Kluwer Arbitration Blog

Syndicate content
Updated: 14 hours 23 min ago

The Paradoxical Relationship between “Foreign Direct Investment Screening” and International Investment Law: What Role for Investor-State Arbitration?

Thu, 2020-04-30 04:00

On March 25, the European Commission issued a set of guidelines addressed to Member States, concerning foreign direct investment (FDI) from third countries and the protection of European critical assets. In face of the current crisis caused by the outbreak of Covid-19, the European Commission calls upon Member States to make full use of their existing FDI screening mechanisms, or in the alternative to set up full-fledged screening mechanisms to cope with the increased potential risk to EU strategic industries.

The communication of the European Commission follows the increasing trend to adopt national laws aimed at screening FDI potentially impinging on national security or strategic interests. This trend has grown out of concerns related to the foreign investments of sovereign wealth funds and state-owned enterprises, in particular that these subjects may be driven by geo-political rather than financial interests. However, the question arises as to the relationship between FDI screening measures and international investment law, in particular whether foreign investors enjoy any protection under international investment agreements (IIAs) in case of exclusion due to discriminatory or abusive use of the screening powers granted to host states.

This question becomes central when one considers the opposite trends followed in this regard by domestic and international law. On the one hand, states have been reinstating their right to subject the admission and pre-establishment phase of foreign investments solely to domestic law. On the other the conundrum of bilateral and multilateral IIAs has brought the post-establishment phase of foreign investments to a supranational level, thus not only ruling out the jurisdiction of state courts, but also providing for the application of public international law, in addition to the host state’s domestic law.

The question tackled in this post is whether the pre-establishment phase of foreign investments is tout court left out of the scope of international investment law (and, consequently, of the jurisdiction of the arbitral tribunal that would accordingly have jurisdiction over any dispute arising between the foreign investor and the host state) or, instead, whether the scope of application of the latter extends to the pre-establishment phase of the investment, so as to generate a potential conflict with national screening mechanisms.

In other words, the question is whether the temporal dimension of the investment determines a fork in the road between two opposite directions followed by, respectively, the law governing the treatment of foreign investment after its establishment in the host state and that governing the foreign investment prior to it.1)See M. Burgstaller, Sovereign Wealth Funds and International Investment Law, in C. Brown, K. Miles (eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge, 2011, at pp. 179-180. jQuery("#footnote_plugin_tooltip_5484_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5484_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

In order to assess the applicability of international investment law to – and the subsequent jurisdiction of investment treaty arbitral tribunals over – the admission and pre-establishment phase of a foreign investment, a distinction has been drawn between three different approaches to this point that can be identified among IIAs drafted over the decades.

 

The First Model: IIAs Silent on the Pre-Establishment Phase

The first model, mostly adopted by early IIAs, is not to regulate the pre-establishment phase of investments at all. These treaties do not encompass a right of establishment in the host state, but rather merely require the latter to abide by the investment protection standards and guarantees in relation to those foreign investments that it has unilaterally decided to admit (see, e.g., the 1972 Democratic Republic of Congo – France BIT).

Under this model, domestic regulations screening the entry of FDI would not be prohibited nor limited by the host state’s treaty obligations, and the host state would hold discretion to decide which foreign investments to admit.2)See P. Blyschak, State-Owned Enterprises and International Investment Treaties. When Are State-Owned Entities and Their Investments Protected?, in Journal of International Law and International Relations, 2011, 6, p. 17. jQuery("#footnote_plugin_tooltip_5484_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5484_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

As a consequence, under such a treaty, where a host state adopts discriminatory or abusive measures in the pre-establishment phase, the foreign investor will not be entitled to trigger the investment treaty arbitration clause in respect of such measures. It will instead only have access to the domestic remedies made available by the host state.

 

The Second Model: “Best Effort” Clauses

The second approach is the one adopted by most European Union member states. IIAs following this model generally include clauses requiring States Parties, on the one hand, to reciprocally promote investments from the other State Party, and on the other, providing that such investments’ admission be regulated by domestic law (see, e.g., Article 2.1 of the 2008 German Model BIT).

These provisions do not impose any treaty obligation as to the admission of the investment, but rather qualify as “best effort” commitments undertaken by host states to promote foreign investment from the other State Party.

As a consequence, following this model, any protectionist measure adopted by host states pursuant to their domestic regulations prior to the establishment of an investment will not amount to a violation of the IIA. This, more importantly, rules out the possibility for the investor to resort to investment treaty arbitration.

 

The Third Approach: International Investment Law’s Expansion to the Pre-Establishment Phase

As opposed to the European Union member states, the United States, Canada and Japan have promoted yet another model, explicitly bestowing upon foreign investors the right to have their investment admitted into the host state.

Such right of establishment is usually provided under the “National Treatment” standard of protection, by which the host state agrees to accord to the foreign investor, under equal circumstances, a treatment not less favorable than that it accords to domestic investors (see, e.g., Article 3.1 of the 2012 U.S. Model BIT).

In addition, these treaties frequently place the admission of investments under the “Most-Favored Nation Treatment” standard. Thereby, States Parties to the treaty agree to grant investors from the other State Party a treatment not less favorable than that they accord to third states’ investors pursuant to other IIAs (see, e.g., Article 4.1 of the 2012 U.S. Model BIT).

Unlike the first and the second approaches analyzed above, this model raises problems concerning the relationship between the international protection of investments at the pre-establishment phase, on one side, and national FDI screening procedures adopted by host states, on the other.

 

National Security as a Potential Defense by the Host State

In case the applicable IIA expressly provides for a right of establishment (e.g., through its inclusion under the “National Treatment” standard), any foreign investor being denied admission of its investment pursuant to domestic FDI screening regulations may trigger the treaty arbitration clause. Under such a treaty, the investor may start an arbitration against the host state claiming the latter’s violation of its international obligations under the IIA.

In this case, however, the host state might raise a defense based either on possible IIA clauses leaving specific economic sectors out of the treaty’s scope or, more in general, on the national security exception. An analysis of the latter ultimately allows to shed some light on the relationship between the host state’s international obligations and domestic FDI screening regulations.

In particular, the host state may invoke national security as enshrined in “Non-Precluded Measures” (NPM) provisions contained by many IIAs, limiting the applicability of treaty investment protections in case of measures, though detrimental to the foreign investor, justified by “essential national security interests” (see, e.g., Article XI of the 1991 U.S.-Argentina BIT).3)See W. Burke-White, A. von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, in Virginia Journal of International Law, 2008, passim. jQuery("#footnote_plugin_tooltip_5484_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5484_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

 

The Role of Investment Treaty Arbitral Tribunals before National Security Exceptions

When confronted with such a defense, the arbitral tribunal will first be called upon to assess whether the relevant clause is “self-judging”. A “self-judging” clause gives the host state power to unilaterally decide whether a national security interest exists. Such assessment should be carried out based on the wording of the treaty. “Self-judging” clauses typically read “it considers necessary”, while “non-self-judging” clauses will merely indicate that measures must be “necessary”.

In the Nicaragua case the International Court of Justice used this reasoning to affirm the “non-self-judging-nature” of the NPM clause included in the 1956 Treaty of Friendship, Commerce and Navigation between the U.S. and Nicaragua. The Court stressed that such clause spoke “simply of “necessary” measures, not of those considered by a party to be such”. Though with reference to an alleged violation of the host state’s post-establishment obligations in the context of severe economic crisis, the same stance was taken by the ICSID tribunals in the Argentine cases. Among others, the Tribunal in CMS v Argentina inferred the “non-self-judging” nature of the NPM clause in the 1991 U.S.-Argentina BIT through a comparison with differently worded provisions such as GATT Article XXI(b).

The latter ICSID tribunals also gave a good explanation of the extension of the arbitral tribunal’s jurisdiction where the national security exception is grounded on a “non-self-judging” clause. In these cases, “the judicial control must be a substantive one” as to whether the conditions to invoke such exception have been met (see, e.g., Enron v Argentina). In other words, the arbitral tribunal may evaluate the factual circumstances on which the measure has been grounded, in order to assess whether it is justified by national security interests.

On the other hand, a “self-judging” clause prevents or limits the arbitral tribunal’s review of the implemented measure. Though in the context of trade, the WTO Panel approach in the Russia – Traffic in Transit Report was to find an external limit to state discretion in the principle of good faith. It then found to have jurisdiction as to whether the state invoking the exception had sufficiently articulated its national security interests, and the measures at issues were plausibly protective of such interests. Similarly, the Statement of Administrative Action to the 1993 U.S. NAFTA Implementation Act interpreted the NPM clause of the NAFTA (i.e., Article 2102) to be “self-judging in nature, although each government would expect the provisions to be applied by the other in good faith.

To sum up, potential contrasts between, on one side, international treaty protection to the pre-establishment phase of foreign investments and, on the other side, FDI screening regulations adopted at the domestic level only emerges in limited situations. This problem arises where the applicable IIA grants foreign investors a right of establishment and refuses to accord to the host state full discretion (though with the good faith limit) to invoke the national security exception. Only in this case will foreign investors be able to resort to international investment arbitration against any abusive or discriminatory use of the host state’s screening powers. In all other cases, host states retain full discretion in unilaterally denying admission to foreign direct investments pursuant to their domestic law, or in assessing whether an investment constitutes a threat to their national security.

References   [ + ]

1. ↑ See M. Burgstaller, Sovereign Wealth Funds and International Investment Law, in C. Brown, K. Miles (eds.), Evolution in Investment Treaty Law and Arbitration, Cambridge, 2011, at pp. 179-180. 2. ↑ See P. Blyschak, State-Owned Enterprises and International Investment Treaties. When Are State-Owned Entities and Their Investments Protected?, in Journal of International Law and International Relations, 2011, 6, p. 17. 3. ↑ See W. Burke-White, A. von Staden, Investment Protection in Extraordinary Times: The Interpretation and Application of Non-Precluded Measures Provisions in Bilateral Investment Treaties, in Virginia Journal of International Law, 2008, passim. 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
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Use of Expert Witness in Arbitration from the Perspective of SHIAC

Wed, 2020-04-29 01:00

The use of expert witness is common in international arbitration. Recent discussions amongst Chinese practitioners have centered on the case related to the world-famous Chinese athlete Sun Yang in which the WADA’s expert opinion was believed to be material to the ruling of the CAS tribunal (“WADA vs. Sun Yang”).1)CAS2019/A/6148, World Anti-Doping Agency v. Sun Yang & Fédération Internationale de Natation. jQuery("#footnote_plugin_tooltip_5505_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5505_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, it is less common in China-seated arbitrations since the majority of arbitration rules of Chinese arbitration institutions do not provide for rules on expert witness.

This article intends to explore questions over the appointment and use of expert witnesses in China under the framework of both international arbitration rules and the arbitration rules of the Shanghai International Arbitration Center (“SHIAC”), and to discuss the practice of SHIAC arbitration in using expert witnesses.

 

Overview of Appointment of Expert Witnesses

There are two main types of expert witnesses in international arbitration: party-appointed expert and tribunal-appointed expert.

There is generally no requirement of a written declaration of independence or impartiality from an expert witness. For example, a written declaration of independence or impartiality by the party-appointed expert is not required under R44.1 and R44.2 of the Code of Sports-related Arbitration. According to Article 27.2 of the UNCITRAL Arbitration Rules (2010), the opinions given by a party-appointed expert are treated as evidence submitted by the appointing party. However, the tribunal may in practice consider the independence of a party-appointed expert when evaluating such expert opinions, which is largely due to the influence from the rules of conduct on party-appointed expert made by international organizations such as the IBA,2)Article 5.2 of the IBA Rules on the Taking of Evidence in International Arbitration requires that a party-appointed expert must disclose “his or her present and past relationship (if any) with any of the Parties, their legal advisors and the Arbitral Tribunal” and provide “a statement of his or her independence from the Parties, their legal advisors and the Arbitral Tribunal”. jQuery("#footnote_plugin_tooltip_5505_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5505_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as well as from guidelines and practices influenced by English court procedures such as the Chartered Institute of Arbitrators’ Protocol for the Use of Party-Appointed Expert Witnesses.

Under a number of international arbitration rules,3)See for example, the UNCITRAL Arbitration Rules, the Code of Sports-related Arbitration, the 2016 SIAC Rules, the 2017 ICC Rules and the 2018 HKIAC Rules. jQuery("#footnote_plugin_tooltip_5505_3").tooltip({ tip: "#footnote_plugin_tooltip_text_5505_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); a party-appointed expert will not be disallowed from giving opinion for the sole reason that the expert is party-appointed or have a link with the appointing party, though it is clear that such experts must not be partisan advocates or ‘hired guns’ who may tailor their evidence to favor the appointing party. By way of example, in WADA vs. Sun Yang, the fact that WADA’s appointed expert was employed as WADA’s Deputy Director did not lead to rejection of his expert opinion. Rather, his evidence was to be assessed by tribunal and under cross-examination by opposing counsel.

A tribunal-appointed expert is on the other hand generally required to submit a written statement of impartiality and independence.4)See for example Article 29 of the UNCITRAL Arbitration Rules, which sets out detailed rules for the appointment of tribunal appointed expert including the use of statement of impartiality and independence. jQuery("#footnote_plugin_tooltip_5505_4").tooltip({ tip: "#footnote_plugin_tooltip_text_5505_4", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The opinions of the tribunal-appointed expert may be examined and heard in oral hearing, sometimes with the aid from a party-appointed expert. In contrast, R44.3 in the Code of Sports-related Arbitration also allows the tribunal to appoint experts when it deems appropriate, though a signed statement of impartiality and independence is not required but such expert’s independence from the parties is required throughout the proceedings.

In comparison, Articles 37 and 39 of the 2015 SHIAC Arbitration Rules (“SHIAC Rules”) on appointment of expert and use of expert evidences do not specify the accepted form of evidence to be submitted to the tribunal, and this may be interpreted that written opinions or reports given by party-appointed experts are acceptable. We observed that the opinions of the party-appointed expert are usually annexed to parties’ submissions as exhibits. The SHIAC Rules also permit the arbitral tribunal to appoint one or more experts on its own initiative for clarification on specific issues as it considers necessary under Article 39.

Similar to other international arbitration rules, there is no requirement under the SHIAC Rules for written declaration of independence and impartiality by a party-appointed expert. In practice, we observed arguments on lack of impartiality or independence is raised in almost every case where a party-appointed expert is engaged and where their opinions are submitted. Although the SHIAC Rules do not list detailed procedures on dealing with these challenges, they allow the tribunal discretion to decide on whether to accept such expert opinions or reports as Article 29 of the Rules stipulates that the tribunal shall examine the case in any manner that it deems appropriate under the circumstance that it shall act impartially and fairly, and shall provide reasonable opportunities to all parties for them to present and argue their cases.

 

Examination of Party-Appointed Experts in SHIAC Arbitrations

Firstly, the parties submitting the opinions of their appointed experts are responsible for ensuring the availability of such experts for cross-examination in oral hearings. Further, in SHIAC arbitration practice, the opinions given by the party-appointed experts are treated as document evidence produced by the submitting party. As such, the documented opinions will have to be cross-examined in oral hearing.

The jurisprudence behind this practice is largely derived from the relevant provisions of the Chinese Civil Procedural Code.5)Article 122 of the Judicial Interpretation on the Application of the Chinese Civil Procedure Law of the Supreme People’s Court sets out that, before the expiration of the time limit for providing evidence, the parties may, in accordance with the provisions of article 79 of the Civil Procedure Law, apply for one or two persons with specialized knowledge to give opinions on the professional issues involved in the facts of the case in the court. The opinion given by this person is considered as statement of the party. jQuery("#footnote_plugin_tooltip_5505_5").tooltip({ tip: "#footnote_plugin_tooltip_text_5505_5", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); However, such requirement is generally not mandatory since a number of arbitration rules under Chinese institutions remain silent on how document evidence should be treated in proceedings. This is in line with the general idea that the tribunal has discretion on determining evidence is suitably treated. The extent of the cross-examination on documented expert opinions will be further addressed below.

In an unpublished case administered by the SHIAC in 2016, an insurance underwriter sought remedies from a sea shipper for compensation over losses caused to the underwritten cargo shipped from China to Germany, which was silicon with high purity and limited scope of industrial application. In order to document the status of the contaminated cargo arrived at the destination port, the cargo owner engaged a well-known assessor to assess the losses caused to such cargo. The assessment report was later used by the underwriter in SHIAC arbitration proceedings against the sea shipper, following a letter of subrogation issued by the cargo owner. In response, the sea shipper engaged an expert with chemistry background to issue an expert report on calculation of losses of the cargo value.

In an oral hearing, the sea shipper questioned the independence of the assessor as the assessor was solely appointed by the cargo owner, and pleaded inadmissibility of the assessment report as a whole. The sea shipper also argued that the assessor should be summoned to testify before the tribunal. The insurance underwriter on the other hand argued that it is a rare practice to summon a reputable assessor to testify before the tribunal, and that it would not be economical as the assessor was based in Germany. The insurance underwriter maintained that the authenticity of the assessment report should not be doubted as any misconduct that would give rise to concern over authenticity of the assessment report would be detrimental to the assessor’s reputation which would be extremely unlikely in the competitive assessment industry.

The tribunal allowed the evidence because it held that opinions given by a party-appointed expert should generally be treated as document evidence submitted by the filing party rather than as testimony from an individual witness, hence the expert was not required to testify before the tribunal either under the Chinese Procedural Code or the SHIAC Rules.

The tribunal further noted the well-recognized credibility of the assessor in the industry and found the likelihood of the assessor to falsify the opinions to be extremely low, provided that there was no counter evidence showing probable credibility concern over the authenticity of the documented opinions or the assessor himself.

As for the assessment on losses, the tribunal noted that the sea shipper had engaged its own expert witness residing in Guangzhou, China. Given that the credibility of such expert was not known to the Tribunal and that it was considered economically feasible to have such expert testify before the tribunal, an oral hearing was convened to examine the opinions given by the sea shipper-appointed expert.

Although the SHIAC Rules do not explicitly mention the use of party-appointed experts, such experts have been engaged in practice as shown in the aforementioned SHIAC arbitration. Often, credibility of a party-appoint expert is challenged by the opposing party with reasons varying from a mere allegation of lack of independence, to presenting evidence on pre-existing relationship between the expert and the appointing party. In this regard, it is observed that opinions of party-appointed experts would not be disregarded on the sole reason that they are partially appointed or not mutually agreed upon. Instead, without a probable cause shown and as long as both parties are treated fairly, the tribunal would likely consider and give weight to opinions made by the party-appointed expert.

 

Examination of Tribunal-Appointed Expert in SHIAC Arbitrations

Under Article 39 of the SHIAC Rules, tribunal-appointed experts and their opinions are treated similarly under an appraisal procedure commonly found in civil law jurisdictions.

In an unpublished case administered by the SHIAC in 2017, a purchaser of certain high-quality glass and an owner of the construction works for which the purchased glass were supposed to be installed by the third-party seller jointly filed an arbitration against the seller, claiming that the glass sold did not conformed to contractual specifications. The contract specifications required glass with a trademark owned by a certain Fortune 500 company. At the oral hearing, both parties disagreed on whether the glass provided by the seller was the branded glass claimants had contracted for. In particular, the issue was what documents the seller had to show in order to prove that the specification of the glass provided. However, the parties failed to provide sufficient evidence to convince the tribunal on the issue and accordingly required consultation with an expert in licensing practice of the relevant trademark.

The tribunal decided to engage an expert witness to produce a report on the issue. After giving parties an opportunity to challenge the qualification and impartiality of the candidate appointee, the tribunal made an official appointment of the expert and directed the costs to be prepaid by the parties. The tribunal-appointed expert provided a signed statement of independence after which the tribunal prepared a list of questions, or referred to as terms of reference under the UNCITRAL Arbitration Rules, and consulted both parties on the completeness of the list before sending it to the tribunal-appointed expert. The expert promptly issued his report on the list of questions. Thereafter, the parties were again consulted and an oral hearing held during which the tribunal-appointed expert answered questions from both parties within the scope of list of questions based on the expert report. In that case, neither party appointed their own expert to assist with examination of the report issued by the tribunal-appointed expert. In the arbitral award, the tribunal adopted the analysis presented by the tribunal-appointed expert on the factual issues and rendered a final award ordering the costs of appointing that tribunal-appointed expert to be borne by both parties.

However, it is to be noted that the use of tribunal-appointed experts should be limited to the issues that are factual or technical, and should not interfere with the decision-making process which is to be conducted by the tribunal.

 

Conclusion

As Chinese arbitration institutions, such as the SHIAC, are increasingly involved in the administration of international arbitrations or domestic arbitrations with international elements, their institutional rules may have to adapt to the evolving needs and practices of arbitration users. SHIAC Rules provide for general rules on use of experts without identifying specific guidance for each type of experts. The logic of the current ambit for use of experts under the SHIAC Rules is to provide the tribunal with the most extensive flexibility in the conduct of arbitrations where experts, whether party-appointed or tribunal-appointed, are engaged since as shown in practice, the various legal backgrounds of arbitrators may play a decisive role on how the tribunal will approach on the expert witness procedure. However, familiarity with the practice of party-appointed and tribunal-appointed experts in the Chinese legal community remains to be enhanced, as one may observe from the hearing records of WADA vs. Sun Yang.

References   [ + ]

1. ↑ CAS2019/A/6148, World Anti-Doping Agency v. Sun Yang & Fédération Internationale de Natation. 2. ↑ Article 5.2 of the IBA Rules on the Taking of Evidence in International Arbitration requires that a party-appointed expert must disclose “his or her present and past relationship (if any) with any of the Parties, their legal advisors and the Arbitral Tribunal” and provide “a statement of his or her independence from the Parties, their legal advisors and the Arbitral Tribunal”. 3. ↑ See for example, the UNCITRAL Arbitration Rules, the Code of Sports-related Arbitration, the 2016 SIAC Rules, the 2017 ICC Rules and the 2018 HKIAC Rules. 4. ↑ See for example Article 29 of the UNCITRAL Arbitration Rules, which sets out detailed rules for the appointment of tribunal appointed expert including the use of statement of impartiality and independence. 5. ↑ Article 122 of the Judicial Interpretation on the Application of the Chinese Civil Procedure Law of the Supreme People’s Court sets out that, before the expiration of the time limit for providing evidence, the parties may, in accordance with the provisions of article 79 of the Civil Procedure Law, apply for one or two persons with specialized knowledge to give opinions on the professional issues involved in the facts of the case in the court. The opinion given by this person is considered as statement of the party. 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
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Border of Slovenia and Croatia – Where the CJEU Reached the Frontier of its Jurisdiction

Tue, 2020-04-28 04:00

On 11 December 2019, the Advocate General Priit Pikamäe delivered its Opinion recommending the Court of Justice of the European Union (“CJEU”) to declare that it does not have jurisdiction to rule in infringement of European Union (“EU”) law proceedings concerning the long-running border dispute between Slovenia and Croatia, which the CJEU endorsed in the judgement of 31 January 2020.

The main question raised in the case between the two EU member states is whether the CJEU is competent to decide on an action brought by Slovenia under Art. 259 of the Treaty on the Functioning of the European Union (“TFEU”) alleging that Croatia has failed to fulfil its obligations under EU law by refusing to recognise an arbitral award determining the maritime and land boundary between the two states.

 

Factual Background and Pre-litigation Procedure

The collapse of the Socialist Federal Republic of Yugoslavia (“SFRY”) in the early 1990s uncovered some smouldering issues between its former constituent republics.

Amongst others, the breakup revealed the border dispute between two of the SFRY’s successors –Slovenia and Croatia. After declaring their independence in 1991, between 1992 – 2001 both states unsuccessfully attempted to resolve the dispute regarding the course of their land and maritime boundary.

On 4 November 2009, in the course of Croatia’s accession to the EU, Slovenia and Croatia signed an arbitration agreement (“Arbitration Agreement”) referring their land and maritime border dispute to arbitration. The European Commission and the Swedish EU Council Presidency facilitated the drafting of the Arbitration Agreement, and along with being signed by the parties, the Arbitration Agreement was also signed by the Swedish EU Council Presidency as a witness. During the arbitral proceedings, due to ex parte communication between the arbitrator appointed by Slovenia and one of the Slovenian representatives in the proceedings, in July 2015, Croatia informed Slovenia and the arbitral tribunal of its decision to terminate the Arbitration Agreement claiming a material breach of the Arbitration Agreement by Slovenia under Art. 65, para 1 of the Vienna Convention on the Law of Treaties (discussed on the blog here). After a change in the composition of the arbitral tribunal, the proceedings continued, and on 29 June 2017, the tribunal rendered its final award (“Arbitral Award”) determining the boundary between Slovenia and Croatia. However, Croatia contested the validity of the Arbitral Award and its binding effect.

The border as determined by the arbitral tribunal in the Arbitral Award, page 347

 

Infringement Proceedings Filed by Slovenia

On 16 March 2018, Slovenia initiated infringement proceedings under Art. 259 TFEU referring the dispute to the European Commission. Since the Commission did not issue a reasoned opinion on the matter within the required three month period, on 13 July 2018, Slovenia brought an action before the CJEU.

In support of its action, firstly, Slovenia claimed that by breaching its unilateral commitment undertaken during the EU accession process to adhere to the Arbitral Award and the boundary determined by that award, Croatia refused to respect the rule of law and the principles of sincere cooperation and res judicata. Secondly, Slovenia maintained that by refusing to comply with the Arbitral Award, Croatia prevents it from exercising its full sovereignty over its land and maritime territory breaching its duty of sincere cooperation and jeopardizing the attainment of the EU’s objectives. Lastly, Slovenia argued that Croatia was preventing it from fulfilling its obligation to implement a number of EU secondary law acts related to the common fishery policy, the border control and the maritime spatial planning.

On 21 December 2018, Croatia submitted a motion arguing that the action brought by Slovenia is inadmissible as the CJEU had no jurisdiction to rule on a dispute concerning the Arbitration Agreement and the Arbitral Award which did not require the application or interpretation of EU law.

 

Findings of the Advocate General

In his opinion, The Advocate General began his analysis by examining the relationship of the Arbitration Agreement and the Arbitral Award with EU law and determining whether they bound the EU. He found that:

  1. The cases where the EU is bound by international law are well-established. Namely, the EU is bound by international conventions concluded by the EU itself or where the EU assumes powers previously exercised by the member states, and by rules of customary international law. Therefore, international agreements which do not fall within the situations listed above, are not EU acts and, therefore, do not bind the EU (§ 104).
  2. The territorial scope of the Treaties is an objective fact determined by the member states. As a consequence, the delimitation of national territory does not fall within the jurisdiction of the CJEU (§§ 110-112).
  3. The Arbitration Agreement and the Arbitral Award did not fall within any of the hypothesis in which the EU is bound by international law (§ 122).
  4. The issues concerning the alleged infringements of the rule of law and the principle of sincere cooperation are ancillary to the issue of determination of the land and maritime boundary between the two member states and therefore, the CJEU does not have jurisdiction to decide on those matters (§ 130, 134, 135).
  5. Slovenia’s claims in relation to non-compliance with the EU secondary legislation were based on the assumption that the border between the two member states had been determined by the Arbitral Award. However, the Arbitral Award has not been implemented, and the boundary between the two member states remained undetermined (§ 149).

The Advocate General expressed his view that Slovenia was seeking implementation of the Arbitral Award, which fell outside the competence of the EU and the CJEU’s jurisdiction. He then concluded that the infringements of EU law alleged by Slovenia are ancillary to the issue of the determination of its border with Croatia which is a matter of public international law and therefore falls outside of the jurisdiction of the CJEU (§ 164).

 

The Judgment of the CJEU

In the judgment of 31 January 2020, examining the issue of whether it has jurisdiction to hear the case, the CJEU noted that it is not within its sphere of competence to interpret an international agreement concluded by member states whose subject is not a matter of EU law. Relying on previous case-law, the CJEU further explained that it lacks jurisdiction to decide on an action under Art. 259 TFEU for failure to fulfil obligations, when the infringement of EU law pleaded in support of the action is ancillary to the obligations stemming from the international agreement at issue (§§ 91-92).

In light of the above, the CJEU found that the infringements of EU law claimed by Slovenia resulted from the alleged failure by Croatia to comply with the obligations under the Arbitration Agreement and the Arbitral Award rendered on its basis or from the false premise that the border between the two member states has been determined by the Arbitral Award (§ 101).

The CJEU clarified that the Arbitral Award was rendered by an international tribunal established under a bilateral arbitration agreement governed by international law the subject matter of which did not fall within the sphere of competence of the EU and the EU was not a party to the Arbitration Agreement, notwithstanding its facilitating role. It further stated that despite the links between the conclusion of the arbitration agreement and the arbitral proceedings conducted on its basis on the one hand and the accession of Croatia to the EU on the other, the Arbitration Agreement and the Arbitral Award could not be considered an integral part of EU law. In this context, the CJEU clarified that the neutral reference made to the Arbitral Award in the Act of Accession of Croatia to the EU did not mean that the commitments made by Slovenia and Croatia under the arbitration agreement were incorporated into EU law (§§ 102-103).

In that regard, the CJEU concluded that the infringements pleaded by Slovenia were ancillary to the alleged failure by Croatia to comply with its obligations under the Arbitration Agreement. As the action for failure to fulfil obligations under Art. 259 TFEU can only apply in case of non-compliance with obligations arising out of EU law, the CJEU found that it lacked jurisdiction to decide on the alleged failure to comply with the obligations stemming from the Arbitration Agreement and the Arbitral Award (§ 104).

The CJEU noted that it is within the competence of each member state to determine its borders in accordance with international law. Therefore, it was beyond its jurisdiction to examine the extent and the limits of the respective territories of Slovenia and Croatia by applying directly the boundary as determined by the Arbitral Award in order to verify the existence of the pleaded infringements of EU law. The CJEU nevertheless reminded Slovenia and Croatia of their obligation to “strive sincerely to bring about a definitive legal solution consistent with international law, as suggested in the Act of Accession” of Croatia to the EU which ensures the application of EU law. One such option could be a submission “to the Court under a special agreement pursuant to Article 273 TFEU” (§§ 107, 109).

 

The Way Ahead

The Judgment in the case between Slovenia and Croatia is one of the very few where the CJEU had to decide on a dispute between two member states.

Indeed, it is the first case under Art. 259 TFEU where the territorial application of EU law was at stake, and the CJEU had to decide on whether an arbitral award rendered on the basis of an arbitration agreement concluded between two member states has a connection with EU law and thus falls within the sphere of competence of the CJEU.

While the CJEU said its last word and its Judgement is final and cannot be appealed, the boundary between Slovenia and Croatia remained undetermined.

Looking ahead, it is likely that Croatia will call for a mutually acceptable agreement. Slovenia, on the other hand, will more likely demand the implementation of the Arbitral Award. Although the CJEU decided that it had no jurisdiction to rule on the border dispute between the two member states, Slovenia can count on the fact that the Arbitral Award is a binding settlement instrument under public international law.

An important factor which will likely play a key role in finding a definitive solution of the border dispute between the two member states is Croatia’s attempt to join the Euro and the Schengen Area. To become a member, Croatia needs the unanimous consent of all Euro and Schengen Area member states, among which is Slovenia. It is probable that Slovenia will seek a favourable solution of the dispute using its power to cease Croatia’s accession, as it did during the negotiations for Croatia’s accession to the EU.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


CJEU to Seal the Fate of US$50 Million ECT Award Against Moldova?

Mon, 2020-04-27 03:00

The Paris Court of Appeal has recently sought a preliminary ruling from the Court of Justice of the European Union (CJEU) on the interpretation of the Energy Charter Treaty (ECT) in the ongoing Republic of Moldova v. Komstroy case.

 

A 20-Year-Old Tale

The Republic of Moldova v. Komstroy case highlights the contradicting approaches to the notion of investment under the ECT of the French Courts.

This is a two-decade-old tale that takes us back to the late 1990s, when Ukrainian company Energoallians (Komstroy’s predecessor-in-interest) concluded two tripartite contracts for the supply of electricity. The contracts provided that Energoallians would purchase electricity from Ukrenergo and resell it to Moldtranselectro, the Moldovan State-owned company in charge of operating the Moldovan power grid, via Derimen, a British Virgin Islands company.

Shortly afterwards, Moldtranselectro defaulted, and Derimen ultimately assigned the contractual claim against Moldtranselectro to Energoallians.

A dispute arose between the parties regarding the payment of Moldtranselectro’s debt, with Energoallians considering that certain actions taken by the Republic of Moldova constituted a violation of the State’s obligations under the ECT, as well as under the 1996 Ukraine-Moldova BIT.

Energoallians commenced Paris-seated UNCITRAL arbitration proceedings and in 2013, co-arbitrators Mikhail Savranskiy (Russia) and Viktor Volchinskiy (Moldova) rendered a majority award dismissing the Moldovan State’s jurisdictional objections and ordering it to pay US$46.5m. Quite uncommonly, the dissenting arbitrator was the chair, Dominic Pellew (UK). In his view, in order for assets to qualify as “investments” within the meaning of the ECT, they must have characteristics of “investments” in the ordinary sense. Turning to Energoallians’ debt assignment, he concluded in his dissenting opinion that it did not constitute an investment in the ordinary sense, due inter alia to the lack of contribution of capital or effort by the investor.

Shortly thereafter, Ukrainian company Komstroy bought Energoallians, acquiring the rights to the award.

Moldova went on to initiate setting aside proceedings before the Paris Court of Appeal claiming that the tribunal wrongly declared itself competent and that the award was contrary to international public policy.

In a 2016 ruling, the Paris Court of Appeal set aside the award on the ground that the arbitral tribunal lacked jurisdiction over the dispute. The Court followed a three-step reasoning: first, “claims to money” referred to in Article 1(6) (c) ECT are claims pursuant to a contract associated to an investment; second, an “investment” involves a contribution of capital or resources (“apport” in French); and third, the claim originating from an electricity supply contract does not involve any “contribution” and thus cannot be deemed to be an investment.

In its ruling of 2016, the Paris Court of Appeal did not follow the stance taken in several arbitral awards such as the Petrobart v. Kyrgyzstan award where it was found that a right conferred by contract concerning the sale of gas condensate is an investment according to ECT (see also the Fedax v. Venezuela decision on Objections to Jurisdiction of 11 July 1997, the Yukos Universal Limited v. The Russian Federation Interim Award on Jurisdiction and Admissibility of 30 November 2009). The solution also departs from the positions taken by scholars and commentators,1)See in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (1996): Thomas Wälde, “International Investment under the 1994 Energy Charter Treaty,” pp. 271-273 and Esa Paasivirta, “The Energy Charter Treaty and Investment Contracts: Towards Security of Contracts,” pp. 356-358. jQuery("#footnote_plugin_tooltip_3936_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3936_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); as well as from the position taken by the Paris Court of Appeal itself in previous decisions.2)See the Czech Republic v. Pre Nekra decision dated 25 September 2008, Revue de l’arbitrage, 2009, issue no. 2, p. 337. jQuery("#footnote_plugin_tooltip_3936_2").tooltip({ tip: "#footnote_plugin_tooltip_text_3936_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); The Court elected to take a leap into restrictive interpretation, holding that there was no protected investment by the ECT, due to the absence of contribution of capital and resources.

While the Court appeared to carry out a straight-forward interpretation of the conditions of the notion of investment under the ECT, it finally had recourse to an seemingly external additional condition of “contribution”, which led to the contractual claim not qualifying as an investment.

Following an appeal from Komstroy, the French Cour de cassation rendered a ruling in 2018 quashing the 2016 Paris Court of Appeal decision and therefore reinstating the arbitral award, on the ground that the Paris Court of Appeal had wrongly introduced a jurisdictional requirement not contained in the ECT, namely the condition of a contribution of capital or resources.

The case was thus remanded to the Paris Court of Appeal, this time constituted with different judges. In this instance, the Republic of Moldova requested that the Court set aside the 2013 arbitral award, claiming (just as in 2016) that the arbitral tribunal should have declined its jurisdiction in the absence of any protected investment due to the lack of any contribution from the investor. In the alternative, Moldova requested that the Court of Appeal seek a preliminary ruling from the CJEU regarding the interpretation of the term “investment” under the ECT.

In a judgment dated 24 September 2019, the Paris Court of Appeal stated that the response to Moldova’s arguments depended on the interpretation of the ECT and consequently decided to suspend the proceedings and put the following questions to the CJEU:

  • Whether article 1(6) ECT shall be interpreted in a sense that a debt arising out of an electricity sales contract that did not involve any form of contribution from the investor to the host State can be regarded as an “investment”;
  • Whether article 26(1) ECT shall be interpreted in a sense that the assignment of a non-ECT economic operator’s debt (Derimen’s) to an investor from an ECT Contracting State (Energoallians/Komstroy) can be regarded as an investment; and
  • Whether article 26(1) ECT shall be interpreted in a sense that a debt arising from an electricity sales contract delivered to the border of the host State can be regarded as an investment made “in the area” of the host State, where no economic activity has actually been carried out on its territory.

 

ECT Interpretation: A Trap for The Unwary to Heed?

Historically, the main purpose of the ECT was to encourage investment flows mainly from the West to the former soviet economies, by providing broad protection to investors investing in the region.3)See for instance the Concluding Document of the Hague Conference on the ECT which is included in the ECT itself, and abovementioned Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, spec. pp. 252-253 and 270-272. jQuery("#footnote_plugin_tooltip_3936_3").tooltip({ tip: "#footnote_plugin_tooltip_text_3936_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Those more accustomed to a narrower definition of foreign investment should be wary of the ECT’s deliberately comprehensive definition, which proves faithful to the historical view according to which property rights in the general sense – and not only foreign capital – may be regarded as a protected investment.

Interpreting Article 1(6) ECT is a delicate process. On the one hand, it includes a rather classic broad-type definition referring to a non-exhaustive list of examples, but on the other hand, the last paragraph inserts a general condition according to which “the ‘Investment’ refers to any investment associated with an Economic Activity in the Energy Sector”. It has been commented that consequently “not every asset constitutes an ‘Investment’ under the ECT, but only those assets that satisfy a double threshold: they are investments within the ordinary meaning of the term and they are associated with an Economic Activity in the Energy Sector”. It derives however from other provisions of the ECT (see articles 1(4), 1(5) and 27.16 of Annex EM I107) that the “Economic Activity in the Energy Sector” includes an activity concerning the sale of “electrical energy”. This contributes to further blurring the lines as the sale of electricity was the underlying subject-matter of the Energoallians’ claim. In this context, determining what would be an investment within the ordinary meaning is a perilous exercise.

The two other questions to the CJEU appear to be less critical. Indeed, should the CJEU rule that a debt arising out of an electricity sales contract is an investment within the meaning of the ECT, the fact that the debt has been assigned by a non-ECT economic operator and that the electricity has been delivered to the border of the host State is unlikely to change the qualification of investment.

 

Passing The Buck or Sign of Resistance?

One may wonder whether seeking a preliminary ruling from the CJEU on questions which in essence constitute the whole dispute it has been entrusted with is nothing more than an attempt to pass the buck.

Another interpretation is that the Court is actually resisting the Cour de cassation’s directions, and counts on a restrictive interpretation by the CJEU on the matter. The general approach of the CJEU since Achmea against investor-State arbitration could indeed lead it to narrow down the definition of investment and, beyond that, the jurisdiction of ECT-based arbitral tribunals.

References   [ + ]

1. ↑ See in Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade (1996): Thomas Wälde, “International Investment under the 1994 Energy Charter Treaty,” pp. 271-273 and Esa Paasivirta, “The Energy Charter Treaty and Investment Contracts: Towards Security of Contracts,” pp. 356-358. 2. ↑ See the Czech Republic v. Pre Nekra decision dated 25 September 2008, Revue de l’arbitrage, 2009, issue no. 2, p. 337. 3. ↑ See for instance the Concluding Document of the Hague Conference on the ECT which is included in the ECT itself, and abovementioned Thomas Wälde (ed), The Energy Charter Treaty: An East-West Gateway for Investment and Trade, spec. pp. 252-253 and 270-272. 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
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Contents of the Brazilian Arbitration Journal, Volume XVII, Issue 65 (March 2020)

Mon, 2020-04-27 02:00

The Brazilian Arbitration Journal, in its 65th edition, presents, in the National Doctrine section, the reflections of João Pedro Accioly on the arbitrability of conflicts involving the government. In addition, Marcelo Levitinas and Luisa Cabral de Mello Marques Coelho propose a reasonable interpretation of article 10 of the Brazilian Arbitration Law, in regard to the arbitration agreement in an on-going dispute and the adequate moment to appoint arbitrators. Finally, Andréia Propp Arend and Luciano Benetti Timm conduct a study on expedite arbitration, from the perspective of economic-legal analysis.

In the International Doctrine section, Bruno Sousa Rodrigues examines, in the context of investor-state arbitration, the exercise of discretion in relation to treaty interpretation.

Ricardo Ranzolin and Guilherme Queirolo Feijó contribute to the National Judicial Case Law section, by commenting on a conflict of jurisdiction case decided by the Second Section of the Brazilian Superior Court of Justice (STJ), in which it recognized the jurisdiction of the arbitral tribunal to analyze a corporate litigation between a minority shareholder and a society under judicial recovery, after the submission of a recovery plan and its approval by the general meeting of creditors. On his turn, Thiago Marinho Nunes notes a decision rendered by the First Panel of the Brazilian Superior Court of Justice, which refuted the ruling according to which the notification to initiate arbitration would have the power to interrupt the statute of limitations.

In the International Judicial Case Law section, Nikhil Palli examines a judgement from the Supreme Court of India, from the point of view of the constitutional validity of provisions of the Indian Arbitration and Conciliation Law, as well as its amendments. Furthermore, Pedro Arcoverde comments on a ruling from the Paris’ Court of Appeal, which annulled the exequatur that had been granted to the arbitral award, due to the need for arbitrators to adopt a proactive stance on the issue of corruption.

In the General Information section, Maria Claudia Assis Procopiak concentrates on the State Attorney General’s Resolution number 45 on the registration of arbitral institutions in São Paulo. The IV Oxford Symposium on Comparative International Commercial Arbitration, held on 15 November 2019, is commented by Carolina Apolo Roque. Ana Coimbra Trigo and Gustavo Becker present the round table held on 15 April 2019, during the 26th Willem C. Vis International Commercial Moot, on the theme “Rethinking Choice of Law and International Arbitration in Cross-Border Contracts: A Roundtable with Stakeholders”.

This edition includes Fernanda Medina Pantoja’s review of the book “Participação de terceiros na arbitragem”, authored by Marcela Kohlbach de Faria; and Leonardo Corrêa’s review of “A convicção do árbitro: do inconsciente à Sentença Arbitral”, by Octavio Fragata.

I wish you an excellent arbitral reading!

João Bosco Lee, Director

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Offline or Online? Virtual Hearings or ODR?

Sun, 2020-04-26 04:00

“Alice again enters a fantastical world, this time by climbing through a mirror into the world that she can see beyond it. There she finds that, just like a reflection, everything is reversed”…and “walking away from something brings you towards it” (Alice’s Adventures in Wonderland, Lewis Carroll).

The current worldwide outbreak forced by Covid-19 has led the international dispute resolution community to consider other means of proceeding with their arbitrations. Opinions differ: some practitioners have already started utilising what technology has been offering for many years; others are still discussing whether virtual hearings may be an option; another group of people, reluctant to move online, considers that online hearings are not adapted to their arbitrations. Is everything reversed like Alice in Wonderland, or is the mirror showing us what we have neglected or refused to see? Walking away from the current reality will inevitably bring us towards it.

When we moved from snail mail to telex, and later to telefax and then to email, such changes did not create a buzz. This sudden viral outbreak may well be the triggering event that is generating popularity for virtual hearings. The unexpected noise has had many benefits including bringing to light issues that we have kept ignoring because the models we had adopted were comfortable. There was no reason to change unless we were compelled. The disruption caused by Covid-19 has justified us to think differently. This triggering event is a positive aspect, despite the very sad situation of contamination, death, confinement and the catastrophe of the worldwide economy, which is impacting every sector, firm and individual.

 

Virtual Hearings or ODR?

Virtual hearings have become the centre of discussion among the dispute resolution community. Webinars are being organised around the globe to examine to what extent virtual hearings may replace in person hearings in a physical location, and to consider procedural and technical issues.

I had the opportunity to speak on 16 April 2020 at a webinar organised by the American Bar Association on “Progressing Arbitrations in the New Global Reality”, moderated by Ana Sambold. With my fellow panellists, Mohamed Abdel Wahab and Michael McIlwrath, we presented the spirit of the ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the Covid-19 Pandemic (“Guidance Note”), dated 9 April 2020, and the practical solutions being adopted by the ICC International Court of Arbitration (“ICC”).

The panellists indicated that virtual hearings need not replicate online what is being done offline and that practitioners need to consider new methods. For example: are many witnesses necessary? Do hearings need to last weeks, as is often the case in common law countries? Or will fewer days, more often applied in civil law countries suffice? Does an ability to manage or overcome Covid-19 problems factor into thinking about which arbitrators to nominate at this moment?

It is worth clarifying that virtual hearings is not the same as online dispute resolution (“ODR”). The use of technology to hold hearings remotely is meant to connect people, affording an opportunity to replace the real world, offline space, which may not be available to them for some reason (such as difficulty to travel, illness), by an online space. The procedure, however, is not conducted online. ODR consists in using information and communication technology to negotiate, mediate, arbitrate, conduct proceedings, and settle disputes exclusively or primarily online. When platforms used make a significant contribution to resolving disputes, such online resolution equates to ODR. Using a platform for virtual hearings does not meet that purpose, unless other parts of the procedure are conducted online through a dedicated dispute resolution platform. The UNCITRAL Technical Notes on Online Dispute Resolution issued in 2016 defined ODR as “a system for dispute resolution through an information technology-based platform and facilitated through the use of electronic communications and other information technology”. Many mediation procedures are conducted exclusively online, such as on SeeYouOutofCourt that Graham Ross uses for his mediations. We hope that in the future arbitrations may be entirely conducted online, without necessarily excluding face-to-face meetings or hearings where necessary.

My second remark concerns using technology in arbitration. Colin Rule, one of the two fathers of ODR with Ethan Katsh, posted a message on LinkedIn at the beginning of April, quoting Tom Clarke from the National Center for State Courts (NCSC), who wrote that it is “immensely ironic that the coronavirus crisis will do more for virtual courts than decades of work by NCSC. I’m glad to see it come, even if this is not the way I would wish it to happen.” This is so true! Probably few people are aware of the work we have been doing in the last twenty years with all fellows from the National Center for Technology in Dispute Resolution (NCTDR), the International Council for Online Dispute Resolution (ICODR) and NCSC. We have been strongly urging moving public and private justice online in order to benefit from the many advantages offered by resolving disputes that way (seeWhat does it take to bring justice online”). The three panellists of this webinar have been involved in technology in arbitration for twenty years and agree that ODR has been lagging behind.

It is said that need is the mother of innovation. However, in this instance, innovation is rather about changing our traditional way of working as opposed to innovation in tools that already exist. Perhaps we needed this outbreak to discover that hearings may be conducted online, and hopefully to start considering going further in applying such technology. From every misfortune good things may derive. We are living in fascinating times!

 

ICC Tools to Ensure Effective Case Management

Virtual hearings may be a new subject generated by the pandemic. What is not new is the fact that ICC had already several tools available to assist parties, their representatives and arbitrators in effectively managing arbitrations. ICC was at the forefront ever since 2000 including its NetCase platform. The Guidance Note is now reiterating the practical insights that users need to remember.

The ICC Commission on Arbitration and ADR issued a few reports that provide users the means to conduct procedures in an effective and cost-efficient manner, some of which are useful for virtual hearings. The first one, published in 2004 and updated in 2017, concerns the “Use of Information Technology in International Arbitration” and provides helpful standards on issues to be considered, such as common technical ability, electronic exchange of documents, data integrity issues, and issues to be considered for videoconferencing including directions that the tribunal needs to give to the parties after consulting them. The second one, published in 2007 and re-issued in 2012, addressed “Techniques for Controlling Time and Costs in Arbitration”. That report recommended already at that time, that telephone and videoconferencing may be considered, as well as whether witnesses may be heard by video link so as to avoid the need for them to travel to an evidentiary hearing. Appendix IV of the ICC Arbitration Rules (Rules) clearly reminds us that one of the recommended case management techniques is precisely the use of telephone or videoconferencing for procedural and other hearings where attendance in person is not essential. Some of the techniques proposed in the report were included as Appendix IV to the 2012 Rules, which introduced, among others, an important provision related to an early case management conference. Another very helpful report, issued in 2015, provided further guidance for “Effective Management in Arbitration”, such as early case management, maintaining realistic schedules, and raising awareness about potential settlement opportunities. “Techniques for Managing Electronic Document Production”, published in 2011, is another useful report. Finally, the “Note to Parties and Arbitral Tribunals on the Conduct of Arbitration under ICC Rules of Arbitration” (“Note”) reminds us of many techniques and also provides new solutions, such as the possibility of signing terms of reference and awards in counterparts, subject to any mandatory requirements of relevant applicable laws.

Some of the measures for effective management of which the Guidance Note reminds us include the possibility to dispose expeditiously of certain claims or defences, resolve issues in dispute in stages by rendering partial awards, identify whether some issues may be resolved on the basis of documents only, organise mid-stream procedural conferences to assess the most relevant issues and consider focusing on most efficient means to resolve them, identify issues that may be resolved without witness and/or expert evidence, use of audio or videoconferencing for hearings, and to consider whether parties would agree to opt in to the ICC Expedited Rules Provisions.

It is hoped that the Guidance Note, which reminds users of the many existing tools and measures available, will help parties and arbitrators consider all opportunities available to them to move arbitrations forward. Subject to any constraints of legal requirements, the uncertainty of the pandemic situation should be considered seriously to avoid adjournments and further disruptions.

 

ICC Guidance Note on the Organisation of Virtual Hearings

The second practical aspect of the Guidance Note is the assistance provided to arbitrators and parties about issues they need to consider when organising a virtual hearing. The Guidance Note first reminds tribunals to take into account all circumstances, including those caused by the pandemic, the nature and length of the conference or hearing, the complexity of the case and number of participants, any need to proceed without delay, whether rescheduling the hearing would entail unwarranted or excessive delays, and the need for the parties properly to prepare for the hearing. Should a meeting be necessary in a single physical location, parties and arbitrators should make efforts to reschedule in a way that minimises delays, and should discuss the appropriate sanitary measures to ensure the safety of all participants. If it is decided to proceed with a virtual hearing, arbitrators and parties should discuss and plan for special features of proceeding in that manner.

If a tribunal decides to proceed with a virtual hearing without party agreement, or over party objection, it should carefully consider all relevant circumstances: assess whether the award will be enforceable at law, and provide reasons for that determination. After consulting the parties, arbitrators may take into account their broad procedural authority under Article 22(2) of the Rules, to “adopt such procedural measures as [the tribunal] considers appropriate, provided that they are not contrary to any agreement of the parties.” The tribunal “shall proceed within as short a time as possible to establish the facts of the case by all appropriate means” (Article 25(1)) and “shall hear the parties together in person if any of them so requests” (Article 25(2)). The Guidance Note further indicates that Article 25(2) is structured to regulate whether the tribunal can decide the dispute based on written submissions and documents only or whether there must also be a live hearing. It does not preclude a hearing taking place “in person” by virtual means if the circumstances so warrant. The French version of Article 25(2) reflects this meaning in providing that: “Après examen des écritures des parties et de toutes pièces versées par elles aux débats, le tribunal arbitral entend contradictoirement les parties si l’une d’elles en fait la demande; à défaut, il peut décider d’office de leur audition.” The Secretariat’s Guide to ICC Arbitration also notes that “whether the arbitral tribunal construes Article 25(2) as requiring a face-to-face hearing, or whether the use of video or teleconferencing suffices, will depend on the circumstances of the case.” Moreover, virtual hearings were progressively acknowledged as mentioned above, including in Article 24(4) of the Rules with respect to case management conferences, Article 3(5) of Appendix VI of the Rules with respect to Expedited Arbitration, and paragraph 77 of the Note with respect to dispositive issues.

The Guidance Note further provides that to ensure that parties are treated equally and given full opportunity to present their case during a virtual hearing, the tribunal should consider several issues, such as the different time zones in fixing the hearing dates, logistics of the location of participants, use of real-time transcript and interpreters, identification of all participants, use of demonstratives and electronic hearing bundles. Furthermore, parties and arbitrators need to agree on the selection of platforms for videoconferencing and document sharing.

Finally, the Guidance Note provides a checklist and a draft procedural order which will be hugely useful for the dispute resolution community. In addition to issues to consider during the pre-hearing plan, including scope and logistics provided in the checklist, the checklist and the procedural order deals with issues in four sections related to: technical issues, specifications, requirements and support staff; confidentiality, privacy and security; online etiquette and due process considerations; and presentation of evidence and examination of witnesses and experts.

To conclude, the game changer is positive and we need to build on it. The benefits of virtual hearings include saving time and costs of travelling, and saving the environment, seeing that climate change is at the centre of the world’s preoccupation today. The way people now interact with technology has removed barriers which were difficult to remove before the outbreak. Virtual hearings will, in the near future, become the norm. The sooner we start practicing virtual hearings, the easier it will be to move procedures online. Many practitioners wish and hope that the arrangement during the pandemic will prove that we are capable of working differently. It is the ideal opportunity to revisit some of our current practices and streamline procedures.

 

Mirèze Philippe is a special counsel at the Secretariat of the ICC International Court of Arbitration. She is Co-Founder & Board Member of ArbitralWomen, member of the Steering Committee of the Equal Representation in Arbitration Pledge, fellow of the National Center for Technology and Dispute Resolution, Member of the Council of the American Bar Association (ABA) Section of Dispute Resolution, Member of the ICCA Diversity Task Force, Board Member of the International Council for Online Dispute Resolution.

The views expressed in this article are those of the author alone and should not be regarded as representative of, or binding upon ArbitralWomen and/or the author’s institution.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Scope, the Validity and the Effect of Advanced Liability Waivers: Investment and Commercial Arbitration Perspective

Sun, 2020-04-26 03:00

There was a time when arbitrators were to a large extent immune from liability and could thus not be sued before national courts for damages caused to the parties to a dispute. This was true mainly in common law jurisdictions and was probably the case in most civil law countries as well. For instance, under English law for at least 250 years until the decision of the House of Lords in two cases in 1974 and 1997, it was firmly assumed that an English arbitrator could not be sued for damages.1)V. VEEDER, “Arbitrators and Arbitral Institutions: Legal Risks For Product Liability?”, American University Business Law Review, Volume 5, Issue 3, 2015. jQuery("#footnote_plugin_tooltip_5510_1").tooltip({ tip: "#footnote_plugin_tooltip_text_5510_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); This assumption is no longer accurate. Due to the growing use of arbitration as an attractive alternative to court litigation, arbitrators have gained increasing importance and responsibility as final adjudicators of international legal disputes.

In recent years, strong criticisms have been raised against these key actors, in particular regarding the system of party-appointed arbitrators in both commercial and investor-state arbitration. Because of this on-going criticism of partisan arbitrators, purportedly infected with potential bias and the high risk of party manipulation, dissatisfied parties have increasingly sued arbitrators before state courts by seeking damages allegedly suffered from arbitrators’ misconduct. However, this in turn poses a risk of “harassment” of the institution and the arbitrator. Increasingly, combative parties initiating claims against the decision-makers and administrators could in turn undermine the expediency and legitimacy of the system.

Therefore, it is generally assumed that arbitrators need to be offered some level of protection against the risk of abusive lawsuits. It is for this reason that the practice of inserting contractual waivers of liability in international arbitration rules (ad hoc or institutional) was developed. With a view to address this current tension, this post focuses on the scope, validity and effect of limited or excluded liability clauses provided by international arbitration rules.

 

A comparative analysis: LCIA, ICC, PCA and UNCITRAL advanced liability rules

Given the strong competition among international arbitration institutions, a growing number of institutional arbitration rules include clauses of exemption from liability of the institutions or arbitrators.

For example, the LCIA Rules provide in Article 31 (1) that “no arbitrator shall be liable to any party whatsoever for any act or omission in connection with any arbitration conducted under its auspices”. Nevertheless, it defines circumstances where immunity is waived, by stating that “the arbitral tribunal shall be liable in case the act or omission constitute conscious and deliberate wrongdoing in connection with any arbitration”. The threshold is thus rather high and the broad scope of Article 31 offers protection against the most abusive lawsuits.

It is noteworthy that Article 41 of the ICC Rules offers an even broader protection and contains a complete exclusion of any liability. Similarly, in the context of investor-state (non-ICSID) arbitration, Article 16 of the PCA Arbitration Rules contains a broad arbitral immunity clause. Some legal commentators declare that the protection given by Article 16 is “almost identical” with Article 41 of the ICC Rules.2)See e.g., D. JIMENEZ, ICC Bulletin, 2017 p. 8-10. jQuery("#footnote_plugin_tooltip_5510_2").tooltip({ tip: "#footnote_plugin_tooltip_text_5510_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Leaving aside the peculiarities of these rules, Article 16 of the UNCITRAL Arbitration Rules adopts, as opposed to the PCA Arbitration Rules, a similar position as Article 31 of the LCIA Rules, by conferring a partial immunity on arbitrators, which, nevertheless, is not applicable in cases where parties prove that there is intentional misconduct by arbitrators during the arbitral process.

The protection against civil liability may also be expressed through other provisions. Article 40 of the ICC Rules, Article 32 of the UNCITRAL Rules, Article 26.8 of the LCIA Rules and Article 32 of the PCA Rules state that the parties may irrevocably waive their right to object to any non-compliance with these rules or with any requirement of the arbitration agreement and may also waive their right to any form of appeal, review or recourse to any state court or other judicial body. One may argue that this type of waiver may also include breaches by an arbitrator to his adjudicative services and can be translated as a waiver in suing an arbitrator before state courts. However, as will be discussed below, the effectiveness of such waivers depends on the applicable law, as such waivers can be found void if prohibited under the applicable law.

 

A critical analysis of the advanced liability waivers

In light of the above, the issue of civil liability is dealt, firstly, among institutional arbitration rules in a quasi-unanimous way. Indeed, institutional arbitration rules, both in the context of international commercial arbitration and ISDS ad hoc arbitration, approach the matter with the apparent intent to discourage arbitrator liability and thus, to adopt a very broad arbitral immunity. Most certainly, the idea of these rules is to provide security and legal certainty both for the parties and the arbitrators; such as to provide the possibility of modifying to a large extent the scope or terms of these rules and to adapt them to their specific needs.

However, this liberty is not unlimited, as it can be sanctioned by national mandatory laws and specifically by mandatory laws of the seat of arbitration (i.e. lex arbitri). In other words, the extent of the usefulness of exemption clauses depends on the applicable law. For instance, under Swiss law, complete exclusions of liability are void and cannot be reduced to an acceptable standard of exclusion. Article 100 (1) Code of Obligations of Swiss law states that “any agreement purporting to exclude liability for unlawful intent or gross negligence in advance is void”. This is reflected in Article 45 (1) of the Swiss Rules of International Arbitration, which provides that arbitrators shall not be liable for any act or omission in connection with an arbitration conducted under these Rules, except if the act or omission is shown to constitute intentional wrongdoing or gross negligence.

Secondly, these waivers merit attention as in many jurisdictions, like under Italian law, the setting-aside of the award is considered as a pre-condition that needs to be fulfilled before the dissatisfied party can take action against an arbitrator. Indeed, the simple breach of his contractual obligations (e.g., failure to render the award in due time) is not a sufficient ground for the party’s right to claim damages. A further element is needed: the award must have been set aside because of the late rendition (i.e., Article 829 n.6 of the Italian Cod of Civil Procedure).

Thirdly, many doubts have been raised with regard to the interpretation of such clauses. For instance, the Paris Court of Appeal was confronted with the question of the scope of the arbitrator’s advanced civil liability waiver. After having highlighted that an arbitrator’s misconduct was independent from the performance of their judicial mission, the Court considered that Article 34 of the ICC Rules, which provides that arbitrators are not liable for any act or omission in connection with arbitration, is only applicable to the immunity arbitrators enjoy in the performance of their judicial function (Paris March 31, 2015 (Delubac), n°14/05436, Dalloz).

In the author’s view, a complete exclusion of liability may not only be partially but also entirely invalid depending on the national law applicable. As rightly stressed by Professor Lukas Mistelis, whether such exclusions of liability are valid depends on the applicable national law. In particular, the complete exclusion of liability under the ICC Rules may prove problematic in this respect. Despite this, the ICC opted to have the widest possible exclusion in its Rules. The underlying idea was that state courts may only give effect to Article 41 of ICC Rules to the extent that the liability can be validly excluded under national law. Indeed, in most civil law countries, liability for grossly negligent or intentional wrongdoing cannot, in advance, be excluded by contractual agreement (e.g., Section 276 (3) of the German Civil Code, BGB).

Lastly, it seems from the legal literature that it is highly debatable whether these private contractual instruments have the power to confer judicial immunity on arbitrators. The author of this post agrees with the position that such judicial immunity could either be inferred by operation of law, or it could become, as a matter of public policy, a term of the arbitrator’s contract with the parties. This may provoke doubts on whether the complete exclusion of liability, recognized by the PCA and ICC Rules may provide for a full immunity, regardless the applicable law.

To conclude, users should carefully draft the scope of advanced liability waivers, in order to avoid any ineffectiveness or invalidity. In future clauses, a balance should be achieved between the need that a certain degree of immunity has to be provided to adjudicators in order to encourage fearless decision-making and the need to enhance professional accountability, including the optimization of their behavior for the sake of fairness and efficiency.

References   [ + ]

1. ↑ V. VEEDER, “Arbitrators and Arbitral Institutions: Legal Risks For Product Liability?”, American University Business Law Review, Volume 5, Issue 3, 2015. 2. ↑ See e.g., D. JIMENEZ, ICC Bulletin, 2017 p. 8-10. 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
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Enforcement of Intra-EU BIT and ECT Awards in the UK Post Micula

Sat, 2020-04-25 03:43

In its unanimous decision in the Micula case the UK Supreme Court on 19 February 2020 made clear that ICSID arbitral awards rendered by tribunals established pursuant to intra-EU BITs could be enforced in the UK. As explained by Guillaume Croisant in his blog post on 20 February, the UK Supreme Court overruled the Court of Appeal and lifted the stay of proceedings to enforce the arbitral award rendered in 2013 by an arbitral tribunal constituted under the auspices of ICSID and a BIT between Sweden and Romania.

Since the General Court’s EC Annulment Decision was still on appeal at the time the Supreme Court rendered its decision many expected that the Supreme Court would only address the issue of whether it had the power to stay the proceedings to enforce the Micula award until the final ruling of the CJEU on whether the Micula award amounted to illegal state aid as decided by the European Commission in 2015. However, the Supreme Court instead unanimously ordered that the Micula award be enforced immediately holding that the Court of Appeal had “exceeded the proper limits of” the power granted to English courts to stay proceedings in cases of an enforcement of an ICSID award.

The Supreme Court found that the relationship between Article 351 TFEU and Article 4(3) TEU was “the issue [that] goes to the heart of the present dispute” and consequently could be raised by the court of its own motion. Romania had objected to the Supreme Court considering submissions on this point since the Claimants had not appealed the decision of Blair J in the High Court to the Court of Appeal thereon. It was Lady Justice Arden in paras. 190 to 198 of her separate opinion to the Court of Appeal decision (rather than the parties in their submissions) who highlighted the importance of Article 351 TFEU in resolving the conflict between the UK’s obligations under EU law and international law. In particular in para. 198 she noted that in her view the duty of sincere cooperation “is only engaged if [the English courts], as an emanation of the UK in its capacity as a member state, ha[ve] some obligation under EU law”. She then suggested that Article 351, which expressly provides that “[t]he rights and obligations arising from agreements concluded … for acceding States, before the date of their accession, between one or more Member States on the one hand, and one or more third countries on the other, shall not be affected by the provisions of the Treaties”, may be construed to mean that such a duty does not apply in respect of the ICSID Convention, it being a multilateral treaty.

The Supreme Court agreed with Arden LJ. Having carefully reviewed the travaux préparatoires of the ICSID Convention, the preparatory works leading up to its conclusion and the writings of Professor Schreuer and acknowledging that “ultimately” the scope of the provisions of the ICSID Convention could “only be authoritatively” interpreted by the International Court of Justice, it found that the “grounds of objection raised by the Commission, even if upheld before the EU courts, were not valid objections to the [Micula award] or its enforcement under the ICSID Convention”. Furthermore, since the obligations imposed on the UK pursuant to Articles 53 and 54 of the ICSID Convention regarding the enforcement of arbitral awards were owed by the UK to all signatories thereto and thus also to states which are not parties to the EU and that the UK had become a signatory to the ICSID Convention before it joined the European Communities (as the EU was known in 1973), the Court held that “[A]rticle 351 TFEU has the effect that any obligation on the UK courts to give effect to a decision such as the Commission Decision pursuant to the duty of sincere co-operation which might arise under the Treaties in other circumstances does not arise in this case”.

Surmising from the Supreme Court’s decision, it is clear that intra-EU BIT and ECT ICSID arbitral awards will be enforced in the UK post Achmea. Since the UK joined the EU before it ratified the New York Convention[fn]UK joined the EU on 1 January 1973. It acceded to the New York Convention on 24 September 1975[./fn] it is also clear that the Supreme Court’s reasoning cannot be applied by analogy to ensure that New York Convention arbitral awards, whether pursuant to a BIT or ECT, are enforced in Micula-type circumstances.

There is some uncertainty about the approach English courts will take in cases where the enforcement of New York Convention awards is sought once the United Kingdom is outside the EU (prior to the outbreak of the coronavirus pandemic the transition period was expected to end on 31 December 2020) in case of intra-EU BITs and ECT awards in which Micula-type arguments are raised.

What is clear is that post-Brexit English courts will no longer be bound by a duty of sincere corporation as per Article 4(3) TEU nor will they be entitled to seek a preliminary ruling from the CJEU as per Article 267 TFEU. Instead, English courts will have to enforce arbitral awards which raise questions of EU law by reference to the terms of the European Union (Withdrawal Agreement) Act 2020 (as discussed below) and the provisions of the Agreement on the withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (“the Withdrawal Agreement”).

In particular, Article 89 of the Withdrawal Agreement provides that the “judgments and orders of the Court of Justice of the European Union handed down before the end of the transition period … shall have binding force in their entirety on and in the United Kingdom”. In addition, Article 4(5) of the Withdrawal Agreement provides that “[i]n the interpretation and application of this Agreement, the United Kingdom’s judicial and administrative authorities shall have due regard to relevant case law of the Court of Justice of the European Union handed down after the end of the transition period”.

Giving effect to these provisions of the Withdrawal Agreement in domestic law, Section 6(1) European Union (Withdrawal Agreement) Act 2018, as amended by the Withdrawal Act 2020, provides that English courts are “not bound by any principles laid down, or any decisions made, on or after exit day by the European Court”, Section 6(2) provides that courts “may have regard to anything done on or after exit day by the European Court, another EU entity or the EU so far as it is relevant to any matter before the court or tribunal”, and Section 6(4) clarifies that the Supreme Court is not bound by any retained EU case law.

The obligation of the courts in respect of EU law as in force as at the end of the transition period is further watered-down in Section 26(5)(A) of the European Union (Withdrawal Agreement) Act 2020 (which entered into force on 23 January 2020) which gives the British government the power to adopt regulations (i) to provide for inter alia the “extent … and circumstances in which, a relevant court or relevant tribunal is not to be bound by retained EU case law”; (ii) “to prescribe the test which a relevant court or relevant tribunal must apply in deciding whether to depart from any retained EU case law”; or (iii) lay down the considerations which such courts or tribunals should consider relevant in deciding whether to depart from EU case law.

Whether a decision by the European Commission and/or the CJEU that an arbitral award amounts to illegal state aid will be a ground which can successfully be invoked before UK courts to refuse enforcement on account of public policy as per Article V(2)(b) of the New York Convention will largely depend on the provisions of the agreement currently being negotiated between the EU and the UK concerning their future relations, since the EU is insisting that such agreement must cover inter alia state aid and competition law.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Similar Test, Different Outcomes: Comparing BNA v BNB and Kabab-Ji’s Determination of the Proper Law of an Arbitration Agreement

Fri, 2020-04-24 01:49

The significance of an arbitration agreement’s proper law cannot be understated, given its importance vis-à-vis the arbitration agreement’s validity and consequent implications on the tribunal’s jurisdiction and the arbitral award’s enforceability. Notwithstanding this, parties rarely specify the arbitration agreement’s proper law – hence the need for a clear legal framework governing its determination.

In BNA v BNB [2019] SGCA 84 (“BNA”), the Singapore Court of Appeal (“SGCA”) clarified the applicable framework in determining the arbitration agreement’s proper law (the “Choice-of-Law Framework”):

  • The parties’ express choice of proper law governing the arbitration agreement is first identified (the “Express Choice-of-Law Analysis”).
  • Absent any express choice, the court turns to ascertain the parties’ implied choice based on their intentions (the “Implied Choice-of-Law Analysis”).
  • Where an express/implied choice is absent, the arbitration agreement’s proper law adopts the system of law with the closest connection to it.

Three weeks after BNA, the English Court of Appeal (“ECA”) applied the same framework, but in a different manner, in Kabab-Ji SAL (Lebanon) v Kout Food Group (Kuwait) [2020] EWCA Civ 6 (“Kabab-Ji”). This article compares the two approaches and argues that the former’s approach is correct in principle and to be preferred.

 

The SGCA’s approach in BNA

In BNA, the underlying contract’s governing law was the law of the People’s Republic of China (“PRC”). The arbitration agreement provided for any disputes to be settled by “arbitration in Shanghai” but did not expressly stipulate a proper law. When a dispute was brought to arbitration, the jurisdiction of the arbitral tribunal was challenged on the ground that the arbitration agreement’s proper law is PRC law and the arbitration agreement is invalid under PRC law.

Notwithstanding the potential risk that the arbitration agreement and the tribunal’s jurisdiction would be rendered invalid, the SGCA found that PRC law is the arbitration agreement’s implied proper law. Applying the Choice-of-Law Framework, the SGCA reasoned that:

  • The Express Choice-of-Law Analysis did not apply as the parties had not expressly chosen the arbitration agreement’s proper law (BNA at [56]).
  • Under the Implied Choice-of-Law Analysis, there is a presumption that the parties’ choice of the underlying contract’s proper law (i.e. PRC law) also reflects the parties’ implied choice of the arbitration agreement’s proper law (BNA at [61] and [62]).
  • This presumption can be displaced should the lex arbitri be materially different from the arbitration agreement’s implied proper law. However, displacement was unnecessary in the present case since the phrase “arbitration in Shanghai” in the arbitration agreement was construed as the parties’ choice of arbitral seat and therefore the lex arbitri was also PRC law (BNA at [62], [69] and [94]).

The SGCA’s analysis in BNA on, among others, the proper law of the arbitration agreement, has been analysed in another blog post.

 

The ECA’s approach in Kabab-Ji

In Kabab-Ji, Article 15 of the contract stated that underlying contract’s governing law was English law. The arbitration agreement was set out in Article 14 and did not expressly stipulate a proper law. Subsequently, one party commenced arbitration against the other party’s parent company. The issue was whether the parent company was also party to the arbitration agreement and therefore subject to the tribunal’s jurisdiction. It was undisputed that this fell to be determined by the arbitration agreement’s proper law.

Applying the Express Choice-of-Law Analysis, the ECA held that Article 15 also amounted to an express choice of the arbitration agreement’s governing law. The ECA reasoned as follows:(Kabab-Ji at [62] and [63]).

  • Article 1 of the contract provides that “[t]his Agreement” comprised all the provisions that followed it, including Articles 14 and 15.
  • Article 15 provides that “[t]his Agreement shall be governed by and construed in accordance with the laws of England“.
  • Consequently, reading Articles 1 and 15 together, the parties had expressly chosen English law to govern all the terms of the parties’ contract, including the arbitration agreement in Article 14.
  • This conclusion is fortified by Article 14.3, which provides that “the arbitrator(s) shall apply the provisions contained in the Agreement”.

The ECA also cited Arsanovia v Cruz City [2013] 2 All ER (Comm) 1 for the principle that “[e]xpress terms do not stipulate only what is absolutely and unambiguously explicit” and held that if the express words the parties used in Articles 1, 15 and 14.3 demonstrate a clear intention that the entire contract is to be governed by English law, then it does not matter that Article 14 itself does not expressly state this choice of proper law (Kabab-Ji at [67]).

 

Conflating the Express and Implied Choice-of-Law Analyses 

The ECA’s application of the Express Choice-of-Law Analysis in Kabab-Ji has been analysed favourably in another blog post. However, with respect, I find the ECA’s application doubtful.

The Express Choice-of-Law Analysis has traditionally been conducted by examining whether the arbitration agreement’s plain wording expresses a choice of proper law. For example, in Westacre Investments Inc v Jugoimport SDPR Holding Co Ltd [1999] QB 740, the court found Swiss law to be the governing law of an arbitration clause which expressly provided for “the laws of Switzerland” as its governing law (Westacre at 749 and 750). Conversely, where parties only included a governing law clause for the underlying contract, courts have always turned towards the Implied Choice-of-Law Analysis since that is an interpretative approach that involves construing the contract in its entirety to determine what system of law the parties had implicitly intended as the arbitration agreement’s governing law. Hence, in Sulamérica Cia Nacional de Seguros SA v Enesa Engelharia SA [2013] 1 WLR 102, an express proper law governing the underlying contract was a relevant consideration under the Implied Choice-of-Law Analysis (Sulamérica at [11]).

In BNA, the SGCA did not consider the parties’ express provision of the underlying contract’s proper law to be an express provision of the arbitration agreement’s proper law when it applied the Express Choice-of-Law Analysis. Rather, barring any express wording to the contrary, that was merely an indication of the parties’ implied intention to have the arbitration agreement governed by the same proper law as the underlying contract, and therefore relevant to only the Implied Choice-of-Law Analysis.

In contrast, the ECA in Kabab-Ji affirmed that an interpretative approach is equally applicable under the Express Choice-of-Law Analysis. It considered that since Articles 1, 14 and 15 all contained the phrase “this Agreement”, and Article 14.3 in particular mandated the arbitrators to apply all the provisions of “this Agreement” including Article 15, a true construction of the underlying contract pointed to an express choice of English law to govern the arbitration agreement. The ECA applied the approach normally undertaken in an Implied Choice-of-Law Analysis at the Express Choice-of-Law Analysis stage.

Its interpretative approach is an erroneous conflation of the Express Choice-of-Law Analysis and the Implied Choice-of-Law Analysis. It is illogical to say that something which is “implied” can also be “express”. Following this, while the use of defined terms (such as a capitalized “Agreement”) in contract drafting evinces the parties’ intention have such terms applied consistently throughout the contract, it is incorrect to, for example, say that the use of defined terms in two provisions means that the effects of one provision is expressly provided for in another provision. An express term cannot possibly exist without express words, and so any term that is not spelt out in the contract can only be considered implied and not express.

 

Implication of terms in fact

Kabab-Ji also observed that the Implied Choice-of-Law Analysis involves the implication of terms in fact, although it did not elaborate further (Kabab-Ji at [53] and [70]). However, it is submitted that these two analyses are conceptually distinct.

Under Singapore law, the SGCA in Sembcorp Marine v PPL Holdings Pte Ltd [2013] SGCA 43 (“Sembcorp”) drew a principled distinction between the process of contractual interpretation and the implication of terms in fact: interpretation involves ascertaining the meaning of contractual expressions, whereas implication involves filling a contractual gap with a term that gives effect to the parties’ presumed intentions which could not be achieved by the terms already present within the contract (Sembcorp at [27] to [29]). Given that the Implied Choice-of-Law Analysis seeks to uncover the parties’ intended proper law governing the arbitration agreement by examining the terms present in the contract as well as the consequences of choosing the proper law of the underlying contract,1)Sulamérica at [26]. jQuery("#footnote_plugin_tooltip_3426_1").tooltip({ tip: "#footnote_plugin_tooltip_text_3426_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); it is arguably more consistent to characterise that process as an interpretative one (which the SGCA has done), rather than a process involving implication of terms in fact (which the ECA has done).

Further, the high threshold required for implying a term in fact renders its application practically impossible in determining the parties’ implied choice of proper law governing the arbitration agreement.

In Marks & Spencer plc v BNP Paribas Securities [2015] UKSC 72, the UK Supreme Court held that implication of terms in fact will only be carried out “if it is necessary for business efficacy” (Marks & Spencer at [14] to [32]). The high threshold of “necessity” is practically impossible to satisfy, since it is impossible to conclude that it is necessary for business efficacy for the arbitration agreement to be governed by the laws of one particular jurisdiction and not others. In Kabab-Ji, there were good, arguable reasons both for finding that the proper law was English law or French law. More importantly, the successful performance of a contract’s primary obligations is independent of the need for the arbitration agreement’s proper law.

Additionally, coming back to Singapore’s position, Sembcorp also prefaces the business efficacy test with the requirement of demonstrating a “true” contractual gap arising from the parties’ failure to contemplate the relevant issue (Sembcorp at [94], [95] and [98]). In most cases, however, it is suggested that commercial parties would likely have contemplated that the governing law clause in the underlying contract would also apply to the arbitration agreement (which is typically a clause within that same written contract). If so, failing to expressly provide for the arbitration agreement’s proper law would not amount to a true gap allowing for the implication of a term in fact.

To conclude, Kabab-Ji misapplied the Express Choice-of-Law Analysis and, further, mischaracterised the Implied Choice-of-Law Analysis as involving the implication of terms in fact. The approach in BNA should be preferred.

References   [ + ]

1. ↑ Sulamérica at [26]. function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


EU-Ukraine Arbitration on the Export of Wood: Will Protectionism Prevail?

Thu, 2020-04-23 05:00

On 28 January 2020, the arbitration panel has been formed in the dispute between the EU and Ukraine regarding Ukraine’s export prohibition of unprocessed timber. Notably, this is the first dispute between the EU and Ukraine under the Association Agreement (“EU-Ukraine AA”), and here, the EU invokes the dispute settlement mechanism provided by the free-trade agreement instead of the usual WTO dispute settlement mechanism.

 

Background of the Dispute

In brief, on 20 June 2019, the European Union initiated arbitration against Ukraine under Article 306 of the EU-Ukraine AA between the European Union and Ukraine regarding Ukraine’s export prohibition of unprocessed timber.

The dispute arose when Ukraine imposed a temporary 10-year ban on export of unprocessed timber by the Law of Ukraine No 325-VIII of 9 April 2015. The law imposed a ban on the export of all timber except the pine tree as of 1 November 2015, and as of 1 January 2017 of the pine tree as well. The Explanatory Note to the law clarified that the main objective of this law is reorientation of the export from the unprocessed timber to the furniture products and processed timber. The note reasons that the export of the unprocessed timber that is of low value itself comparing to the processed timber is neither economically nor ecologically beneficial for Ukraine.

The EU alleges that this export ban contradicts Article 35 of the AA that provides a prohibition on export restrictions by the parties or measures of the equivalent effect.

The dispute settlement mechanism between the EU and Ukraine is stipulated in the EU-Ukraine AA and Articles 306-316 thereto provide for an ad hoc arbitration. The dispute is to be resolved by three arbitrators selected as a result of mutual consultations of the parties. The arbitration panel is to render its ruling within 120 days (in certain circumstances no later than 150 days) from the date of its establishment. Article 311 of the EU-Ukraine AA provides an obligation of the parties to comply in good faith with the arbitration panel ruling.

If the respondent fails to comply with the ruling, the complainant may request the respondent to present an offer for temporary compensation (Article 315(1)). If parties cannot reach an agreement on the compensation, the complainant is entitled to “suspend its obligations arising from any provision contained in the Chapter on the free-trade area at a level equivalent to the nullification or impairment caused by the violation” (Article 315(2)). One of the options for the complainant is to increase the tariff rates to the level applied to other WTO Members.

The arbitration panel, in this case, consists of Christian Häberli (Switzerland / Chairperson), Giorgio Sacerdoti (EU), Victor Muravyov (Ukraine).

 

Ukraine’s Potential Defences

As already noted, the EU alleges breach of Article 35 of EU-Ukraine AA. However, Article 35 of EU-Ukraine AA incorporates Article XI of the General Agreement on Tariffs and Trade 1994 (“GATT”). Further, Article 36 of EU-Ukraine AA incorporates exceptions provided for by Article XX and XXI of the GATT 1994 that Ukraine may raise as potential defences.

In particular, Article 35 of the EU-Ukraine AA stipulates exceptions to the prohibition on import/export restrictions by reference to Article XI GATT 1994: “To this end, Article XI of GATT 1994 and its interpretative notes are incorporated into, and made an integral part of, this Agreement”.

Article XI:2(a) of the GATT 1994 provides for an exception to the prohibition of the export restrictions when “export prohibitions or restrictions temporarily applied to prevent or relieve critical shortages of foodstuffs or other products essential to the exporting contracting party”.

While there should not be many problems proving that unprocessed timber is a product essential to Ukraine, the “critical shortage” criteria of this provision would be difficult to establish. The Appellate Body in China – Raw Materials case established that “critical shortage” refers to those deficiencies in the quantity that are crucial, that amount to a situation of decisive importance, or that reach a vitally important or decisive stage, or a turning point (paragraph 324). And, the Appellate Body upheld the conclusion of the panel that critical shortage criteria would not be satisfied only because of the exhaustibility of the disputed product as in the case of unprocessed timber. The Appellate Body reasoned that “it would seem that Article XI:2(a) measures could be imposed, for example, if a natural disaster caused a “critical shortage” of an exhaustible natural resource, which, at the same time, constituted a foodstuff or other essential product” (paragraph 337). Therefore, the exhaustibility of wood as natural resource per se would not be enough for a successful defence under Article XI:2(a) of the GATT 1994.

Further, Article 36 of EU-Ukraine AA incorporates Articles XX and XXI of GATT 1994 that provide for exceptions to the prohibition on import/export restrictions. Article XX of the GATT 1994 sets forth the list of exceptions that may be raised to justify the imposition of export restrictions. Before invoking any exceptions in Article XX, Ukraine must prove that the disputed export restrictions meet the “chapeau test” of Article XX. This test provides that such measures should not be “applied in a manner which would constitute a means of arbitrary or unjustifiable discrimination between countries where the same conditions prevail, or a disguised restriction on international trade”. After meeting this test, Ukraine may raise argument under Article XX(g) that provides an exception under which measures relating to the conservation of exhaustible natural resources would not contradict GATT if such measures are made effective in conjunction with restrictions on domestic production or consumption.

The Appellate Body in China – Rare Earth clarified that the requirement that restrictions be made effective “in conjunction” suggests that, in their joint operation towards a conservation objective, such restrictions limit not only international trade but must also limit domestic production or consumption (Appellate Body Report, paragraph 5.92). The Appellate Body also made clear that such domestic restrictions must be “real” rather than existing merely “on the books”, and there is no requirement that the burden of conservation must be evenly distributed between foreign consumers and domestic producers and consumers (paragraph 5.136). However, at the same time, the Appellate Body noted that “it would be difficult to conceive of a measure that would impose a significantly more onerous burden on foreign consumers or producers and that could still be shown to satisfy all of the requirements of Article XX(g)” (paragraph 5.134). Therefore, the effectiveness of export restrictions for the conservation of the natural resource would be analysed in conjunction with the domestic remedies on the case-by-case basis.

Ukraine, trying to comply with the requirements of this provision, imposed a restriction on domestic consumption of the unprocessed timber in the amount of 25 million m3 per year. This restriction is imposed under Article 4 of the Law of Ukraine No 2860-IV of 8 September 2005 “On Specifics of the State Regulation of Companies’ Activities Related to the Sale and Export of Timber” with specific reference to the Article XX(g) of GATT 1994. This domestic restriction has been introduced only in September 2018 (in comparison to the export ban effective as of November 2015), and the specific reference to the Article XX(g) of GATT 1994 in the wording implies that this, presumably, would be Ukraine’s main defence. However, the application of Article XX(g) of GATT 1994 triggers the question whether this domestic restriction is proportionate to the imposed export ban, and why, for instance, the quantitative restriction on the export was not a sufficient remedy. This could be the main stumbling block in Ukraine’s defence against the EU’s allegations.

 

Conclusion

To conclude, the argument on conservation of exhaustible natural resource under Article XX(g) of GATT 1994 seems to be most important in Ukraine’s defence against the EU’s allegations. However, for this argument to work, Ukraine has to prove that the ban was aimed at the conservation of natural resource rather than at boosting national wood processing industry as provides the Explanatory Note. Second, Ukraine must prove the ban was made effective in conjunction with the domestic restrictions. And, although, there is no requirement for even distribution of the burden of conservation, Ukraine should substantiate imposition of more onerous burden on foreign consumers for this argument to stand. Otherwise, the arbitral tribunal is unlikely to uphold Ukraine’s protectionist measure.

The evolution of this dispute is especially interesting in the context of criticism towards the export ban which argues that the ban was not effective: it has not ceased the export of unprocessed timber and only triggered the development of the shadow export; the ban does not prevent the deforestation of Ukrainian forests. The outcome of this dispute may shed light on the understanding of whether the protectionism that may be on the rise in view of the current events is ever an effective tool.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Contents of the ASA Bulletin, Volume 38, Issue 1 (March 2020)

Thu, 2020-04-23 03:00

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, Of Lighthouses and Rocks

In his first message as ASA President, Felix DASSER points out the challenges and opportunities ASA faces during his term and sets priorities.

 

Catherine A. KUNZ, Revision of Arbitral Awards in Switzerland: An Extraordinary Tool or Simply a Popular Chimera? A Review of Decisions Rendered by the Swiss Supreme Court on Revision Requests over the Period 2009-2019

Catherine A. Kunz presents an overview of the decisions rendered by the Swiss Federal Supreme Court on revision requests over the period 2009-2019.

 

Bernhard BERGER, Die Schweiz als Schiedsort für Investitionsstreitigkeiten – Erkenntnisse aus der neueren Rechtsprechung des Bundesgerichts – Teil I

Bernhard BERGER explores the case law of the Swiss Federal Supreme Court on the setting aside of investment treaty awards, with a particular focus on the limited grounds of annulment available.

 

Marco Stacher, Jurisdiction and Admissibility under Swiss Arbitration Law – the Relevance of the Distinction and a New Hope

Marco STACHER critically assesses the case law of the Swiss Federal Supreme Court as to whether it properly draws the line between jurisdictional and non-jurisdictional issues.

 

Hans-Ueli VOGT, Patrick SCHMIDT, Schiedsklauseln in Vereinsstatuten. Bemerkungen zum Bundesgerichtsurteil 5A_1027/2018 vom 22. Juli 2019 und zur Revision des 12. Kapitels des IPRG und des Aktienrechts – Teil I

This article addresses the validity and binding effect of arbitration clauses contained in the articles of an association or a stock corporation by reference to the decision of the Swiss Federal Supreme Court of 22 July 2019 (5A_1027/2018).

 

DECISIONS OF THE SWISS FEDERAL SUPREME COURT

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The Role of Investor’s Due Diligence in International Investment Law: Legitimate Expectations of Investors

Wed, 2020-04-22 03:13

In interpreting one of the most contested investment treaty protection standards – fair and equitable treatment – arbitral tribunals have increasingly referred to the necessity for an investor to conduct a due diligence investigation before investing in a host state. Foreign investors have been required to assess not only commercial, but also general socio-political risks. The investor’s due diligence in the context of the fair and equitable treatment standard (FET) goes beyond the risk-based business due diligence performed by a foreign investor for its own benefit. It has implications for a state’s right to regulate in the public interest and also contributes to a broader notion of business responsibilities. This post elaborates on this issue.

 

An investor’s due diligence and the fair and equitable treatment

A breach of the FET standard is one of the most frequent bases for investor-state dispute settlement (ISDS) claims. Presently, the protection of the legitimate expectations of an investor constitutes a central element of the FET standard. Under the concept of legitimate expectations in international investment law, states are required to maintain a certain degree of stability and predictability in their regulatory framework, which is relied upon by investors when making investments. Tribunals have considered there to be a breach of an investor’s legitimate expectations where a host state makes substantial changes to the legal framework which result in serious financial losses being suffered by the investor.

In this regard, many states are concerned with their right to adopt and change their laws for public good, as these regulatory changes may trigger investment claims. Currently, a significant number of ISDS claims relate to state changes to renewable energy policies. Spain, Italy and the Czech Republic are among the respondent states that are currently facing investment claims because of alterations to their regulatory frameworks for renewable energy. In these cases, the investor’s due diligence has been a significant factor in the assessment of the FET standard and the determination of a state’s liability by investment tribunals.

The notion of investor due diligence in the context of FET extends beyond the risk-based business due diligence performed by a foreign investor for its own benefit. The investor’s responsibility to conduct an investigation into a state’s regulatory framework, as emphasised in numerous investment decisions, has an impact on a state’s ability to regulate in the public interest. To what extent a state can change or adapt its laws and policies in the public interest without violating the FET standard depends on how tribunals balance the notion of stability against other factors, e.g. the investor’s due diligence.

Tribunals have consistently held that an investor cannot expect the legal system to freeze. Laws always evolve and will always change. The challenge appears to lie in being able to pinpoint the extent to which a regulatory change is permissible under the FET standard.

To balance the obligation of stability, some tribunals, including in renewable energy cases, require an investor to exercise proper due diligence and to conduct a risk assessment when considering whether to invest in a host state. The threshold for the violation of the legitimate expectations is whether the state’s contested regulatory changes were not foreseeable by a prudent investor. The extent to which regulatory changes will be deemed to have been foreseeable will depend on the form and content of due diligence and efforts undertaken by an investor to assess the risks of change.

 

The role of due diligence in the assessment of a FET claim

Tribunals differ regarding the role of due diligence in the overall assessment of an FET claim, and concerning the criteria used to assess the due diligence that must be conducted by an investor. In some cases, tribunals have held that exercising due diligence is a prerequisite for an investor to have its legitimate expectations protected under the FET standard. For example, in Stadtwerke Munchen and others v. Spain (2019), the tribunal held that for an investor’s expectation to be reasonable, it ‘must also arise from a rigorous due diligence process carried out by the investor.’ In Antaris v. Czech Republic (2018), the tribunal denied the investor’s claim for the protection of legitimate expectations, as there was ‘no evidence of any real due diligence.’ In Belenergia v. Italy (2019), the tribunal found that the due diligence reports presented by the investor had not concerned the Italian regulatory risks in regard to the feed-in tariffs. A tribunal emphasised that a ‘”prudent” investor was required to examine Italian PV laws and regulations, which suggest a clear trend toward incentives’ reduction.’ Hence, the due diligence conducted by the investor was deemed insufficient.

However, in other awards, e.g.  SolEs Badajoz v. Spain (2019), Cube Infrastructure v. Spain (2019) and Novenergia v. Spain (2018) the role of an investor’s due diligence has been limited in an overall appraisal of a breach of the FET standard. In SolEs Badajoz v. Spain and Cube Infrastructure v. Spain, the tribunals indicated that there was no requirement to conduct a formal due diligence process, such that this process was not considered to be a pre-condition to a successful claim for the protection of legitimate expectations. This being said, the tribunals nevertheless noted that some due diligence efforts are expected from an investor.

 

The form and extent of the due diligence required

There are also no specific criteria regarding what constitutes adequate due diligence for the purpose of a claim based on the instability of the regulatory framework. Only a few tribunals such as  Stadtwerke Munchen and others v. Spain (2019) have accepted that some type of formal written legal advice about the potential impact of changes to the regulatory framework was necessary to constitute acceptable due diligence.

In other cases, sources such as general legal opinion not specifically directed at the analysis of disputed legislation, information from officials, or general knowledge about a regulatory framework were considered to be sufficient to meet the required level of due diligence. In Foresight v. Spain (2018), the tribunal provided that a general legal advice from a law firm may constitute sufficient due diligence. In that case, the advice did not include a complete legal analysis of the Spanish regulatory framework, but the tribunal nonetheless found that the investor was kept informed about the legal developments by its law firm, it being ‘reasonable for an investor to assume that its legal advisors would have raised a red flag had they detected any risk of fundamental change to the regulatory regime.’

In Operafund Eco-Invest v. Spain (2019), the tribunal concluded that two legal opinions provided to a bank that loaned money to an investor were enough to constitute sufficient due diligence. Even though these legal opinions did not include an assessment of the risks related to the possible changes laid down in the measure at issue in that case (Article 44(3) of RD 661/2007), the tribunal came to the conclusion that the investor’s due diligence was proper under the circumstances at the time of investment.

In some Spanish renewable energy cases, the judgments of the Spanish Supreme Court have played a role in the assessment of the investor’s due diligence efforts. In referring to decisions of the Supreme Court, Spain argued that the changes to the renewable energy regime were predictable and that an investor could not expect more than a reasonable rate of return on its investment. In Charanne v Spain, Isolux v. Spain and Stadtwerke Munchen and others v. Spain tribunals concurred with Spain and stressed the relevance of some of the Supreme Court decisions in predicting regulatory changes in assessing the due diligence efforts by an investor. However, in some other cases, e.g. OperaFund v. Spain and Cube v. Spain, tribunals questioned the relevance of these judgments. A majority of the tribunal in OperaFund v. Spain asserted that ‘judgments rendered before investment are not relevant for interpretation of Article 44(3) of RD 661/2007 and cannot be applied thereto by analogy.’

 

Conclusion

The notion of investor due diligence has evolved as one of the relevant considerations in assessment of an investor’s legitimate expectations under the fair and equitable treatment obligation. Currently, as demonstrated by the case law discussed above, the requirements as to the form and content of due diligence are not clearly defined. The due diligence process is not a formal legal requirement. The central criterion for many tribunals in evaluating due diligence process is whether an investor has conducted an assessment of risks concerning a regulatory framework it relied on at the time of its investment. For several tribunals however, a due diligence report or opinion that did not contain an assessment of a disputed regulatory regime was still be accepted as evidence of adequate due diligence.

Divergence on the scope of the required due diligence observed in the jurisprudence creates uncertainty regarding the existence and the extent of an investor’s responsibility to act with diligence while investing in a host state. This gap creates risks for opportunistic investment claims. This is particularly problematic for weak political regimes or economies in transition, where the possibilities of regulatory changes are very likely. A clarification in IIAs of the conditions for protection of investor’s legitimate expectations including an investor’s duty to conduct a due diligence can contribute to development of more consistent approach regarding the extent of the required due diligence.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


The COVID-19 Crisis and Investment Arbitration: A Reflection From the Developing Countries

Tue, 2020-04-21 04:02

COVID-19: Background and Impact on Foreign Investment in the Developing Countries

As discussed on the Blog previously, the number of confirmed cases of COVID-19, the disease caused by the virus named SARS-CoV-2, continues to rise globally, as shown on this page from the WHO.

Today, the virus has already spread in Western Europe and the US (Northern Developed Hemisphere), where most of the arbitral institutions are located, most arbitrations are seated, most of the prominent international arbitrators and practitioners are living, and most of the claimant investors companies and their law firms are headquartered. The serious control measures imposed by the governments in Western Europe and the US have already affected the arbitration field. Even beyond these developed countries, governments across the world are implementing wide-ranging control measures according to their situations. The measures include travel bans, quarantines in specific locations, self-isolation, suspension of mass gatherings, and social distancing that includes working from home. In addition, various emergency measures have been enacted on a local and national basis, which severely affect foreign investors.

 

Implications of the Failure to Contain the Pandemic on Developing Countries

As indicated by the WHO Director General, no doubt, the situation will be more complicated if COVID-19 spreads severely in developing countries that, unlike the developed countries, have poor health infrastructures and more-vulnerable populations. Assuming that the most-frequent respondent States are from the developing world, the implications might be more complicated if the virus is not contained in the near future, or in the alternative, is contained in the developed world and life returns to normal there, while it begins (and then continues) to spread in the less developed countries. Assuming that States adopt inadequate measures and hastily created, ill-coordinated policies giving them unlimited powers with no clear ceasing date, most likely, this will pave the way for investment claims to be brought by foreign investors.

This post focuses on the impact of the spread of COVID-19 on investment arbitration from a developing country’s perspective, in light of the confusion, uncertainty, public risks, and reactive control measures caused by the unprecedented situation. In the first two sections, I will examine the current impact to reveal the potential weakness of the current system of investment arbitration in such situations. In the last section, I will envisage the future impact of the situation. Finally, I will offer some concluding remarks.

 

1. Disputes Notified and not yet Registered

Since the outbreak started and until the time of writing, several disputes were notified. Certainly, there is the possibility that investor claimants might initiate arbitration proceedings as a means to encourage amicable settlement with host States where they are dissatisfied with the status of their current investments. As noted in my earlier blog post, after the so-called Arab Spring, several investors filed various meritless claims. Today, the risk continues that investors may misuse the process and time limits of arbitral procedure in the same way.

Litigants might also invoke the current situation to justify not adhering to cooling-off periods stipulated in several BITs, which require investors to try to reach a settlement with the State before filing an arbitration. Some investors may argue that the request for settlement at the time of the outbreak was futile, due to the measures taken at that time and the unpredictability of the situation. The same will apply to BITs where exhaustion of domestic remedies is required before filing an arbitration. Some investors may argue that it was impossible to exhaust domestic remedies due to the shutdowns and the closure of national courts, and accordingly, it is pointless to adhere to this condition.

Another example may involve circumventing the fork-in-the-road provisions in BITs as a tactic to avoid the limitation of choosing only one of the agreed disputes resolution options. An investor may argue that it was impossible at the time of the outbreak to comply with the provision due to the shutdowns and closure of the national courts.

On the other hand, we also can see States refraining from cooperating in accordance with due process. For example, States may reply to dispute notices by requesting an open-ended extension for the time limits provided in some BITs, such as for selecting applicable arbitration rules or appointing the arbitrators. A State may rely on various government actions to justify delays, such as total lockdowns, curfews, or availability of government officials due to the outbreak.

A further more minor non-cooperation could arise from States insisting on receiving hard copies of any arbitration filings, such as the request of arbitration, using the current disruption of mail services in different parts of the world as a tactic for delaying the registration of the arbitration. This tactic may interact with the recent development that several arbitration institutions have announced that request for arbitration may only be filed electronically.

One cannot predict how tribunals will react to these tactics. Each tribunal is unique, and arbitrators will most likely react and behave differently depending on the facts at hand.

 

2. Disputes that are On-going and Disrupted by the Outbreak

In general, the length and level of the disruption to the ongoing disputes will depend on when “life gets back to normal.” However, as noted above, there are fears that the spread of the virus will get more severe in the developing world after things come back to normal in the more developed world. This means that arbitration institutions, arbitrators, and law firms located in the developed countries will work normally, while respondent States presumably won’t.

Hearings: As noted above, several hearings were already/are being postponed by the arbitral tribunals, notwithstanding the attempts to minimize the disruptions by conducting hearings by video conference or otherwise. Procedurally, even, there is nothing in most arbitration rules that requires hearings to be conducted only in person. As stipulated in Rule 28(4) UNCITRAL Rules, for example, witnesses may be examined through means that do not require physical presence. Procedural hearings are usually held by video conference, no doubt about that, but for hearings on the merits, many obstacles may affect due process. These obstacles may be as simple as poor internet connection in the country of one or more of the participants, or more complex, as, for example, handling cross-examination, which is complicated to administer through video conference. For example, it is nearly impossible to ensure that the fact witness is not accompanied by someone unauthorized in the room during the hearing. Normally, persons who are authorized are those allowed to enter the hearing room where the arbitration is held. These complexities have an impact on the enforceability of an award according to Articles V(1)(b), V(1)(d), and V(2)(b) of the New York Convention of 1958 (although the New York Convention would not apply to awards rendered pursuant to the ICSID Convention).

Most arbitral institutions have the capacity to conduct virtual meetings so the spread of the virus would not hinder or prevent arbitrators from conducting their meetings. For example, as recently posted on the ICSID page, in 2019, 60% of the 200 hearings organized by ICSID were held by video conference. Yet, could a party object, arguing that they prefer an in-person hearing for presentation of their witnesses, in order to make cross-examination more effective and for the tribunal to properly deduce their credibility?

To answer these questions, I examined several procedural orders from on-going and recent investment arbitrations to analyze how tribunals are dealing with the issue of video-conferencing. While in most cases tribunals accept proceeding through video-conferencing, other tribunals expressly mention their preference that witnesses appear in person, except in exceptional circumstances for justified reasons at the discretion of the tribunal.1)LDA v. India, PCA Case No. 2014-26, Award 11/9/2018, Para 69;  Pawlowski and Project Sever v. Czech Republic, ICSID Case No. ARB/17/11, Procedural Order No. 1. jQuery("#footnote_plugin_tooltip_1998_1").tooltip({ tip: "#footnote_plugin_tooltip_text_1998_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Written Procedures: Due to the current situation, some parties might ask for an open-ended extension of time for their filing deadlines for responsive memorials. Some of the cases during the so-called Arab Spring may illustrate the impact of such requests. In one of the cases, the State requested the suspension of the procedural calendar due to political unrest, but the request was denied. However, the second request for suspension was granted due to the escalation of the political unrest.2)Ampal-American Israel Corporation and Others v. Egypt, ICSID Case No. ARB/12/11, Award on Jurisdiction, Paras 39 and 40. jQuery("#footnote_plugin_tooltip_1998_2").tooltip({ tip: "#footnote_plugin_tooltip_text_1998_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); It remains unclear how tribunals will react to this motion, considering that most of the lawyers and experts who are involved are located in Europe and the US. In my opinion such requests will be accepted by most of the tribunals, but might have a negative impact for the requesting party in future cost allocations. So far, it is expected that arbitral tribunals would react towards postponing or suspending the proceedings, in light of counsel’s inability to work full capacity at this time. Accordingly, we can expect time extension and delay in resolution of many ongoing arbitration proceedings.

Enforcement: New applications for annulment of ICSID awards may be impacted as well due to the exceptional nature of the stay of enforcement, as States may successfully demonstrate that the spread of a pandemic is a circumstance beyond the inherent or normal effects of an adverse award in accordance with Article 52(5) ICSID Convention and Rule 54 ICSID Rules. Developing States that are suffering from the ravages of a global pandemic may have good grounds for being granted a stay of award.

Enforcement proceedings for non-ICSID awards may be affected as well due to the partial or total closure of some national courts. Some national courts have reduced the capacity of their work to essential litigations. In some jurisdictions, the recognition, enforcement, and setting aside of foreign arbitral awards are not considered essential litigations. It remains unclear how States will react to such situations if parties are not exempted from their obligation to comply with time limits.

 

3. Post COVID-19 Disputes (beyond the immediate effect)

Due to the spread of the virus and related global shortages, it is expected that various contentious disputes will be on the rise due to party default. The breadth of resulting claims and underlying measures claimed cannot be predicted, but many claims will relate to FET and indirect expropriation. I assume that some States may have difficulty to argue that they did not substantially contribute to the situation and below I discuss the most relevant defenses to epidemics.

  • BIT Exceptions and the National Security Concept: Under several BITs, States are able to argue that they are entitled to take the necessary measures to protect the health of their citizens or public order. However, the State must prove that these measures were applied reasonably on a non-discriminatory basis and in a timely manner. According to the Investment Policy Hub, there are 163 in-force BITs with health exceptions identified. Most of the State signatories are European, Asian, and African states. As contemplated by UNCTAD in 2009, the evolving concept of national security also implies that new threats may arise in the future that are unknown today.
  • The Doctrine of Police Powers: Some States may argue that the measures were introduced as part of a larger international scheme of controlling the spread of the virus and were a valid exercise of police powers for the protection of public health.3)Philip Morris v. Uruguay, ICSID Case No. ARB/10/7, Award, Paras 305, 306, 307. jQuery("#footnote_plugin_tooltip_1998_3").tooltip({ tip: "#footnote_plugin_tooltip_text_1998_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });
  • Human Rights and Corporate Social Responsibility: According to Article 12(2C) of the International Covenant on Economic, Social and Cultural Rights, States should achieve the full realization of the prevention, termination, and control of epidemics, endemics, occupational and other diseases. States may argue that the measures taken were based on human rights and their obligations according to the Covenant. It can also be argued that the right to health is an essential human right which is not only the responsibility of States but also a responsibility binding on individuals and, consequently, companies as well. States may also argue that companies are bound by these principles according to the Declaration of Multinational Enterprises and Social Policy, which acknowledges that the rules contained in the Universal Declaration of Human Rights and the corresponding international covenants are applicable to corporations.

States will most probably invoke the law of responsibility of states in relevance to their efforts to stop the spread of the virus. As noted in a recent blog post there are three available defenses according to the ILC Articles on State Responsibility. Even if one of the defenses was accepted, it could not relieve the State from compensating the claimant for damages according to Article 27 ILC, which in relevant part provides for compensation for any material loss caused by a covered act.

 

Conclusion

The crucial need and use of new technologies for arbitration proceedings and settlements is growing (even before this pandemic came into existence). New technologies will most likely replace physical meetings, while ensuring accurate and adequate face-to-face interactions between parties, witnesses, and arbitrators.

Will we see the drafting of notices, submissions, correspondence, pleadings, statements, and applications—which are traditionally document-only tasks—made electronic? Time will tell if this will pose a difficult task for certain parties.

I assume that arbitral institutions may have realized by now the need for introducing regulations in similar unprecedented situations, such as allowing for special suspension provisions to be available for the secretariat of the institution in similar circumstances.

In my opinion, amicable settlements will be the only winner after these unprecedented events. Investment damages will not be healed easily, and the arbitration process will be more complicated because it is highly unpredictable how tribunals will react to the current situation.

 

The views expressed herein are those of the author alone and should not be regarded as representative of, or binding upon the author’s work at the Ministry of Justice or any other institution to which the author is affiliated. The data in this article were provided from the publicly available sources such as the ICSID, UNCTAD and Jus Mundi websites.

 

The Kluwer Arbitration Blog is closely following the impact of COVID-19 on the international arbitration community, both practically and substantively. We wish our global readers continued health and success during this difficult time. All relevant coverage can be found here

References   [ + ]

1. ↑ LDA v. India, PCA Case No. 2014-26, Award 11/9/2018, Para 69;  Pawlowski and Project Sever v. Czech Republic, ICSID Case No. ARB/17/11, Procedural Order No. 1. 2. ↑ Ampal-American Israel Corporation and Others v. Egypt, ICSID Case No. ARB/12/11, Award on Jurisdiction, Paras 39 and 40. 3. ↑ Philip Morris v. Uruguay, ICSID Case No. ARB/10/7, Award, Paras 305, 306, 307. 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
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Section 1782 Discovery: California District Court Follows Sixth and Fourth Circuits in Holding Statute Applies to Private Arbitral Tribunals

Mon, 2020-04-20 04:10

A California district court held in February that 28 U.S.C. Section 1782 could be used to seek discovery for use in a private, commercial arbitration, becoming the first district court in the Ninth Circuit to do so, and, following recent decisions in the Sixth and Fourth Circuits, potentially teeing up an even more pronounced split between the U.S. Court of Appeals on the issue.

 

Section 1782 and the “For Use in a Foreign or International Tribunal” Requirement

28 U.S.C. Section 1782 is a provision of the U.S. Code that allows a United States district court to order a person found or resident in the district to provide information or documents “for use in a proceeding in a foreign or international tribunal.”  As detailed in previous posts on the Kluwer Arbitration Blog, considerable uncertainty exists regarding the scope of the statute, and particularly whether it can be used to obtain discovery for use in a private, international commercial arbitration.

The uncertainty stems from the U.S. Supreme Court’s 2004 decision in Intel.  There, the Supreme Court suggested in dicta that private, commercial arbitrations fell within the scope of Section 1782.  However, five years prior, the U.S. Courts of Appeals for the Second Circuit had explicitly held in NBC that a commercial arbitration administered by the International Chamber of Commerce (ICC) did not fall within the scope of “foreign or international tribunal” for purposes of Section 1782.  The Fifth Circuit similarly held that same year that an arbitration administered by the Stockholm Chamber of Commerce (SCC) was not covered by Section 1782 in Biedermann.

Since Intel, little clarity has been gained on the subject.  The Fifth Circuit, for its part, reaffirmed its pre-Intel decision, holding in 2009 in El Paso Corp. that Section 1782 could not be used to obtain discovery for use in a private, commercial arbitration taking place in Switzerland.  The Eleventh Circuit, on the other hand, seemed to consider that Section 1782 did apply to a private arbitration taking place in Ecuador in its 2014 decision in Consorcio; however, that opinion was later vacated on other grounds.

The situation in the Second Circuit is even more complicated.  A split has emerged in the last year amongst district courts within the Second Circuit—indeed within the Southern District of New York—on this issue, with some judges holding that NBC is still good law (see Hanwei Guo), and others concluding that Intel overturned NBC and thus that private, commercial arbitrations are covered (see Children’s Investment Fund Foundation).  The Second Circuit has yet to address the issue post-Intel, but an appeal of the district court’s decision in Hanwei Guo is currently pending before the Court (an appeal of Children’s Investment Fund Foundation was withdrawn after having been filed by the parties).

More recently, two Circuit Courts have found that private, arbitral tribunals are covered by Section 1782.  In September 2019, the Sixth Circuit held in Abdul Latif Jameel that the statute could be used to seek discovery for use in a UAE arbitration administered by the Dubai International Financial Centre – London Court of International Arbitration (DIFC-LCIA), becoming the first Circuit Court post-Intel to clearly hold that private, commercial arbitrations are covered by Section 1782.

Late last month, the jurisprudence shifted yet again.  On March 30th, the Fourth Circuit held in Servotronics that Section 1782 could be used to obtain discovery for use in a private arbitral proceeding in the United Kingdom under the auspices of the Chartered Institute of Arbitrators (CIArb).  Noting that the Fourth Circuit had never considered the issue before, pre- or post-Intel, the Fourth Circuit concluded that the Statue reflected Congress’ intention to facilitate cooperation with both foreign courts and international tribunals.  In light of this Congressional intent, it held that the “for use” requirement includes the private, commercial proceedings in the UK.

 

In HRC-Hainan Holding Company, the Northern District of California Follows the Recent Sixth and Fourth Circuit Decisions

Against this backdrop comes HRC-Hainan Holding Company, where a U.S. Magistrate Judge sitting in the U.S. District Court for the Northern District of California confronted whether a private arbitration before the China International Economic and Trade Arbitration Commission (CIETAC) is a foreign or international tribunal for the purposes of Section 1782.  Noting that the Ninth Circuit had not yet decided the issue, the district court focused its analysis on the reasoning contained in the two key opposing cases, NBC and Abdul Latif Jameel, ultimately concluding that the Sixth Circuit’s was the more persuasive.

In the district court’s view, the reasoning of the Second Circuit was fundamentally flawed.  In the first place, the Second Circuit in NBC neglected to properly interpret the ordinary and natural meaning of “foreign or international tribunal”, which the district court found includes private arbitrations.  Further, the district court found that nothing in the legislative history of the Statute suggested that Congress intended to exclude private arbitrations from the scope of Section 1782, as the Second Circuit had held, noting that the Sixth Circuit had instead found support for a more expansive interpretation in the legislative history.  Finally, the district court stated that it was “not as persuaded by public policy concerns as was the Second Circuit”, but, in any event, it considered that public policy may well weigh in favour of broader application. Finding that it was in complete agreement with the Sixth Circuit’s decision in Abdul Latif Jameel, the district court thus held that a CIETAC proceeding was a “foreign or international tribunal” for purposes of Section 1782.

 

Splits Within and Across Circuits Further Highlight Need for Clarification

The district court’s decision in HRC-Hainan is the first in the Ninth Circuit to hold that a private, commercial arbitration falls within the scope of Section 1782.  However, it is not the first time a district court in the Circuit has considered the issue.  District courts in the Ninth Circuit, including the Northern District of California, have twice held post-Intel that private, commercial arbitrations—particularly private arbitrations under the AAA-ICDR Rules and ICC Rules—are not covered by Section 1782.  The February 2020 decision in HRC-Hainan thus tees up another district court split that is in need of clarification.

The unsuccessful defendants in HRC-Hainan have filed their notice of appeal to the Ninth Circuit, and a briefing schedule has already been set, with the appellants opening brief due in early May. Thus, the arbitration community should keep an eye on the Second and Ninth Circuits to see if Abdul Jameel Latif and Servotronics are the exception or the rule.  Either way, there is a clear split amongst the Circuits, and decisions from the Second and Ninth Circuits may cause the Supreme Court—if not Congress—to finally weigh in on the issue of whether private, commercial arbitrations are “foreign or international tribunals” within the meaning of Section 1782.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167


Paris Court of Appeal Upholds the Supranational Character of Ohada Law in An Action for Annulment of an Arbitral Award

Sun, 2020-04-19 04:00

A decision by the Paris Court of Appeal rendered in 2018 rejected a request by the state of Cameroon for annulment of an arbitral award that had applied OHADA law over Cameroonian law (CA Paris 16/25484, 20 December 2018).

The action for annulment had been brought by the state of Cameroon against three arbitral awards that had found that the state had wrongfully terminated a lease contract. The issue of the contrast between OHADA law and Cameroonian law related to the identity of the claimant, and accordingly to the existence of an arbitral agreement between the parties and the jurisdiction of the arbitral tribunal.

 

OHADA Law

The Organisation pour l’harmonisation en Afrique du Droit des affaires (Organization for the Harmonization of Commercial Law in Africa) (“OHADA”) is an international organization composed of seventeen (mostly francophone) African countries, created for the harmonization of business law amongst its state members, with the purpose of ensuring legal and judicial certainty for investors and companies.

OHADA’s uniform rules are created through so-called Uniform Acts, which pertain to various domains of commercial law. To date, OHADA has adopted nine different uniform acts, which cover matters of, among others, general commercial law, insolvency, transport of goods, company law, and arbitration (the OHADA’s arbitration and mediation framework was previously discussed on the Blog).

Pursuant to OHADA’s constitutive treaty, the Uniform Acts are directly applicable and binding in the member states, notwithstanding any contrary provision of municipal law that either precedes or postdates the act.

 

The Dispute

Projet Pilote Garoubé (“Garoubé”) was constituted in 2000 in Yaoundé, Cameroon, pursuant to the rules of OHADA’s Uniform Act on the law of companies and economic interest groups (Acte uniforme relative au droit des sociétés commerciales et du groupement d’intérêt économique). The company had its seat in Garoua, Cameroon.

In late 2001, the Cameroonian government and Garoubé entered into a lease agreement over two areas for game ranching and game farming. The agreement was governed by OHADA law and provided for ICC arbitration.

In 2006, the lease agreement was suspended by the Cameroonian authorities.

Following the suspension of the agreement, in 2007, Garoubé moved its seat to Brussels, Belgium as per its shareholders’ unanimous decision. All administrative requirements for the move under Cameroonian law and to Belgian law were followed in this transfer.

Later in 2007, Garoubé, now a company governed by the laws of Belgium, initiated arbitration against the state of Cameroon for, inter alia, the illegal termination of the lease agreement.

A first partial award was rendered early 2010, but was later annulled by the Paris Court of Appeal on the basis of irregular constitution of the arbitral tribunal.

A new arbitral tribunal was then constituted. Cameroon raised jurisdictional objections based on the argument that Garoubé’s seat transfer from Garoua to Brussels was in violation of rules of Cameroonian law governing companies involved in activities of exploitation of wildlife in the country and, in any case, meant that the entity constituted in Cameroon and which was a party to the lease agreement (and thus to the arbitration agreement) had ceased to exist. Therefore, Cameroon contended that there was no arbitration agreement between the Belgian entity and Cameroon and therefore that the arbitral tribunal had no jurisdiction over the dispute.

By late 2014, the tribunal rendered a partial award rejecting Cameroon’s jurisdictional objections and awarded damages to Garoubé. In October 2016, the tribunal rendered a second and final award in favor of Garoubé on the merits, and in 2017 it issued an addendum to the second award with two textual rectifications.

In December 2016, the state of Cameroon filed for annulment of the first two arbitral awards, arguing, inter alia, that the tribunal had wrongfully found for its jurisdiction. In 2017, it also filed for annulment of the addendum issued by the tribunal.

The requests for annulment of all three awards were dealt with at once by the Paris Court of Appeal.

 

The Paris Court of Appeal’s Holding

The Paris Court of Appeal was confronted with the purported conflict between OHADA law and Cameroonian law in the context of Cameroon’s argument that the transfer of Garoubé to Belgium affected the Tribunal’s jurisdiction over the dispute. More specifically, the Court was called to analyze whether the decision by the shareholders to transfer the company’s seat from Garoua to Belgium – carried out pursuant to OHADA law – was null or did not produce effects vis-à-vis the state of Cameroon because it had been taken in breach of mandatory rules of Cameroonian law governing companies involved in activities of exploitation of wildlife in the country (to recall, lease agreement between Garoubé and Cameroon concerned game ranching and game farming in Cameroon).

The arbitral tribunal had found, invoking article 10 of the OHADA treaty, that the validity of decisions of a Cameroonian company are governed exclusively by the provisions on the matter found in OHADA law and, more specifically, in OHADA’s Uniform Act on the law of companies.  Accordingly, the tribunal found that provisions governing other matters, such as Cameroonian law on the exploitation of wildlife – relied upon by Cameroon – would not affect the validity of such decisions, but only the rights granted to a party by the state of Cameroon under such provisions. The arbitral tribunal had also noted that article 2 of the Uniform Act on the law of companies also provided that its provisions amount to public policy and have direct and immediate application in Cameroon. Consequently, as long as the Uniform Act on the law of the companies allowed the decision by the shareholders to transfer the company’s seat away from Garoua, Cameroonian law had no bearing on the assessment of the validity of that decision.

In the annulment proceedings, the Paris Court of Appeal found that a different interpretation than the one employed by the arbitral tribunal would ignore the supranational character and the primacy of OHADA law, as well as the mandatory nature and that of international public policy of its provisions.

By doing so, the Paris Court of Appeal gave full effect to the express provisions of OHADA’s constitutive treaty and of the uniform act providing for the precedence of OHADA law over municipal law and for their mandatory nature. These are respectively, OHADA’s treaty article 10, which reads “the uniform acts are directly applicable and binding within the State Parties, notwithstanding any municipal law provision to the contrary that either precedes or postdates the act” (free translation), and the Uniform Act’s article 2, which provides that companies and economic groups cannot derogate from its provisions.

 

The Rule of Primacy of International Treaty Provisions over Municipal Law

The rule of primacy of its norms over those of municipal law is neither a specificity of nor a novelty brought by OHADA law.

In the international order, this rule has long been accepted as a general principle of international law (see, e.g., Permanent Court of International Justice, Advisory Opinion on the Greco-Bulgarian “Communities”, 1930 ) and has its variants enshrined, for example, in the Vienna Convention on the Law of the Treaties  (Article 27), and the ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts State Responsibility (Articles 3 and 32).

In national orders, the rules on the interaction between international law and national law naturally vary from country to country. In the case of France, through the lenses of which the Paris Court of Appeal assessed the issue in the case at hand, the general rule is that duly-ratified treaties prevail over national laws (see 1958 French Constitution, Article 55).

Against this backdrop, although not expressly addressed by the Court, its decision giving effect to the OHADA treaty’s provision asserting its own precedence over the municipal law systems of the OHADA members seems to be rooted in the French legal order’s own rule that treaty provisions prevail over those of municipal law.

 

Conclusion

The Paris Court of Appeal’s decision does nothing more than give full effect to the text of the OHADA treaty’s and Uniform Act’s provisions that establish their supranational and public policy character. Nevertheless, by doing so, it helps consolidate OHADA law as a system of law that takes precedence over municipal law of its member states and that, as public policy, such primacy is absolute and should be followed by judges and tribunals that are met with it.

As such, the decision furthers the organization’s goals of ensuring a harmonious system of business law amongst its state members, and according, ensuring legal and judicial certainty for investors and companies in the territory of its state members.

More from our authors: Construction Arbitration in Central and Eastern Europe: Contemporary Issues
by Edited by Crina Baltag & Cosmin Vasile
€ 167