its impact on the creditor’s prospects of recovery against the debtor.

References   [ + ]

1. ↑ Bankruptcy Act, Section 9. 2. ↑ Bankruptcy Act, Section 91. 3. ↑ The law on business rehabilitation is also contained in the Bankruptcy Act. The Bankruptcy Court has jurisdiction over both business rehabilitation and bankruptcy matters in Thailand. 4. ↑ Section 43 of Thailand’s Arbitration Act states that the court can refuse to enforce the arbitral award under six different conditions. Section 44 states that an arbitral award that is contrary to Thailand’s public policy is not enforceable. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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When is the Arbitrator Bound to Apply the CISG?

Sat, 2020-10-10 00:00

The relationship between arbitration and the United Nations Convention on Contracts for the International Sale of Goods (“CISG” or “Convention”) is not a clear one, and the question of when an arbitrator is bound to apply the CISG is still not answered with clarity either by scholars or by practitioners. At a recent conference organized to celebrate the 40th anniversary of the CISG, Marco Torsello argued that the arbitrators should apply the CISG, on the basis of art. 1(1)(b) CISG, when conflict rules lead to the application of the law of a Contracting State. Contrary to this view, I consider that the arbitrator’s duty to apply the CISG rather derives from the party autonomy. I will briefly address below the context, diverging views in practice and then put forward my analysis of the issue.

 

Scholarly Position: Majority v. Minority View

Most scholars adopt the view that the CISG does not bind arbitrators. According to Ulrich Magnus, whose opinion reflects the predominant understanding in scholarly writings, for interpreting the Convention’s scope of applicability, one should resort to the Vienna Convention on the Law of Treaties (“VCLT”).1)MAGNUS, Ulrich. Tracing Methodology in the CISG: Dogmatic Foundations. In: JANSSEN, André; MEYER, Olaf. CISG Methodology. Munich: Sellier, 2009, p. 46. jQuery("#footnote_plugin_tooltip_8309_1").tooltip({ tip: "#footnote_plugin_tooltip_text_8309_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); According to Article 26 of the VCLT, since the treaties only oblige the parties that have adhered to them, it is only the Contracting States and their organs that are bound by the treaties’ provisions. Consequently, as arbitrators are not state organs, they are not bound by the CISG, including its Article 1, unless the parties have manifested their intention to apply it.

While most scholars agree with this view, some authors are of the understanding that arbitral tribunals may have to apply the Convention as a consequence of Article 1(1)(b) CISG. According to Article 1(1)(b) CISG, the Convention applies to contracts of sale of goods between parties whose places of business are in different States when the rules of private international law lead to the application of the law of a Contracting State. These authors treat the rule of party autonomy as a rule of conflict and sustain that, where parties have chosen the law of a Contracting State as the governing substantive law, the CISG – as an integral part of the chosen domestic law – should apply. In fact, the applicability of the CISG can only be avoided if the parties expressly provide so. However, these authors do not explain clearly the reasoning behind the ex officio applicability of Article 1(1)(b) of the Convention.

 

Analysis of Arbitral Awards: Three Different Approaches Dominate the Landscape

An analysis of arbitral awards shows that the Convention was applied, but on different grounds. The awards can be divided into three main groups: the first, in which the arbitral tribunal applied the Convention ex officio, based on Article 1 of the CISG; the second, a hybrid approach in which the arbitral tribunal applied the Convention due to an implicit choice of the parties, but also in reliance on Article 1 of the CISG; the third, in which the awards justified the applicability of the Convention for reasons other than Article 1 CISG.

In the first category, arbitral tribunals applied the Convention due to Article 1(1)(a) or 1(1)(b) CISG the same way state courts do. In the ICC Case n. 8128 (Chemical fertilizer case) and in the ICC Case n. 7197 (Failure to open letter of credit and penalty clause case), the parties had not chosen an applicable substantive law, and, in order to solve the conflict of laws issue, the arbitrators evoked Article 1 CISG without mentioning the reasons why the latter is being analysed in the first place.

A slightly different approach is taken by arbitral tribunals when parties have expressly chosen the law of a Contracting State to govern the substantive issues of their contract.

In the ICC Case n. 8324 (Magnesium case), ICC Case n. 10377 (Textile product machines case) of 2002 and in the ICC Case n. 6653 (Steel bars case), it is mentioned that the choice of  law of a Contracting State entails the applicability of the CISG as such choice constitutes an implicit choice of the CISG. These awards highlight that party autonomy is a connecting factor in international arbitration, fulfilling the requirements for the applicability of the CISG set out in Article 1(1)(b) CISG – namely, that the applicable rules of private international law lead to the application of the law of a Contracting State.

For example, in the arbitral award ICC Arbitration Case n. 11333 of 2002 (Machine case), the parties had chosen French law to govern their contract. The arbitral tribunal held that the Convention should be applied, since it was an integral part of French contractual law that addressed issues of international buying and selling of goods. The tribunal further explained that, in this case, the Convention would apply as a consequence of Art. 1(1)(b) of the Convention, since party autonomy fulfilled the requirements of Art. 1(1)(b) CISG:

The principle of party autonomy, according to which the parties may freely choose the law governing their relationship, is without doubt part of ‘the rules of private international law’ referred to in Art. 1 (1)(b) of the CISG […] Accordingly, unless the parties agreed to exclude the application of the CISG, the reference made to ‘French law’ in the Agreement leads to the application of the CISG, which is, since 1 January 1988, the French law of international sales of goods.

Similarly, this reasoning was adopted in Italy 22 February 2008 Milan Chamber of Arbitration Case No. 5706, in X v. Y, Award, CAM Case No. 13209, 1 December 2010 and in ICC Case n. 7660.

The third group of arbitral awards does not resort to Article 1 of the CISG for justifying the applicability of the CISG. Those applied the CISG to the extent that the Convention prevails over non-harmonized domestic law.

In the Arbitration proceeding 95/2004 held in Russia in May 2005, the arbitral tribunal applied the CISG instead of non-harmonized domestic Russian law since the CISG was part of the Russian law and should be applied with priority. The non-harmonized Russian law would apply in a subsidiary manner in accordance with Article 7(2) CISG.

Similarly, in the ICC Case 9187 the CISG was applied with priority over non-harmonized domestic law, with the tribunal recognizing that the CISG was part of the domestic law system chosen by the parties:

As a rule, Swiss law encompasses every international convention to which Switzerland is a party. Since Switzerland is a party to the CISG, the latter, consequently, is a part of Swiss law. Therefore, should contracting parties wish to exclude the application of CISG to a contract, the parties must explicitly state that CISG does not apply to the contract, or alternatively, that only Swiss domestic law is applicable to the Contract.

 

My View on the Matter: Arbitrator’s Duty to Apply the CISG Can Only Stem from Party Autonomy

In my view, the correct interpretation is that the arbitrator’s duty to apply the CISG derives from the party autonomy. Thus, when parties choose the law of a Contracting State as the applicable law, the arbitrator must apply the CISG as an implicit choice of law and not, as many scholars and arbitral awards have sustained, as a consequence of Article 1 of the CISG.

As such, the CISG consists in the segment of the domestic law designed to regulate contracts for the international sales of goods. Since the CISG would apply primarily to the contract for the international buying and selling of goods, the choice of the law of a Contracting State is to be interpreted as an implicit choice of the CISG.

The arbitrator generally must apply a choice of law made by the parties, otherwise there is a risk that the enforcement of the award could be refused as per Article V(1)(d) of the New York Convention, on the basis of excess of authority or the irregularity of the procedure that was not in accordance with the parties’ agreement.2)MOSES, Margaret, L. The principles and practice of international commercial arbitration. Cambridge: Cambridge University Press, 2017. p. 67. jQuery("#footnote_plugin_tooltip_8309_2").tooltip({ tip: "#footnote_plugin_tooltip_text_8309_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Therefore, where parties have chosen the law of a Contracting State as the governing substantive law, the arbitral tribunal must enforce the parties’ will in applying the CISG. Otherwise, this could serve as a reason to refuse enforcement of the award due to a procedural irregularity.

Thus, it is not necessary to rely on Article 1 CISG to justify the applicability of the Convention to arbitral awards.

References   [ + ]

1. ↑ MAGNUS, Ulrich. Tracing Methodology in the CISG: Dogmatic Foundations. In: JANSSEN, André; MEYER, Olaf. CISG Methodology. Munich: Sellier, 2009, p. 46. 2. ↑ MOSES, Margaret, L. The principles and practice of international commercial arbitration. Cambridge: Cambridge University Press, 2017. p. 67. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Too Close For Comfort: Arbitrator Independence After Eiser

Fri, 2020-10-09 00:00

In its decision of 11 June 2020, an ICSID Annulment Committee annulled an award in Eiser and Energia Solar Luxembourg v. Spain, ICSID Case No. ARB/13/36. It did so on the grounds that the arbitrator appointed by the investors, Stanimir Alexandrov, and his former law firm, Sidley Austin, had worked so closely and frequently with the claimant investors’ damages expert Carlos Lapuerta and his firm, the Brattle Group, that a reasonable outsider “would find a manifest appearance of bias” on the facts (at para. 229). The committee further concluded that Dr Alexandrov had failed in his duty to disclose the relationship. It held that had the other members of the tribunal known of the relationship, this would have altered their perception of Dr Alexandrov’s statements and analysis – including during the tribunal’s deliberations (at para. 250). The supposed compromising “closeness” between an arbitrator and an expert witness in Eiser highlights the increased sensitivities of disclosure and conflicts in international arbitration.

The decision has attracted much attention, including on this blog. It shows that an arbitrator’s professional relationships with third parties and failure to disclose those relationships may have a drastic effect on proceedings, resulting even in the annulment of an award.

Yet, Spain did not specify any act by Dr Alexandrov that had evinced bias or otherwise been improper. The issue was narrowly his failure to make disclosure. The committee found that (i) the arbitrator’s failure to disclose his ties with the Brattle Group had deprived Spain of the possibility to challenge him for lack of impartiality and led to the improper constitution of the tribunal; and (ii) that failure of disclosure had resulted in a serious departure from a fundamental rule of procedure.

 

The Problem of Conflict of Interest in Arbitration

An outsider may be forgiven for wondering what the fuss is about. After all, a party chooses and pays an arbitrator to resolve its dispute. Surely, this creates an inevitable conflict of interest. Moreover, why would one choose an adjudicator, unless it were someone one already knew and liked? Yet arbitration practitioners will explain that a party-appointed arbitrator will rise above such considerations to act with impeccable fairness. Perhaps it is this already delicate relationship between an appointing party and its arbitrator that requires users to monitor and minimize extraneous conflicts of interest with special care.

Those categories of independence and conflict of interest are, however, neither straightforward nor fixed. A conflict of interest may be defined as “a situation in which some interest of a person has a tendency to interfere with the proper exercise of his judgment in another’s behalf.”1)M. Davis, Conflict of Interest, p. 589. jQuery("#footnote_plugin_tooltip_4913_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4913_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As a textbook definition this is unexceptionable, yet it refers loosely to a “tendency” and leaves open in what circumstances such a situation arises. Conflict of interest in arbitration depends heavily on specific facts and the judgment and perception of users. It is not easy to devise widely applicable guidelines. The main mechanism for identifying conflicts of interest is spontaneous disclosure by arbitrators. In recent years, a laudable desire for transparency and consistency has led to protocols that promote greater disclosure and that identify and formalize a wide range of possible conflicts.

The leading instrument is the IBA Guidelines on Conflicts of Interest, a non-binding soft law instrument that sets out standards for good international practice. The Eiser decision arguably shows up their limitations, in that they do not expressly address the relationship between arbitrators and expert witnesses. Additionally, institutions increasingly set their own standards. The ICC expanded the scope of disclosure by prospective arbitrators beyond that of the IBA Guidelines. For example, under section 3.1.2 of Part II of the IBA Guidelines, the following circumstances fall under the Orange List of the traffic light classification of arbitrator relationships: “The arbitrator has, within the past three years, served as counsel against one of the parties, or an affiliate of one of the parties, in an unrelated matter”. An Orange List classification identifies a disclosable situation that may give rise to doubts as to the arbitrator’s impartiality or independence. In contrast, the ICC Note to Parties and Arbitral Tribunals, 1 January 2019, at paragraph 23, largely replicates the provision but omits the time limit, suggesting a longer reference period.

Of course, the mere disclosure of a relationship does not concede the existence of a conflict of interest. However, the two cannot be neatly separated. There is no good reason to disclose a relationship, whether personal or professional, unless it is potentially the source of a conflict of interest. The wider the scope of disclosure, the wider the scope of conflicts must be. By requiring broader disclosure arbitration institutions make users more suspicious. Relationships that were previously uncontroversial may now amount to conflicts.

 

The Danger of Abuse

Regrettably, evolving standards and a proper concern for transparency are open to abuse by unscrupulous counsel who challenge arbitrators to deny their opponents their chosen arbitrator, delay proceedings, and intimidate the tribunal. Challenges are now a recognized part of what Sam Luttrell calls the “Black Arts”,2)S. Luttrell, Bias Challenges in International Commercial Arbitration: The Need for a ‘Real Danger’ Test, p. 276. jQuery("#footnote_plugin_tooltip_4913_2").tooltip({ tip: "#footnote_plugin_tooltip_text_4913_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); the use of procedural manoeuvres not for their legitimate ends but purely to secure some tactical advantage. If you aim to disqualify an arbitrator, it is much easier to do so on grounds of a conflict of interest at the outset than bias evinced during the proceedings. Commentators may argue about the precise legal standard for proving bias, but a party will always have to identify some conduct by the arbitrator that strongly and plausibly suggests it.

Personal and professional associations are a particularly fertile ground for challenges. Has the arbitrator worked with opposing counsel? How well do they know each other? To show a conflict of interest it is sometimes enough to pick out a state of affairs in the arbitrator’s environment, suggest that it falls into one of the opaque categories of the Orange List of the IBA Guidelines and write four or five angry letters, only for the arbitrator to cave in and withdraw quietly before the appointment is even confirmed. Be warned, though. Some arbitrators will fight back hard, and an unsuccessful challenge tarnishes the applicant’s credibility.

 

The Challenge of Rethinking Arbitrators’ Relationships

The combination of expanded disclosure and focus on arbitrators’ personal and professional contacts has thrown into relief relationships that might previously have been overlooked or not yet existed in that form. Eiser is a case in point. Expert witnesses, especially damages experts, now perform a vital role in arbitration. They have moved far beyond the accountant who put the figures in some sort of order, or the delay and disruption expert who analysed the course of a construction project. Damages experts now develop and advocate legally sophisticated models, which, in big cases, such as the Yukos arbitrations, attract expert commentary of their own. Of course, experts’ overriding obligation is to the tribunal and not the appointing party, still less counsel. It would be unfair to dismiss them as “hired guns”, but they work with counsel to contribute to as good a case as can responsibly be presented.

Next, close personal relationships may come under scrutiny. An arbitrator’s “close personal friendship” with a counsel or a party already falls under section 3.3.6 the Orange List and is thus disclosable. Similarly, the SIAC Code of Ethics for an Arbitrator, ICC Note to the Parties and Arbitral Tribunals, and LCIA Notes for Arbitrators  recognize personal relationships as possibly compromising an arbitrator’s independence. Given the current obsession with detailed disclosure, it is very much to be hoped that arbitrators’ private lives will not become the subject of seedy and intrusive fishing expeditions by counsel looking to dredge up a scandal and explore close friendships and relationships.

Finally, much has been made of arbitrators’ relationships with third-party funders. In its report, the ICCA-Queen Mary Task Force on Third-Party Funding recommended that parties disclose funding arrangements in part because this would allow arbitrators to assess any conflict of interest towards the funder.

These conflicts of interest are less remarkable than is sometimes suggested. Arbitrators may have a role at a third-party funder. For example, they may act as advisors. Arbitrators may also in their role as counsel advise funders on the merits of claims. These professional links can be assimilated to well-known categories of conflict or potential conflict. An arbitrator’s role on the board of a funder may be similar to a position on an advisory board of another sort of business. Advising a funder on a claim is a lawyer-client relationship. There are established practices for dealing with such relationships in disclosure.

When and where a conflict of interest will arise or an arbitrator’s independence be compromised is not susceptible to neat definition. Rather, it will depend on judging and balancing individual circumstances. This applies particularly to the shifting field of arbitrators’ relationships. As the decision in Eiser brought home, excessive “closeness” can arise in circumstances that would have surprised an earlier generation of practitioner. It is therefore imperative that those bodies responsible for deciding challenges to an arbitrator – whether institutions or courts – will make the necessary effort to publish reasoned and principled decisions that will clarify when close is too close for comfort. Otherwise there is a risk of uncertainty on a foundational matter of arbitration, the appointment of a tribunal, and yet further scope for abusive challenge applications.

References   [ + ]

1. ↑ M. Davis, Conflict of Interest, p. 589. 2. ↑ S. Luttrell, Bias Challenges in International Commercial Arbitration: The Need for a ‘Real Danger’ Test, p. 276. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Contents of the ASA Bulletin, Volume 38, Issue 3 (September 2020)

Thu, 2020-10-08 23:00

We are happy to report that the latest issue of the ASA Bulletin is now available and includes the following articles and cases:

 

ARTICLES

Felix DASSER, ASA – Swiss Home of Arbitration

In his message as ASA President, Felix DASSER addresses the future of Swiss arbitration and the initiatives recently launched by ASA to reinforce the attractivity of the Swiss arbitration market.

 

Laurent LEVY – In Memoriam, Professor François Perret

In his In Memoriam for Professor François Perret, who sadly left us earlier this year, Laurent LEVY retraces the work and life of this eminent academic and arbitrator.

 

Philipp HABEGGER – Das Parlament verabschiedet die Revision von Kapitel 12 IPRG mit einem Feinschliff

In June 2020 the Swiss Parliament enacted the ‘light touch’ revision of chapter 12 of the Private International Act on international arbitration which will enter into force on 1 January 2021. Philipp HABEGGER presents the amendments introduced by this revision.

 

Niels SCHIERSING – Earn-Out Disputes – An Introduction

Niels SCHIERSING, the author of a recently published monograph, Earn-Out Disputes, that comprehensively deals with the substantive and procedural issues relating to earn-out disputes, provides an introduction to this topic to the readers of the ASA Bulletin.

 

Rajat SINHA, Vivek KRISHNANI – Exposing Asymmetry to New Challenges: Status of UDCs under Art. 18 of the Model Law

Rajat SINHA and Vivek KRISHNANI examine the validity of unilateral dispute resolution clauses under the principle of equal treatment of the parties in arbitration proceedings enshrined in Article 18 of the UNCITRAL Model Law and propose a three-step test to assist courts, arbitral tribunals and counsel address this issue in practice.

 

Marion PARIS, Anne Laure BANDLE – Arbitrage contemporain à Art Basel?

Internationally renowned art fair Art Basel adopted a few years ago a disciplinary procedure, the “Legal Compliance Process”, that applies to exhibitors suspected of illicit activities. Marion PARIS and Anne Laure BANDLE explore whether this disciplinary procedure could be supplemented or even replaced by arbitration.

 

Regis BONNAN – On the Nationality and Multi-Nationality of the Arbitrator: Old and New Issues of Formal Neutrality

Regis BONNAN provides a critical analysis of the national and institutional rules pertaining to the nationality and examines the policy considerations behind the importance attached to nationality in the selection of the arbitrators and their consequences on multi-nationality.

 

Maël DESCHAMPS – ICSID Award Annulled for Arbitrator’s Failure to Disclose Close Ties with Party Expert. Note on Eiser v. Kingdom of Spain

Maël DESCHAMPS reports on the recent decision of an ICSID ad hoc committee to annul the award rendered in the Eiser v. Kingdom of Spain arbitration on the ground that one of the arbitrators lacked independence and impartiality for having failed to disclose his ties with the expert appointed by the claimants in the arbitration.

 

Laurent HIRSCH – Odd Arbitration Clause, Reflecting Disagreement, Held to Be Inexistent. Note on the Judgment of the Swiss Federal Supreme Court of 18 May 2020

Laurent HIRSCH discusses a recent decision of the Swiss Federal Supreme Court rendered on 18 May 2020 (4A_418/2019) concerning the interpretation of an arbitration clause which was found to be invalid.

 

DECISIONS OF THE SWISS FEDERAL SUPREME COURT AND CANTONAL COURTS

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‘International Arbitration and the COVID-19 Revolution’ (Part 1 of 2)

Thu, 2020-10-08 01:39

The COVID-19 pandemic has exerted an unprecedented impact on individuals, entities, businesses, and states. National court systems and alternative dispute resolution regimes have also been severely affected. Yet, international arbitration has demonstrated itself to be both adaptable and resilient throughout the crisis and emerged more strongly positioned as a method of dispute resolution for a number of reasons that are explored in the book International Arbitration and the COVID-19 Revolution, which has just been published by Kluwer in online form here, and which will be available in hardcopy in the coming weeks.

This is the first of a two-part blog post series and highlights Chapters 1 through 11, which cover primarily conceptual, analytical, procedural, and empirical aspects of international arbitration in light of the pandemic, including the necessity of putting in place proper dispute avoidance, management and resolution policies, arbitration initiation, arbitrator appointments, analytical legal frameworks of arbitration procedure, remote hearings, remote advocacy, e-filings, digital awards, challenges to remote arbitration awards, and third-party funding mechanisms. Part 2 (forthcoming next week) concerns Chapters 12 through 17, which are sector-specific and deal with the aviation, construction, energy, finance, technology, media and telecommunications, and insurance industries.

We could not have published International Arbitration and the COVID-19 Revolution in such a timely manner without our excellent team of authors. We have been fortunate to bring together 31 leading international arbitration practitioners who act as counsel or arbitrators, serve in arbitral institutions and at third-party funders or work in-house, and thus have first-hand knowledge about the impact of the COVID-19 pandemic on international arbitration from these various angles.

We explore the COVID-19 Revolution and the changing nature of international arbitration in this new era of added complexity and digital transformation. In doing so, we hope to provide useful frameworks and tools to promote enhanced adaptability and efficiency in international arbitration moving forward in relation to technology, process, and procedure. We also aim for the book to be a practical and helpful compendium as a practitioner’s guide, as well as a thought-provoking and insightful resource for academics, researchers, in-house counsel, and industry experts with an interest in dispute resolution. We hope it brings together the arbitration community in its endeavor to transform international arbitration into an even more sustainable form of dispute settlement.

We analyse the emerging global positioning of arbitration as a regime that is well-equipped to address the complex disputes arising from the pandemic by ensuring timelier and business-oriented solutions needed in times of crisis. This is done by highlighting many of the issues and areas of procedural uncertainty that need work in response to the pandemic and beyond. The book also addresses many of the responses taken throughout the COVID-19 Revolution.

In ‘Dispute Prevention, Management and Resolution in Times of Crisis Between Tradition and Innovation: The COVID-19 Catalytic Crisis’, Mohamed S. Abdel Wahab of Zulficar & Partners begins by analysing the theoretical framework for crisis management. Abdel Wahab construes the pandemic as a ‘catalytic crisis’ for the traditional procedural framework of dispute resolution that is being reformed through the COVID-19 Revolution. By adopting an interdisciplinary approach, Abdel Wahab applies crisis management theory to dispute prevention, management, and resolution. This provides indelible advice to the arbitration community for better resolving disputes that arise during the pandemic. He also notes that the disruption experienced by national courts during the early weeks of the pandemic led to a surge in the number of arbitration cases because of the adaptability and flexibility of arbitration as an efficient means of dispute resolution.

Similarly, in ‘Initiating and Administering Arbitration Remotely’, Patricia L. Shaughnessy of Stockholm University highlights many of the positive changes brought about by the COVID-19 Revolution, based on a survey of nineteen arbitral institutions. These arbitral institutions have actively responded to the disruptive consequences resulting from the pandemic by adopting procedures to allow enhanced remote administration of cases and by implementing secure online communication and information sharing platforms. Interesting findings from the survey also help identify key trends discussed in later chapters, such as electronic awards and signatures, and driving efficiency through technology and digitalisation.

Catherine A. Rogers and Fahira Brodlija of Arbitrator Intelligence uncover the difficulties faced by arbitral institutions in ‘Arbitrator Appointments in the Age of COVID-19’ from the specific angle of arbitrator appointments. Indeed, the fact that arbitration proceedings are likely to be conducted remotely may require parties and counsel to consider specific skill sets for prospective arbitrators. Issues such as the lack of information about arbitrators is a current problem that has significant consequences. The contributors propose the use of online tools to fill this information gap. They also make a series of recommendations around the geographical limitations and increased connectivity in remote arbitration, such as strengthening the community by means of encouraging diversity amongst arbitrators.

A central issue still needs to be answered. Even if remote arbitration is beneficial, are there any rules regulating this practice? In ‘The Legal Framework of Remote Hearings’, Maxi Scherer of WilmerHale and Queen Mary University of London defines related concepts and lays out the legal basis for remote hearings, while providing guidance on whether or not to hold a hearing remotely in different scenarios and based on different considerations. For example, she considers those instances where one party is in favour of a remote hearing, and the other is not. This chapter provides guidance for arbitrators on how to engage in a balancing test when faced with such decision-making dilemmas that fall under their discretion.

Delving into procedural details, ‘Conducting Remote Hearings: Issues of Planning, Preparation and Sample Procedural Orders’ by Niuscha Bassiri of Hanotiau & van den Berg analyses the practical challenges arising out of the planning and preparation for remote hearings. This chapter provides arbitral tribunals, counsel, parties, and witnesses with useful and practical advice relating to virtual and digital aspects of remote hearings. Bassiri conceptualises the factors that hearing participants need to consider and proposes a sample procedural order for remote hearings which offers different variants for arbitration practitioners to choose from, together with insightful commentary regarding each procedural and practical consideration.

Focusing on advocacy, ‘Remote Advocacy, Witness Preparation & Cross-Examination: Practical Tips & Challenges’ by Wendy Miles of Twenty Essex addresses the challenges that may arise in written and oral submissions, as well as critical considerations relating to evidence. Miles offers useful tips to conduct effective advocacy remotely in light of the COVID-19 Revolution and argues that remote arbitration proceedings ‘herald an opportunity for a different approach to arbitration and advocacy’, which will save parties in time, cost, and complexity by transforming arbitration into a modernised dispute settlement alternative.

Readers will be wondering whether remote hearings will remain the ‘new normal’ in international arbitration even in the post-pandemic era. ‘Empirical Study of Experiences with Remote Hearings: A Survey of Users’ Views’ by Gary Born of WilmerHale, Anneliese Day QC of Fountain Court Chambers and Hafez Virjee of Delos Dispute Resolution considers this question from an empirical point of view by surveying over 200 arbitration participants and providers. They observe one clear trend from the survey, which is the significant increase in the fully remote conduct of case management type hearings as an effect of the COVID-19 Revolution. Their study also illustrates that arbitration participants may remain cautious about fully remote hearings, particularly in cases with numerous witnesses and experts. However, their findings show that many participants in the study were more willing to propose fully remote hearings than was previously the case.

With the high level of digital penetration that the COVID-19 Revolution has brought with it, it is conceivable that all documents produced in international arbitration proceedings will be digitised in the future. This raises questions that are considered by Erik Schäfer of Cohausz & Florack in ‘E-Signature of Arbitral Awards’ regarding the legitimacy of digital awards. This chapter explores not only the legal framework governing digital signatures but also their feasibility. Schäfer identifies the technical hurdles that prevent the arbitration community from adopting digital formats of arbitral awards and calls for joint efforts from arbitration institutions and associations in light of the COVID-19 Revolution to establish a body to implement virtual facilities for the secure use of digital tools and to create applicable standards.

Given the myriad legal and practical uncertainties associated with remote arbitration, ‘Challenges to Remote Arbitration Awards in Setting Aside and Enforcement Proceeding’ by Erica Stein of Dechert LLP explores the possible grounds that an award debtor may be able to rely on when challenging an arbitral award that was made in remote proceedings. Remote hearings may be said to violate due process rights and exacerbate inequality between parties, which might constitute grounds to vacate an award. Stein analyses these issues comprehensively and discusses whether remote hearings will remain the norm in a post-pandemic world, considering the impact they may have on participants’ rights.

In an era of reduced liquidity, the financing of disputes becomes an even more acute issue. In ‘Third-Party Funding and COVID-19’, Dana MacGrath, Cheng-Yee Khong, Annie Lespérance, and Nilufar Hossain of Omni Bridgeway argue that demand from outside financiers will help transform arbitration ‘from an expense into a cash-generating asset’ providing opportunities to substantially recover assets without undermining liquidity along the way. During the first half of 2020, business-specific sectors that were heavily affected by the pandemic increasingly sought out third-party funding for their claims, for example against insurers, as explored in ‘COVID-19 and Insurance Disputes’, and there is an increase in portfolio funding applications from law firms and corporations. This is a trend that is expected to continue, especially through a second wave of the pandemic and the economic recovery thereafter.

‘The COVID-19 Revolution: The Future of International Arbitration Is Not over Yet’ brings many of the aforementioned points together. Ema Vidak Gojković of King & Spalding and Michael McIlwrath of Baker Hughes highlight how difficult, but also how meaningfully transformative, the COVID-19 Revolution has been, and that all aspects of commerce, including international arbitration, will never be the same. They assess the fundamental and necessary adaptations occurring in the field of arbitration, noting that many of those changes were already on their way. Changes relating to the accessibility of the arbitral practice, the selection of arbitrators, and the modalities of conducting cases will continuously evolve throughout this period of adaptation.

The Appendix on ‘Conducting Remote Hearings Against a Party’s Wishes: Overview of Arbitration Laws of Main Arbitral Seats’ by Amina Afifi of Debevoise & Plimpton neatly complements these chapters.

Chapters 1 through 11 address some pre-existing issues that have been accentuated by the pandemic, novel issues that are unique to the crisis, as well as future challenges that will certainly arise from remote arbitration. The contributors offer conceptual, academic, empirical, anecdotal and practical guidance to the arbitration community on how to conduct arbitration meaningfully in times of crisis and beyond. They highlight issues of continued uncertainty and useful methods aimed at further promoting efficiency and diversity, and ensuring fairness, due process, and the integrity of the proceedings in this new era of digitalisation. Chapters 1 through 11 also delve into the essence of international arbitration as a preferred method for dispute resolution and the adaptations by means of which it can emerge more resilient from the COVID-19 pandemic, namely through active and targeted participation by the global arbitration community and the development of creative solutions to complex legal and procedural challenges.

 

The authors wish to thank Hazem Nakib and Sicen Hu, WilmerHale, for their help in preparing this blog post.

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ADGM Courts: Not Open for Business as a Conduit Jurisdiction?

Wed, 2020-10-07 00:00

Offshore courts in the UAE have long been used as conduit jurisdictions, particularly by international parties seeking to enforce foreign arbitral awards. The Abu Dhabi Global Markets (“ADGM”) and Dubai International Financial Centre (“DIFC”) have signed Memoranda of Understanding (“MoU”) with onshore authorities, pursuant to which onshore Emirati courts agree to recognise and enforce ADGM/DIFC judgments and/or arbitral awards without re-opening and exploring the substance of the dispute. Accordingly, parties awarded a favourable judgment offshore can then seek to have it enforced before an onshore court.

However, as explained below, under the New York Convention, offshore courts can refuse to recognise or enforce an award if it would be contrary to their public policy or public order. This post briefly explores how the ADGM Courts have responded to use as a conduit jurisdiction by parties seeking to avoid proceedings before local courts, in particular in the wake of the decision in A4 v B4 and amendments to the Founding Law. This question is one also currently facing the DIFC and similar developments should be monitored in Dubai.1)A full-length article appearing in the International Journal of Arab Arbitration (Issue IJAA 1/2020) (not yet released) also assesses conduit jurisdiction through the DIFC courts, in addition to setting out an introduction to the offshore jurisdictions and their court systems, offshore enforcement of foreign awards and the public policy exception to recognition/enforcement internationally. jQuery("#footnote_plugin_tooltip_9920_1").tooltip({ tip: "#footnote_plugin_tooltip_text_9920_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Recognition and Enforcement of an LCIA Award in the ADGM Courts

In A4 v B4 [2019] ADGMCFI 0007 – a case previously summarised in Free Zone Arbitration in the UAE: Some Highlights of 2019 (Part 1) – the ADGM Court of First Instance was tasked with considering the enforcement of a foreign award under the New York Convention. The case facts are relatively straightforward: originally, A4 brought arbitration proceedings under the rules of the LCIA against B4. In November 2018, the sole arbitrator ordered B4 to pay sums and interest owed to A4 for services rendered under English law-governed service contracts for work in Abu Dhabi (the “Award”).

In June 2019, A4 applied to the ADGM Court of First Instance for recognition and enforcement of the Award as if it were a judgment of the ADGM itself, pursuant to section 56 of the ADGM Arbitration Regulations 2015. As noted by Justice Sir Andrew Smith in his judgment, however, neither party had any presence in the ADGM, nor were the services or contract connected to the jurisdiction. Justice Smith considered whether any jurisdictional bar to enforcement existed, ultimately concluding that there was none. He also considered B4’s pre-Award challenge against the LCIA’s jurisdiction; as B4 did not attend the ADGM hearing or make submissions in this respect, Justice Smith did not consider this a basis for refusing recognition.

Next, he turned to the issue of public policy. In particular, Justice Smith queried whether allowing a non-ADGM company, seeking to enforce a non-ADGM debt, should be allowed to enforce the Award in the ADGM, the effect of which would be to deprive the onshore courts of the chance to examine for themselves whether the Award should be enforced.

He concluded that the burden of establishing a valid objection to recognition and enforcement falls upon the party wishing to rely on public policy considerations, and B4 had clearly proffered none. Justice Smith added that it is “always open to the court to take an illegality or other public policy point of its own volition” provided there is a sound factual basis, which there was none here: there was no evidence – nor any reason for A4 to believe – that B4 did not have assets within the ADGM or would not have any in the foreseeable future. He concluded:

Accordingly, there is no proper reason to suppose that A4 seek recognition and enforcement in these proceedings simply as a device to execute against assets elsewhere in the UAE.” (paragraph 23).

Moreover, even though A4 had not brought proceedings in any other UAE forum, Justice Smith saw no public policy objection which arose simply as a result of the possibility of parallel enforcement proceedings. B4 did not face any unfairness or detriment due to the Award being recognised and enforced by the ADGM Courts.

The wording of Justice Smith’s conclusion is interesting. The lack of a “proper reason to suppose that A4 seek recognition and enforcement in these proceedings simply as a device to execute against assets elsewhere in the UAE” implies that – where a party has sought recognition and enforcement in the ADGM solely to circumvent the onshore courts – the ADGM Courts may determine that there are public policy objections to granting recognition and enforcement.

 

Recent Amendments to ADGM Legislation

The Abu Dhabi-ADGM MoU – which is unaffected by the Amendment Law (further detailed below) – allows mutual recognition both onshore and offshore of arbitral awards, regardless of the location of the award debtor’s assets, and without any merits review needed. This MoU thus appears to acknowledge, and even encourage, use of the ADGM Courts as a conduit jurisdiction. Article 7 of the Judicial Authority Law similarly provides for onshore enforcement of DIFC Court judgments.

Given the terms of these legal instruments, as well as the lack of any objection to parallel enforcement proceedings, it seemed for a time that UAE authorities, both onshore and offshore, did not treat conduit proceedings as counter to public policy, even where a party had no obvious nexus to the jurisdiction.

However, amendments made to the ADGM’s Founding Law on 27 May 2020, by Law No. 12 of 2020 (“the Amendment Law”) have cast doubt on the longevity of such an interpretation. The Amendment Law extends the ADGM Courts’ jurisdiction to allow parties to select the ADGM Courts as as the forum for their disputes even where the parties and dispute have no connection with the ADGM. However, another amendment appears to prevent the use of the ADGM Courts as a conduit jurisdiction for the enforcement of non-ADGM Court judgments and arbitral awards. Whilst it is unclear if these legislative changes were introduced in the wake of the A4 v B4 decision, the timing certainly suggests a possible link to the case.

In particular, Articles 13(13) and (14) of the Amendment Law state that the provisions applying to recognition by onshore courts of ADGM judgments do not apply to ADGM judgments recognising foreign judgments or awards.

The guidance note to the Amendment Law explicitly rejects conduit jurisdiction, stating that:

parties cannot use ADGM for the enforcement of non-ADGM judgments and awards in other jurisdictions – the limited exception being where the originating judgment comes from another court within the Emirate”. It continues: “if parties wish to take advantage of the favourable enforcement framework that ADGM Courts have in place with other jurisdictions… they must submit their original dispute for determination by ADGM Courts or by arbitration in ADGM.

To date, the ADGM and Abu Dhabi authorities have provided no further commentary or responses to the effects of the Amendment Law, in particular concerning the use of the ADGM Courts as a conduit jurisdiction. However, the recent amendments may be interpreted as an attempt by the ADGM Courts to avoid the issues of conduit jurisdiction litigation with which the DIFC Courts have had to grapple for years.

 

Concluding Remarks

As the Amendment Law is so recent, it will prove interesting to see how these changes impact the use and popularity of the ADGM Courts by international companies, and the extent to which the ADGM Courts will push back on these new restrictions on their jurisdiction.

It remains to be seen whether the ADGM Courts seek to flex their jurisdictional muscle and – as evidenced by A4 v B4 – agree to conduct proceedings that might otherwise not have been properly heard offshore. In the face of the Amendment Law and similar legislative developments in Abu Dhabi, however, it is clear that there is no straightforward path ahead.

References   [ + ]

1. ↑ A full-length article appearing in the International Journal of Arab Arbitration (Issue IJAA 1/2020) (not yet released) also assesses conduit jurisdiction through the DIFC courts, in addition to setting out an introduction to the offshore jurisdictions and their court systems, offshore enforcement of foreign awards and the public policy exception to recognition/enforcement internationally. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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Are the Judicial Procedural Rules Issued During the Pandemic Applicable to International Arbitrations Seated in Santiago?

Tue, 2020-10-06 20:00

Chile confirmed its first case of COVID-19 on March 3, 2020. Since then, Chilean institutions have designed several solutions to adjust their operation during the sanitary crisis.1) Specifically, the President declared a “state of constitutional exception of catastrophe”, which allows the Executive branch to take an array of measures to face the sanitary crisis. See: (Decree N°104 of 2020: https://www.bcn.cl/leychile/navegar?idNorma=1143580 and Exempt Ruling N°208 of 2020:  https://www.minsal.cl/wp-content/uploads/2020/03/1745861_web.pdf). To get more information about the legal reactions to the pandemic in Chile, see: https://drive.google.com/file/d/1Tpo_6jfO8ZQXUXr25d3r8Mx2FXT2LRp1/view. jQuery("#footnote_plugin_tooltip_3321_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This brief report provides information about the legislation passed by the Chilean Congress to regulate judicial proceedings. Specifically, we offer an overview of the impact of Law 21,226 (“Emergency Law”) on international arbitrations seated in Santiago and analyze whether the Emergency Law imposes specific duties over arbitrators relating to the taking of evidence during the pandemic.

 

Relevant provisions from the Emergency Law

On April 2, 2020, the Chilean Congress passed the Emergency Law, which aims to regulate how courts across the country would function during the state of emergency declared by President Sebastián Piñera to ensure procedural safeguards. In a nutshell, the Emergency Law allows the suspension of hearings and in-person proceedings; prevents courts from enforcing legal proceedings that could affect a party’s right of defense; allows the parties to rely on the COVID-19 pandemic to excuse themselves from complying with judicial terms; suspends the evidentiary terms; suspends running terms applicable to domestic statute of limitations; and regulates the use of virtual technology, allowing hearings to be held remotely.

The Emergency Law specifically deals with arbitral proceedings. Article 2 grants arbitrators the power to suspend hearings unless due process is affected. Nonetheless, it requires arbitral tribunals to move forward with a hearing, where the intervention of the tribunal is urgently required and when the parties request so. In these cases, a remote hearing will be conducted, and the arbitral tribunal must ensure compliance with the procedural guarantees established in the Chilean Constitution and international treaties.

Regarding deadlines, and as explained above, Article 4 of the Emergency Law allows a party to rely on any impediment attributed to a situation caused by the pandemic and that prevented them from complying with a deadline to excuse themselves from that breach. In this case, the arbitral tribunal must analyze the situation and grant an additional term if the impediment is confirmed.

Finally, Article 6 of the Emergency Law imposes the suspension of evidentiary terms across the country.2)The evidentiary term is a specific time frame provided in the procedural code where the parties have to offer their evidence. jQuery("#footnote_plugin_tooltip_3321_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); In other words, a procedure can only continue until it reaches the evidentiary phase, at which point, it would have to be suspended. The scope of Article 6 has sparked a heated debate among the arbitral community. Lawyers and arbitrators are questioning whether this article is one of mandatory application, or if they could continue with the arbitration proceedings following an agreement of the parties. So far, there has been no clarification of this issue from the legislative branch.

 

Applicability to international arbitration

Another interesting question is whether the Emergency Law applies to international arbitrations proceedings seated in Santiago. As a preliminary consideration, note that Chile has a dualist arbitration system, so that domestic arbitration is regulated mainly in the Procedural Civil Code 3)The Judiciary Code (Código Orgánico de Tribunales) and the Chilean Constitution: https://www.bcn.cl/leychile/navegar?idNorma=242302 also provide rules on arbitration. jQuery("#footnote_plugin_tooltip_3321_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and international arbitration is regulated by Law 19,971 (International Arbitration Commercial Act or “IACA”). There are strong grounds to support that the Emergency Law would apply to both, domestic and international arbitrations seated in Santiago. As the Emergency Law refers to “arbitration”, with no distinction between national and international arbitration,4)Chile enacted an international commercial arbitration act in 2004, based on the 1985 UNCITRAL Model Law. According to Article 19 of the IACA, the parties remain free to structure their arbitration as they choose, so that the Chilean law as lex arbitri supplies rules only to the extent the parties fail to do so, and few of them are mandatory. jQuery("#footnote_plugin_tooltip_3321_4").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); and considering that no distinction or clarification was made during the legislative procedure to enact such act, as a matter of practice, we believe that Chilean courts will sustain this same approach.

Nonetheless, it would be possible to argue that the IACA is a special law that should prevail over the Emergency Law. One of the objectives of the IACA is to establish a special procedural regime for international commercial arbitration to reduce or eliminate the uncertainty relating to local laws. Therefore, IACA will prevail unless a new law specifically amends it.

 

Article 6 of the Emergency Law

Considering the scope and debate about Article 6 of the Emergency Law, a second question that arises is whether the parties may submit their evidence during the proceedings, or if the arbitral tribunal must suspend the taking of evidence based on the Emergency Law. The answer to this question is relevant when assessing the risk of annulment of the award by the Court of Appeals on the ground of violation of public policy.5)According to Article 34 of the IACA, the violation of public policy is a ground for annulment of an award. jQuery("#footnote_plugin_tooltip_3321_5").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Unlike civil procedure and domestic arbitration rules, international arbitration rules do not provide for a specific “evidentiary term”, but allow the parties to submit evidence from early stages of the proceedings (beginning with their Request for Arbitration), and normally with their pleadings. The evidence is then examined at the hearing. Considering the procedural structure of arbitration proceedings, we believe that arbitral tribunals seated in Chile may continue with the proceedings as usual, as Article 6 could not apply where there is no “evidentiary term” to be suspended.

As a matter of practice, arbitral tribunals have taken a different approach towards the applicability of Article 6 in domestic and international commercial arbitrations. Some domestic arbitrations have continued following the agreement of the parties, others were suspended upon the request of one of the parties based on the Emergency Law, and there have also been arbitral tribunals that refused to continue with the proceedings even with the agreement of both parties due to public policy considerations.

The picture is very different for international arbitrations seated in Santiago. Although there have been some delays due to the pandemic, none of the proceedings that we are aware of have been suspended based on the Emergency Law so far. For instance, some parties have agreed on suspensions of hearings or extensions of deadlines due to restricted access to evidence, or because they would rather have an in-person hearing. In these cases, no party has ever invoked the Emergency Law.

This practice reveals the approach of the arbitral tribunals towards the Emergency Law. Even accepting this law applies to international arbitrations seated in Chile, the proceedings may move forward with the agreement of the parties. We believe this approach is aligned with the design of the IACA. Firstly, the IACA is a “special law”, enacted with the sole purpose of regulating the international commercial arbitrations in Chile, which means its provisions prevail over any other law containing regulations on the subject. Secondly, the IACA expressly regulates the possibility for the parties to stipulate and agree on the procedure for their arbitration. And lastly, IACA only allows the parties to request the nullity of the procedure in strictly limited occasions.

Of course, the question remains on whether an arbitral tribunal may continue with the proceeding if only one party wants to continue and the other is asking for suspension based on the Emergency Law. As we do not know yet how the Court of Appeals will interpret the impact of this law over IACA, and whether they might annul an award based on public policy consideration, some may argue that there is still a risk of annulment if the arbitral tribunal orders to continue with the proceedings when one of the parties objects.

Chilean Courts have shown a friendly approach towards international arbitration since the enactment of the IACA. They have interpreted the concept of public policy in an international sense, which is narrower than domestic public policy so that the annulment of the arbitral award is less likely to be granted. For instance, the Court of Appeals has ruled that local procedural rules are not applicable to international arbitration and that they would annul an award only for serious departures from fundamental notions of procedural justice.6)Court of Appeal of Santiago, case file N°1971-2012, labeled “EGI-VSR, LLC vs. Winecorp S.A.”: http://adipri.cl/v1/wp-content/uploads/2014/07/ROL-ICA-1971-2012-1.pdf. See also: Court of Appeal of Santiago, case file N°1420-2010, labeled “Ann Arbor Foods S.A. vs. Domino’s Pizza International Inc.”: http://adipri.cl/v1/wp-content/uploads/2014/07/ROL-ICA-1420-2010.pdf. jQuery("#footnote_plugin_tooltip_3321_6").tooltip({ tip: "#footnote_plugin_tooltip_text_3321_6", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); We believe that if national courts follow their previous decisions on public policy, they will respect the decision taken by arbitral tribunals to continue with the proceedings.

Of course, as there is no objectively agreed upon set of rules for public policy on an international level, we will need to wait to see whether a party decides to request the annulment of an award based on the Emergency Law provisions.

References   [ + ]

1. ↑ Specifically, the President declared a “state of constitutional exception of catastrophe”, which allows the Executive branch to take an array of measures to face the sanitary crisis. See: (Decree N°104 of 2020: https://www.bcn.cl/leychile/navegar?idNorma=1143580 and Exempt Ruling N°208 of 2020:  https://www.minsal.cl/wp-content/uploads/2020/03/1745861_web.pdf). To get more information about the legal reactions to the pandemic in Chile, see: https://drive.google.com/file/d/1Tpo_6jfO8ZQXUXr25d3r8Mx2FXT2LRp1/view. 2. ↑ The evidentiary term is a specific time frame provided in the procedural code where the parties have to offer their evidence. 3. ↑ The Judiciary Code (Código Orgánico de Tribunales) and the Chilean Constitution: https://www.bcn.cl/leychile/navegar?idNorma=242302 also provide rules on arbitration. 4. ↑ Chile enacted an international commercial arbitration act in 2004, based on the 1985 UNCITRAL Model Law. According to Article 19 of the IACA, the parties remain free to structure their arbitration as they choose, so that the Chilean law as lex arbitri supplies rules only to the extent the parties fail to do so, and few of them are mandatory. 5. ↑ According to Article 34 of the IACA, the violation of public policy is a ground for annulment of an award. 6. ↑ Court of Appeal of Santiago, case file N°1971-2012, labeled “EGI-VSR, LLC vs. Winecorp S.A.”: http://adipri.cl/v1/wp-content/uploads/2014/07/ROL-ICA-1971-2012-1.pdf. See also: Court of Appeal of Santiago, case file N°1420-2010, labeled “Ann Arbor Foods S.A. vs. Domino’s Pizza International Inc.”: http://adipri.cl/v1/wp-content/uploads/2014/07/ROL-ICA-1420-2010.pdf. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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The Tests for Determining Arbitrability of Fraud in India: Clearing The Mist

Tue, 2020-10-06 01:30

The Supreme Court of India (“Supreme Court”) recently ruled on the arbitrability of fraud in the case of Avitel Post Studioz Ltd. v. HSBC PI Holdings [2020] (“Avitel”). The judgement lays down the tests to determine “serious allegations of fraud” and thereby disputes which cannot be resolved through arbitration.

Various developments in the jurisprudence of the arbitrability of fraud in India have led to diverging legal positions adopted by the judiciary. The Supreme Court in A. Ayyasamy v. A. Paramasivam (“Ayyasamy”) attempted to settle the debate on this issue (as discussed on the blog). Previously, an inconsistency existed between the judgements of N. Radhakrishnan v. Maestro Engineers (“Radhakrishnan”), which held that a case would not be arbitrable if it involved serious allegations of fraud, and Swiss Timing v. Organizing Committee, Commonwealth Games (“Swiss Timing”), which held that cases involving allegations of fraud can be resolved through arbitration. Ayyasamy thus sought to offer clarity by distinguishing between “mere allegations of fraud simplictor” and “serious allegations of fraud”, holding the former to be arbitrable and whereas the latter as non-arbitrable.

Despite the attempt made by the Supreme Court to offer clarity in Ayyasamy, ambiguity persisted in the modus operandi of the substantive law in India qua arbitrability of fraud. Ayyasamy thus gave rise to problems of a hazy and inconsistent interpretation of “serious allegations of fraud” (discussed here on this blog). In particular, it held that “a strict and meticulous enquiry into the allegations of fraud” would be conducted in order to determine whether an allegation of fraud is serious or not. Going against the nature and core principles of arbitration, this was bound to result in unnecessary judicial intervention and delay, if a clear cut formula was not derived to distinguish the two categories of fraud.

 

Tests for Determining the ‘Fraud Exception’ 

The Arbitration and Conciliation Act 1996 1996 (“Act”) does not specifically exclude any category of cases as non-arbitrable. Section 8 states that the judicial authority has the power to refer the cases to arbitration if a valid arbitration agreement exists. Further, Section 34(2)(b) provides for awards to be set aside if the subject matter is not arbitrable by the law in force. Despite various landmark judgements and recommendations made by the Indian Law Commission (in its 246th Report), no legislative clarity existed. The exceptions to arbitrability of disputes are therefore created by judicial decisions.

Through these decisions (specifically Ayyasamy) it was extrapolated that in Indian law “serious allegations of fraud” are not arbitrable. Thus, the Supreme Court in Avitel focused on determining what would exactly constitute the “serious allegations of fraud” exemption to the arbitrability of disputes. It accordingly laid down that “serious allegations of fraud” would arise only when either of the following two scenarios are satisfied:

  • The first scenario involves an arbitration agreement that cannot be said to exist. This would involve cases in which a party cannot be said to have entered into an agreement to arbitrate at all. Therefore, only in cases where the allegations of fraud are directed towards the ‘agreement to arbitrate’ or are such that if proved, it would vitiate the arbitration clause along with the agreement, would this test apply. Section 16(1) of the Act provides for a wide interpretation of the arbitration clause. It states that the arbitration clause shall be treated as an agreement in itself and the invalidity of the contract shall not entail ipso jure the invalidity of the arbitration clause. Therefore, through Section 16(1) even when the contract is claimed to be fraudulently induced, the substantive validity of the arbitration clause is not compromised. Application of the first test together with this Section 16(1) would considerably reduce the scope of judicial intervention on grounds of fraud. Furthermore, the Supreme Court referred to the work of Gary Born [International Commercial Arbitration by Gary B. Born 2nd Edn., Vol. I, p. 846], and agreed with his rationale that matters in which a party procures an agreement to arbitrate by fraud rarely arise, even in cases where fraud may have actually been committed in connection with the underlying contract. Thus, this test reflects an internationally accepted approach and stance which endorses minimal intervention by the courts. [Para 14 of the judgement]
  • The second scenario is where allegations of arbitrariness, fraud or malafide conduct are made against the “state or its instrumentalities”. Such cases would not be arbitrable as the questions raised would concern matters of public law, thereby attracting implications not only on the parties but concerning the public domain as well. These cases would necessarily be settled in a writ court as issues related to fundamental rights of the people would arise (such as Article 14 of the Indian Constitution). However, with regards to the “public domain” ambit of fraud, the Supreme Court stated that allegations of impersonation, false representations and diversion of funds are all internal affairs of the parties having no “public flavour” and are thus not to be construed as “serious allegations of fraud” so as to attract the fraud exception. Therefore, unless these allegations are made against the state and its authorities, the dispute would be arbitrable and not be adjudged in a court of law. [Para 14 of the judgement]

 

Analysis 

Avitel in essence deviated from the position taken in Ayyasamy, including inter alia its conformity with Radhakrishnan, and adopted the reasoning given in Swiss Timing instead. It noted that the earlier decisions did not consider the judgement in Hindustan Petroleum Corporation Ltd. v. Pinkcity Midway Petroleums, which stated that under Section 8, it is mandatory for the court to refer the dispute to arbitration if the parties have a valid arbitration agreement. The Supreme Court opined in Avitel that the previous cases failed to take into account a combined reading of Section 5 (limitation on judicial intervention), Section 8 and Section 16 of the Act which reflected a new approach to arbitration. The Supreme Court seemed keen to adopt this approach and thus found Radhakrishnan to be wanting in law.

In Avitel, the Supreme Court sought to clear out multiple anomalies. It addressed the ambiguity arising due to the lack of a specific category of non-arbitrable cases being carved out in the domestic legislation and the decision of the Indian Parliament to not incorporate the recommendation of the Indian Law Commission in this regard. According to the Supreme Court, “the parliament has left it to the courts to work out the fraud exception on a case by case basis”. However, this is worrying as it will lead to a “a case by case” determination of what constitutes fraud and will result in unnecessary judicial intervention and delay. This approach would harm the existing regime of arbitration to a considerable extent.

The Avitel decision is certainly a welcome development after inconsistent interpretations of “serious allegations of fraud”. However, it does not come without its own concerns. The second scenario it presents, where “allegations of such frauds are made against the state or its instrumentalities”, brings to fore certain potential problems as parties can now conveniently raise an allegation or defence of fraud to avoid recourse to arbitration. The test can be misused to avoid arbitral proceedings in cases which involve government sectors, authorities or instrumentalities. India being the second most populous country in the world, there are a large number of contracts which involve the government. Therefore, a blanket application of this test would result in an influx of cases being relegated for adjudication by the courts. This would again lead us back to the initial position of judicial interference by way of closely examining cases involving allegations of fraud to determine arbitrability. Such consequences emerging from this test would thus undermine arbitral principles such as kompetenz-kompetenz and also lead to unwarranted delays which is contrary to the objectives of the Act.

 

Conclusion

Despite the potential scope for misuse of one of the two tests, the Supreme Court has offered clarity on what makes an allegation a “serious” one. There has been a massive shift from the initial positions adopted by the Supreme Court as it has shed off its interventionist attitude and diverged from its arbitration averse approach. It has essentially adopted a pro-arbitration rhetoric albeit while retaining its protectionist approach, not for reasons of lack of confidence in arbitration, but to secure and reinforce the rights of citizens in the public fora. However, a judicial trend of consistent application of the second test (regarding “states and its instrumentalities”) needs to be developed to negate the use of this test as a pretext to avoid recourse to arbitration. Thus, a pragmatic approach to arbitration needs to be adopted in practice.

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Revised and Reinforced Swiss Juge D’Appui & the Debate on Centralizing It

Tue, 2020-10-06 00:00

The draft bill for the revision of the 12th Chapter of the Swiss Private International Law (“PILA”) was recently approved by the Swiss legislator (as analyzed previously on this blog). Besides permitting the filing of set-aside motions in the English language, the provisions regulating the court assistance have also been revised and adjusted with the respective provisions of the Code of Civil Procedure (“CCP”). In addition, the preparation phase of the draft bill saw a debate on the centralization of the Swiss courts that support arbitration proceedings. In this post, the focus will be on the introduction of the tasks of these courts, the revision of the provisions regulating their duties and the debate on their unification.

The state court at the place of arbitration, which can be resorted to if any assistance is required during the arbitration proceedings, is called the “support judge” (juge d’appui). These courts are vested with the power to assist in the appointment, replacement and challenge of arbitrators, the enforcement of interim measures, and the taking of evidence. However, their competence is usually considered as secondary. In other words, in most of the cases, either the arbitral tribunal or the arbitral institution has the authority to order such actions. But the necessity for state courts to perform these tasks appears in cases where these reliefs cannot be obtained from the arbitral tribunal/arbitral institution –which may occur in ad hoc arbitration– or because they are not coercive on the parties. Therefore, the state courts located at the seat can be seized in order to get the required and coercive order.

 

Role of the Swiss State Courts during and after Arbitration

The Swiss juge d’appui has many powers to assist in international arbitration proceedings, which is specified in the PILA. These are:

  • Appointment and Replacement of an Arbitrator (Art. 179 PILA)
  • Challenge, Revocation, and Removal of an Arbitrator (Art. 180a and 180b PILA)
  • Enforcement of Provisional and Conservatory Measures (Art. 183 PILA)
  • Taking of Evidence (Art. 184 PILA)
  • Deposit and Enforceability Certification of Arbitral Awards (Art. 193 PILA)
  • Further Judicial Assistance (Art. 185 PILA)

The first three of these tasks, which were touched upon with the revision, will be discussed below.

 

Appointment and Replacement of an Arbitrator (Art. 179 PILA)

Under the PILA, arbitrators are appointed and replaced by the state court located at the seat, in the absence of any contrary agreement between the parties.

Prior to the revision, the PILA referred solely to the respective articles of the CCP, which regulate domestic arbitrations. Now the procedure of the appointment and replacement of arbitrators is explicitly regulated for international arbitration proceedings in the PILA: before applying to the state court, the applicant party should first give notice to the defaulting party or to the arbitrators (regarding the appointment of the chairman) to make the necessary appointment. After 30 days of such notice, the Swiss court at the seat of arbitration can be seized for the appointment of the arbitrator. When deciding, the juge d’appui will also consider the candidates proposed by the defaulting party1)Mariella Orelli, in Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide (Second Edition), Kluwer Law International, 2018, p. 110, para. 36. jQuery("#footnote_plugin_tooltip_6275_1").tooltip({ tip: "#footnote_plugin_tooltip_text_6275_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, thus, prioritizing party autonomy.

Finally – the revised PILA reconfirms the preexisting regulation whereby, if the state court judge is designated as an appointing authority, it can appoint an arbitrator unless a summary examination shows that no arbitration agreement exists between the parties.

 

Challenge, Revocation, and Removal of an Arbitrator (Art. 180a and 180b PILA)

A further duty of the juge d’appui is to decide on the challenge of an arbitrator. The previous version of the PILA regulated that, absent an agreement between the parties, a party seeking to challenge an arbitrator should first communicate the request of challenge to the arbitral tribunal and the other party. Only thereafter would resorting to the state court be possible.

The new Art. 180a PILA addresses this issue more comprehensively and sets forth that the state court can be approached within 30 days after the filing of the request to the tribunal unless the challenged arbitrator withdraws from office or the parties to arbitration agree on the revocation of the arbitrator. This procedure already existed under Art. 369/3 CCP and was applied by analogy, however, it was not codified under the PILA until recently.

Moreover, the new Art. 180b PILA provides that the state court may remove an arbitrator if the applying party proves that the arbitrator fails to fulfil its obligation in a timely and duly manner. This has been a preexisting practice under Art. 370/2 CCP, which used to be applied by analogy.

 

Enforcement of Provisional and Conservatory Measures (Art. 183 PILA)

Unless otherwise agreed by the parties, the arbitral tribunal has the power to order provisional and conservatory measures. This notwithstanding, the arbitral tribunal may approach the state court for assistance if a party fails to comply with the order. The new version of the PILA also empowers the parties to arbitration to request assistance from state courts. Under this provision, a party or the arbitral tribunal can ask the state court to enforce measures, provided that they are known to the courts of the lex fori. Hence, a state court has the discretion to modify or amend a measure ordered by the arbitral tribunal, to ensure that it conforms with Swiss law.

Finally, pursuant to the revision, the Swiss support judge is now competent to assist foreign-seated arbitral tribunals in the enforcement of interim measures, as well as in the taking of evidence (Art 185a PILA), as introduced previously on this blog.

 

The Debate on Centralizing the Juge D’Appui

In Switzerland, the cantonal courts act as support judges. During the preparation phase of the draft bill, one of the debates in the Federal Council and the consultation proceedings (also see here) was related to whether to centralize the juge d’appui and to determine a sole competent authority, which could be resorted to for any judicial support relating to arbitration. The main goal behind this idea was to consolidate the expertise of support judges, given some of the judges’ limited experience in such matters in those courts with a low caseload in this particular area. This initiative was aimed at determining a single specialized court, and, with it, to increase efficiency and know-how in the proceedings before the support judges.

During the discussions, one of the proposed solutions was to specify a single cantonal court, which would handle all court assistance matters. However, this was declined due to the federalist structure of the country. Though, some participants in the consultation proceedings offered to designate a single court for each canton or, alternatively, to specify one court for the German-speaking part of the country and one for the other cantons; but these suggestions were not assessed in the report of the Federal Council.

A further solution was to add these powers to the jurisdiction of the Federal Tribunal, which was later rejected, owing to the Federal Tribunal’s distinct function, to ensure the uniform application of the law, compared to the function that a juge d’appui has.

Moreover, the delegation of the juge d’appui’s administrative tasks (e.g. appointment, challenge and replacement of arbitrators) to an existing non-judicial institution, such as a Swiss arbitral institution or the Swiss Institute of Comparative Law, was also recommended. However, such delegation was observed as an intervention to the jurisdiction of judges at the seat of arbitration and was not found to be an accurate notion, in particular when looking from the standpoint of foreign parties.

Hence, the final potential solution was the establishment of a new judicial authority. Nonetheless, this was also reversed, as the caseload of support judges was found to be too small to justify the establishment of a new body.

To conclude, the issue regarding the central support judge remains rejected; however, there is still a demand from some stakeholders to reconsider this issue in the future.2)Christian Oetiker, Revision of the Swiss Arbitration Act – A Status Report, Arbitraje: Revista de Arbitraje Comercial y de Inversiones, IproLex 2018, Volume 11, Issue 3, p. 759. jQuery("#footnote_plugin_tooltip_6275_2").tooltip({ tip: "#footnote_plugin_tooltip_text_6275_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

Conclusion

With the revision, the duties of the Swiss juge d’appui in international arbitration proceedings are explicitly regulated under the PILA, and the support judge now has more power to assist both Swiss and foreign-seated arbitrations.

Nevertheless, the Swiss legislator preferred to keep the structure of the juge d’appui as it is and waived the idea of centralization for the time being.

In the author’s view, the unification of the juge d’appui might be very interesting and unique, and it may aid to further boost the attraction of Switzerland as an international arbitration hub. Although it might be less cost-efficient, considering the low workload of the juge d’appui, the author finds that the establishment of a new judicial authority –or at least the designation of a single court for each canton– will further contribute to the specialization of the support judges. Furthermore, this centralization would be in line with one of the main targets of the recent revision – to increase the user-friendliness of the PILA.

References   [ + ]

1. ↑ Mariella Orelli, in Manuel Arroyo (ed), Arbitration in Switzerland: The Practitioner’s Guide (Second Edition), Kluwer Law International, 2018, p. 110, para. 36. 2. ↑ Christian Oetiker, Revision of the Swiss Arbitration Act – A Status Report, Arbitraje: Revista de Arbitraje Comercial y de Inversiones, IproLex 2018, Volume 11, Issue 3, p. 759. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
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