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Romanian electricity supplier wins against Swiss trader

Romanian state-owned company Hidroelectrica has defeated a €43 million ad hoc claim brought by a Swiss energy trader that accused it of failing to comply with an energy supply contract in the face of insolvency...

Romanian electricity supplier wins against Swiss energy trader

Romanian state-owned company Hidroelectrica has said that it has defeated a €43 million ad hoc claim by a Swiss energy trader alleging that it failed to comply with an energy supply contract in the face...

Peeking Behind the Curtains: Insights from the Swiss Supreme Court’s Recent Public Hearings in Appeals against Investor-State Dispute Settlement Awards

Kluwer Arbitration Blog - Fri, 2019-01-04 02:05

Michael Falck

In a marked departure from its usual closed-doors policy, the Swiss Federal Supreme Court (the “Supreme Court”) recently held public deliberations in two separate appeal proceedings concerning foreign investment arbitrations. In both cases, a public deliberation by all five judges of the first civil chamber was necessitated due to the lack of unanimity among the regular panel of three (Articles 20 and 58 of the Swiss Federal Tribunal Act). In both cases, the majority decided to uphold the decisions in the relevant UNCITRAL arbitrations that favored investment protection, with a dissenting minority advocating for a more restrained interpretation of the scope of application of the relevant bilateral investment treaties (“BITs”).

The first hearing, held on 16 October 2018, concerned two cases in which the Russian Federation sought to set aside the interim awards in two PCA-administered UNCITRAL arbitrations with seat in Switzerland for lack of jurisdiction (4A_396/2017 and 4A_398/2017, published on 16 November 2018). The disputes centered on the territorial scope of the Russia-Ukraine BIT of 27 November 1998 (the “R-U BIT”), namely on whether the Crimea was part of the host state territory from the perspective of a Ukrainian investor.

The Supreme Court confirmed the arbitral tribunal’s finding that the BIT extended to the Crimea, over which Russia exercised de facto control. As for the scope of investments covered by the BIT, the Supreme Court backed the arbitral tribunal’s finding that the term “investment” included investments initially located in the investor’s home state that ended up in the host state only subsequent to a change in territorial borders.

Judge Kathrin Klett, the lone dissenting judge, criticized the majority’s finding, arguing that the arbitral tribunal’s jurisdiction should have been declined for two reasons. For one, the investment notion under Article 1 (1) of the R-U BIT was in Klett’s view transaction-based, i.e. it only covered investments that were made by investors of one state in the territory of another state. Judge Klett argued that, by contrast, the majority wrongly based their assessment on an asset-based definition of investment, which she considered to be a definition more commonly used in recent BITs. Judge Klett found that her view was also in line with a systematic interpretation of the R-U BIT, which specifically mentions the need for a cross-border investment ab initio (based on the wording in Article 12 of the R-U BIT: “… investments carried out by the investors of one Contracting Party on the territory of the other Contracting Party …”), thereby excluding investments that only become international later on. She further opined that her stance was supported by the BIT’s goal of attracting foreign investment. Secondly, Judge Klett criticized the majority’s approach as an impermissible supplementation of a lacuna in the BIT. In her view, Russia and Ukraine in 1998 did not consider the possibility that investments would change ‘nationality’ as a result of shifting borders and this gap in their agreement could not be filled by a judicial or arbitral body.

In the second hearing, held on 11 December 2018 and for which the reasoned judgement is still outstanding, the Supreme Court rejected India’s set-aside appeal to an interim arbitral award in a satellite telecommunications dispute with Deutsche Telekom. In the UNCITRAL arbitration with seat in Switzerland, the tribunal had rejected India’s jurisdictional objections and found the force-majeure repudiation of the contract by the Indian state-owned entity to be a violation of the fair and equitable treatment standard. The Supreme Court confirmed the arbitral tribunal’s finding that the subjective scope of the 1995 Germany India BIT (the “G-I BIT”) extended to both direct and indirect foreign investments and thus covered Deutsche Telekom’s Indian investment made through a Singaporean subsidiary.

The majority considered that the G-I BIT covered indirect investments despite not being mentioned explicitly in the text. It based its interpretation on the BIT’s purpose of promoting foreign investment. Christina Kiss, the presiding judge, explained that a state should not be allowed to restrictively interpret such a treaty to exclude the type of investment it intended to attract when entering into the BIT. The majority also found support for its position in the fact that the use of special purpose investment vehicles was common in foreign investment and should not be disallowed by way of a restrictive interpretation. By contrast, the two dissenting judges adhered to a more literal interpretation, with Judge Klett emphasizing that Deutsche Telekom’s investment was in Singapore and not in India. Judge Martha Niquille expressed the view that the treaty’s silence on indirect investments should be interpreted as a conscious omission by the treaty partners since some contemporary BITs explicitly included such investments.

While no assessment on the basis of a sample size of two can be conclusive, the two decisions nevertheless invite a joint assessment in light of the fact that their contested and, in the case of the Crimean decision, politically sensitive subject matter led both to be publicly deliberated in the space of only two months. Seen together, the two decisions betray the possibility of an ideological divide among the judges of the first civil chamber. In common terms, this divide would distinguish Judges Klett and Niquille as the more ‘conservative’ faction favoring a more restrictive interpretation of BITs’ scopes of application, which ultimately favors states’ sovereignty. By contrast, the majority seems to show a willingness to interpret the BITs brought before it based on their objective purpose, thereby maintaining their broad scope (as reflected e.g. in Article 2 of the G-I BIT by the phrase “all investments made”) and refusing to exclude investments that a more restrictive historical or literal interpretation of the BIT would not cover.

It remains to be seen whether this divide follows the described lines or even truly exists. In any case, the Supreme Court’s recent jurisprudence in investor-state dispute settlement disputes can still be said to reflect its customary and long-standing practice as a gate-keeper: it assiduously uses its broad power of review when assessing an arbitral tribunal’s legal reasoning on jurisdiction yet exercises the judicial restraint mandated by Article 190 (2) of the Swiss Private International Law Act on all other grounds of appeal. The result is a body of established precedents that is very consistently in favor arbitri, which is good for investor-state arbitrations with seat in Switzerland and good for business.

More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Procedural Reform: Two Party-Appointed Arbitrators and a Presiding “Expert”

Kluwer Arbitration Blog - Fri, 2019-01-04 00:00

Ylli Dautaj and William F. Fox

Arbitration in the 21st Century requires some bold, fresh thinking.  We must seek flexibility and innovation if legal civilization is to survive. 1) Thomas E. Carbonneau, The Law and Practice of United States Arbitration, xxix (6th. ed. 2018) jQuery("#footnote_plugin_tooltip_2608_1").tooltip({ tip: "#footnote_plugin_tooltip_text_2608_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); Similarly,  when the market speaks strongly, we should  listen very carefully. We believe that open and free markets, receptive to innovation, have proven superior for economic growth and political and legal stability.

It is not a coincidence that arbitration has been the dispute resolution choice of merchants for hundreds of years. While it has never been perfect, arbitration grew out of  free markets and promotes rule of law and private justice. Procedural workability and reasonable substantive fairness have trumped the need for a full-blown, court-like procedure.

Even so, arbitration should not be exempt from criticism. In the past, arbitration has been attacked on the false assumption that it usurps the courts’ inherent prerogatives. Some argue that party-appointed arbitrators take justice in their own hands, and overriding the twin goals of fairness and justice.  We disagree.  Arbitration has not usurped the role of judges. The arbitral procedure merely provides for an alternative to court litigation—not a complement to the courts. The free choice of expert arbitrators enhances private justice and overall freedom. Like free and open markets, the desire for private justice through arbitration is evidenced by arbitration clauses in international commercial agreements. The bottom line is this: arbitration’s workability has been demonstrated by the test of time.

These days, most of the debate on the efficacy of arbitration involves a discussion of potential changes that can improve an already efficient arbitral procedure. Most current debate focuses on procedural efficiency and cost-reduction and how these two features can be balanced in light of substantive quality. Spotting the contemporary issue with respect to increased costs and lengthier procedures is easy. Proposing possible solutions is more difficult. One recent proposal that is gaining traction—and is to be applauded—is that of “expedited procedures” (e.g. fast-track arbitration).

There is another procedural reform that we find both provocative and intellectually stimulating. We propose one significant change for appointment and composition of arbitral tribunals. In an arbitration with three arbitrators, the presiding arbitrator could be selected subsequent to the exchange of written submissions, or, perhaps,  subsequent to the case management conference. Appointing the presiding arbitrator before the case review conference, or before the first procedural order, would reduce costs and allow the third arbitrator to be appointed based on his or her relevant experience and expertise vis-á-vis the issues at hand—or, put a bit differently, the presiding arbitrator will be appointed only after a showing of demonstrated experience and expertise.

ARBITRATOR EXPERTISE 

Traditional practice among international merchants is to refer disputes to a tribunal comprised of three arbitrators under the supervision of a recognized arbitration institution. Usually each party nominates one arbitrator and the party-appointed arbitrators choose the presiding arbitrator.  Much less frequently, an arbitral institution (or national court) may be the final appointing authority. The freedom to choose one’s own arbitrator is considered a major advantage and central hallmark of arbitration. But there is frequently a great deal of disagreement and contentiousness when the two party-appointed arbitrators begin the selection process for the presiding arbitrator.  We urge two changes: first, the credentials of the presiding arbitrator should include not only competence as an arbitrator but also significant expertise and relevant education in the subject matter of the dispute. Second, if the presiding arbitrator is appointed later in the process, it will be much easier to identify the specific expertise necessary to resolve the dispute.  These two innovations may reduce excessive hostility and contentiousness and the parties may be more prone to settle. If the presiding arbitrator is appointed subsequent to the exchange of written submissions—the parties can appoint an acknowledged expert in the relevant subject matter. Moreover, this procedural reform would potentially allow parties to save money since the presiding arbitrator will be a qualified expert by experience, expertise, and relevant educational background. With this “built-in” expertise parties might be willing to forego the expense and hassle of appointing their own expert.

COST-REDUCTION AND PROCEDURAL EFFICIENCY

Lack of speed and excessive costs are among the worst perceived features of international commercial arbitration. 2)White & Case, 2018 International Arbitration Survey: The Evolution of International Arbitration, 2 (2018) jQuery("#footnote_plugin_tooltip_2608_2").tooltip({ tip: "#footnote_plugin_tooltip_text_2608_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); As has been said in this blog: “the key to efficiency is to identify when resources are being invested and when they are being wasted.” Reducing costs and minimizing procedural intricacies while at the same time delivering on procedural workability and substantive fairness is a tough task. Conducting a preliminary case assessment is a good practice prior to selecting the tribunal. In a “best case” scenario a dispute might settle subsequent to a preliminary case assessment. At the very least the important issues might be identified and narrowed with some certainty.  Similarly, letting the parties work out the crux of the matter and the time table with their own party-appointed arbitrator might reduce adverserialism and hostility and promote cooperation leading to, hopefully, early settlement. If not, at least costs will be significantly reduced and appointing a true expert might be an easier task.

One step in implementing our proposal will require arbitral institutions to investigate the credentials of their arbitrators in terms of both arbitration experience and subject matter expertise and to provide lists of potential arbitrators that are broken down into various subject matter areas.  So, for example, the institution could provide a list of experienced arbitrators who have a minimum of, say, ten years’ experience in international energy matters.3)We acknowledge that our proposal is a work in progress.  We believe a ten-year level of expertise (while perhaps a bit arbitrary) to be close to the minimum necessary to achieve our ultimate goal of dispensing with party-appointed expert witnesses jQuery("#footnote_plugin_tooltip_2608_3").tooltip({ tip: "#footnote_plugin_tooltip_text_2608_3", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });.  A similar list could be compiled from arbitrators with significant expertise in communications law or securities regulation or employment law.  Diligent parties may be able to identify experts on their own with no assistance from the arbitral institution.  The second step is drafting an arbitration agreement that reflects the requirement of presiding member expertise.

PROPOSED LANGUAGE IN AN ARBITRATION CLAUSE

The following language, based heavily on language suggested by the London Court of International Arbitration (LCIA) in its Model Arbitration Clause, could be added to arbitration clauses and submission agreements:

“Any dispute arising out of or in connection with this contract, including any question regarding its existence, validity or termination, shall be referred to and finally resolved by arbitration under the LCIA Rules, which Rules are deemed to be incorporated by reference into this clause, except for the establishment of the Tribunal.

The number of arbitrators shall be three. One arbitrator shall be chosen by each party and the two shall chose the presiding arbitrator within 30 days after the exchange of written submissions. The choice of the presiding arbitrator shall be based on both demonstrated experience as an arbitrator and specific expertise in the subject matter of the underlying agreement.  If an agreement cannot be reached, the [arbitral institution] shall appoint the presiding arbitrator by identifying presiding members who have both arbitration experience and subject matter expertise. If a provisional measure is sought, an emergency arbitrator will be appointed by the LCIA to issue an order. The seat, or legal place, of arbitration shall be Washington DC, United States. The language to be used in the arbitral proceedings shall be English. The governing law of the contract shall be the substantive law of the State of New York, United States.”

We recognize that inserting the “expertise” element in the choice of the presiding member can seriously complicate the search for an appropriate person.  But if our prediction bears out–that a presiding member with bona fide subject matter credentials will eliminate the need for party-appointed expert witnesses—such additional time and expense will be well-justified.

While arbitral institutions have an important role in shaping arbitral procedure, the users of international arbitration should make the final decisions on procedure. Arbitration is after all a reflection of party autonomy. As has been said here, institutional reform “should never be a substitute for meaningful self-reflection and self-discipline by the parties, their counsel and the arbitrators that they themselves select.”

CONCLUSION

We believe our proposal is consistent with the main theoretical advantages of arbitration: flexibility, procedural efficiency, cost-reduction, and expertise, reflecting best practices, legal theory, and rational doctrine. Most importantly, the proposal like arbitration itself, is grounded in party autonomy and that classic expression of freedom—Liberté, Egalité, and Fraternité.  Giving parties the autonomy to tailor the procedure and choose their expert presiding member is directly related  to the broader goal of freedom. We believe our proposal will fulfil the purpose and destiny of arbitration without disturbing its underlying mandate. It keeps the process in the hands of and under the control of the users.

References   [ + ]

1. ↑ Thomas E. Carbonneau, The Law and Practice of United States Arbitration, xxix (6th. ed. 2018) 2. ↑ White & Case, 2018 International Arbitration Survey: The Evolution of International Arbitration, 2 (2018) 3. ↑ We acknowledge that our proposal is a work in progress.  We believe a ten-year level of expertise (while perhaps a bit arbitrary) to be close to the minimum necessary to achieve our ultimate goal of dispensing with party-appointed expert witnesses function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
by Edited by Niuscha Bassiri, Maarten Draye
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Impressive Report on Worldwide Dispute System Needs and Design

ADR Prof Blog - Thu, 2019-01-03 11:43
The Hague Institute for Innovation of Law recently released a report entitled, Understanding Justice Needs: The Elephant in the Courtroom. The Institute describes the report as follows: “For the first time, we quantify and pinpoint the yearly need for fair solutions. In this report, we estimate that each year, 1 billion people face a new … Continue reading Impressive Report on Worldwide Dispute System Needs and Design →

“Sham” Cairo award - ICC seeks to intervene

The ICC International Court of Arbitration has asked a US court for permission to file an amicus curiae brief in support of Chevron’s attempts to prevent enforcement of a US$18 billion award that the energy...

ICC seeks intervention over “sham” Cairo award

The ICC International Court of Arbitration has asked a US court for permission to file an amicus curiae brief in support of Chevron’s attempts to prevent enforcement of a US$18 billion award that the energy...

The ICC Secretariat Behind the Scenes: A Chat with Ana Serra e Moura

Kluwer Arbitration Blog - Wed, 2019-01-02 16:05

Gloria Alvarez (Associate Editor)

The endeavours of the ICC go beyond the definition of an arbitration institution; it is indeed one of the most important agents of cultural integration, incubator of diversity and best arbitration practices. 1)Stavros Brekoulakis, The Culture in International Arbitration: Integration or Fragmentation?, CBAr Conference, Salvador Bahia, 18 September 2018 jQuery("#footnote_plugin_tooltip_4403_1").tooltip({ tip: "#footnote_plugin_tooltip_text_4403_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] }); A true manifestation of this is the ICC Young Arbitrators Forum (YAF); a global space for the young arbitration community which provides networking opportunities while engaging with the highest quality in the debate of topical issues.

To celebrate the end of the year and a successful UK ICC YAF cycle; Maria Claudia Procopiak and Rachael O’Grady invited the ICC Deputy Secretary: Ana Serra e Moura to a Q&A session in London. The interviewer, Luiz Aboim distilled some of the most relevant information we need to know as members of the young arbitration community.

As starting point of the discussion, Ana mentioned her own personal experiences, including her first arbitration job at a boutique arbitration firm in Madrid. Ana highlighted the importance of new learnings and mentoring:

“Sometimes, you are too young to make decisions yourself and it is the arbitration market that make those decisions for you, so be ready and open to learn, either as administrative secretary or counsel.

In building an arbitration career, Ana advised not to focus exclusively on the ultimate result, but instead to work hard in the learning process. Maria Claudia added that it is crucial to work on your experience and exposure and most importantly: make the most of your first arbitration opportunity!

Empirical research supports Ana’s advice. Consistent with the 2018 White & Case Survey, parties are likely to select institutions capable of handling arbitrations in a multitude of locations and respond to specific needs. These specific needs also apply in seeking the right arbitrator’s profile; including its ability to speak different languages. Therefore, for young practitioners aspiring to become an arbitrator; an extra language(s) on your pocket is always a bonus.

According to a the 2018 White & Case Survey, the ICC is the preferred institution by 77% of the arbitration users. Therefore, it is not a surprise that the ICC has 11 teams organised by regions in the world. The 11 teams are managed by: 1) the Secretary General, 2) the Deputy Secretary General, and 3) the Managing Counsel. In addition to the seven teams based in Paris; the ICC also has offices in Hong Kong, New York, Singapore and São Paulo. The Deputy Secretariat also continues to work on further improvements and developments including the ICC’s IT system composed by an internal and external platform and several other projects, including research.

 

Source: ICC Secretariat.

Founded in 1923 with more than 24,000 cases – the ICC Court has achieved full gender parity (88 women and 88 men). This endeavour will continue to be one of the flagship commitments of the ICC at ensuring genuine diversity. The ICC also understands that parity and equality is also achieved with regional presence. The ICC Africa Commission illustrates the Secretariat’s commitment on this matter. The Africa Commission’s main objectives comprise: raising arbitration awareness on the region, while focusing their efforts on expanding the pool of African arbitrators qualified and available to resolve the increasing number of disputes in the region.

Source: ICC Secretariat.

Source: ICC Secretariat.

Another example on genuine diversity; is the ICC’s long-term commitment and trust in Latin American arbitration practice, which continues to be a story of success and mutual prosperity. The ICC has contributed at bringing down cultural barriers to the ever-expanding Latin American arbitration market. The 2018 White & Case Survey highlighted the efforts made by the ICC at opening an office in São Paulo, Brazil, which also includes a modern hearing centre. In less than one year, the São Paulo office have registered 40 cases, involving 123 parties (117 Brazilian parties and 6 foreign parties).

The ICC owes much of its success to its international external structures, namely its Court Members, National Committees, and ICC YAF Representatives. Ana explained that all decisions submitted to the ICC Court help the Secretariat to develop the best practices on the ICC Arbitration Rules. In terms of appointments, the ICC receives proposals from their national committees when seeking a specific profile for an arbitrator.

Luiz Aboim asked the Deputy Secretary General about Expedited Procedures, an arbitration process for disputes below USD 2 million, where the final award should be rendered within 6 months. So far 85 parties from 38 countries have been involved in an ICC Expedited Procedure. This is another example of the ICC constantly adapting to the needs of the market and broadening the portfolio of its services. The most frequent type of disputes are sales and purchase of goods; construction and engineering; consultancy and agency.

In responding to Luiz’s request on predictions for the future; Ana concluded that technology will continue changing the way young arbitrators work and probably double-hatting will be less common in the future. While remaining confident arbitrators are not going to be replaced by AI; Ana suggested to keep an eye on predictive justice.

Lastly, Alina Sartogo joined the panellists for a Mock ICC Arbitration Court Plenary Session. The ICC Court Plenary Sessions are open to all Court members and take place once per month to discuss relevant issues with respect to ICC awards involving states and state entities and challenges.

The key message from the ICC Deputy Secretary General to us, young aspiring arbitrators, is to focus on our learning process and networking; the first appointment will then come naturally.

References   [ + ]

1. ↑ Stavros Brekoulakis, The Culture in International Arbitration: Integration or Fragmentation?, CBAr Conference, Salvador Bahia, 18 September 2018 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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€ 185


What you missed at ICSID

Five new claims against Peru, Venezuela, Bulgaria, Spain and Turkey were registered by ICSID over the holiday period as well as a rectification proceeding initiated by a Swiss energy company after the...

Italy suffers first loss in solar claim

A Stockholm Chamber of Commerce tribunal has found Italy liable for breaching the Energy Charter Treaty – the first known award made against the state in the series of claims it faces over changes to regulations...

The Whispered Conversation: Hong Kong v. Singapore

Kluwer Arbitration Blog - Tue, 2019-01-01 20:00

Gary L. Benton

Hong Kong v. Singapore. It’s not the next big football match or title of an upcoming Japanese monster film. It’s the question of where to bring international arbitration claims in Asia. It’s a topic whispered at cocktail receptions and routinely reserved for hushed discussion in law firm conference rooms. It’s the topic rarely if ever discussed with sincerity at arbitration conferences – and it’s certainly not a topic to debate too loudly while in Singapore or China, especially if you’re on the “wrong” side of the debate.

The West has slowly come to recognize Hong Kong and Singapore as credible seats for international arbitration in Asia and one can barely deny that Hong Kong and Singapore are rapidly becoming global arbitral seats in their own right.

Their development is very much an Asia-first model, fueled largely by economic potential and, in considerable part, by disregard from the West. With European nations and the US focusing arbitration resources on the Atlantic and largely ignoring the Pacific Rim, East Asia simply took matters into its own hands, building arbitral centres that attract Asia-related disputes. With the rise of credible seats in Asia, there is rarely a need to travel to Paris or London for arbitration and, in turn, Asia may soon be challenging the West for matters without regional ties.

The potential for further expansion in Asia is significant. The International Monetary Fund ranks the US, China and Japan as the world’s largest economies and, in fact, most of their economic activity is focused on Asia and the Pacific Rim. In the US, California, ranked alone, is the fourth largest economy in the world, with China, Hong Kong and Japan ranking among its top 5 export regions. California companies, particularly companies in the technology sector, look principally to Asia for trade and, not surprisingly, are under growing pressure to submit disputes to courts and tribunals in Asia for resolution. The same holds true for companies supplying raw materials and finished goods from Western Canada and throughout much of Latin America – the focus is largely on trade with China and other Asian countries. Looking North from Oceana or East from Central Asia, particularly with China’s planned Belt and Road Initiative, the epicenter of further global economic growth appears to be Asia.

Accordingly, a question increasingly asked in jurisdictions facing Asia is where to arbitrate in Asia. At present, the choice is largely between Singapore and Hong Kong. Although regional centers in Seoul, Tokyo, Kuala Lumpur, mainland China and elsewhere in Asia are developing, and may be a solution for specific cases, there is no doubt that Hong Kong and Singapore remain the standard-bearers.

Both have their virtues. Singapore is a modern, vibrant shopping mecca; Hong Kong is a cosmopolitan cultural delight with ready access to mainland China. But, of course, the answer more importantly turns around each jurisdiction’s receptiveness to arbitration and the rule of law.

As rich and cosmopolitan as Singapore and Hong Kong may be, there is an underbelly to both to be considered. Freedom House, the leading international research institute that ranks freedom, democracy and the rule of law around the world, ranks Singapore as only partly free giving it a freedom score of 52/100. Freedom House ranks Hong Kong as partly free as well giving it a slightly better score of 59/100. Similarly, judicial independence rankings by The World Economic Forum place Hong Kong 13th in the world and Singapore at 19th.

Relative to much of the world, these rankings are not bad but the question can be asked whether jurisdictions that have less than ideal rankings for freedom and judicial independence can be entrusted with administering international arbitrations and enforcing arbitration awards. And, as between Hong Kong and Singapore, putting aside the relatively minor differences in their pro-arbitration laws and the rules of their leading institutions, which is to be preferred as an arbitral seat?

Starting with Singapore, the little city-state is on steroids when it comes to government initiatives to promote Singapore as an international dispute resolution mecca. Anchored by Singapore International Arbitration Centre and the well-accoutered Maxwell Chambers, Singapore is attracting a growing share of international work notably from Southeast Asia and India while regularly taking strategic steps to gain footholds in mainland China. The ICC, ICDR and other global players are scrambling to implement strategies to strengthen their positions there and Singapore has seen a large influx of Western practitioners who hope to benefit from Singapore’s rise.

Behind the curtain, Singapore’s political system receives mixed marks. Singapore’s parliamentary political system has been dominated by the ruling People’s Action Party (PAP) and the family of current prime minister Lee Hsien Loong since 1959. According to Freedom House, the electoral and legal framework allows for some political pluralism and considerable economic prosperity but critics contend that what effectively amounts to a one-party system limits freedoms of expression, assembly, and association. Death penalties for drug traffickers, canings for some 35 other offenses and prohibition on chewing gum are reminders that Singapore adheres to different standards than many Western jurisdictions.

That said, it is not believed that political interests unduly influence the judicial system, at least when it comes to international commercial matters. The courts in Singapore are well-respected and have a strong record for following a British tradition honoring the rule of law. Nonetheless, the question remains how independent the courts can truly be given the political constraints and the pressures faced by the small, regionally isolated city-state.

Hong Kong has a far different past and faces a far different future than Singapore largely because of its intertwined relationship with mainland China. Despite China opening its doors to international business, Hong Kong remains an important gateway to the mainland. Hong Kong’s continuing strength as an international banking and financial center, combined with its access to mainland markets, provide strong economic advantages. The international arbitration sector in Hong Kong, built largely around the HKIAC and a talented legal and academic community, have made Hong Kong the traditional leader in Asia Pacific-based international arbitration. ICC is active in Hong Kong and CIETAC and other arbitral institutions are also looking to reap rewards.

Hong Kong residents have traditionally enjoyed substantial civil liberties and economic freedoms. As a Special Administrative Region of China, Hong Kong abides by the rule of law under its local constitution, the Basic Law. However, the Chief Executive and half of the Legislative Council are chosen through indirect electoral systems that are widely viewed to favor pro-Beijing interests, and the territory’s freedoms and autonomy have come under threat in recent years due to growing political and economic pressure from the mainland.

In the meantime, Hong Kong remains a stubborn bastion of democracy. Its legal system is fitted with a long history of English law jurisprudence including a court system that remains independent and widely respected. Hong Kong maintains a system of appointing pre-eminent jurists from around the world as non-permanent judges on its highest court. Hong Kong is an attractive forum for enforcement of arbitral agreements and the recognition of awards and, to date, the courts have not hesitated to enforce awards against Chinese state-owned enterprises. Like Singapore, Hong Kong is proactive with respect to legislation favoring arbitration.

Hong Kong has the added benefit of ties to the mainland and some argue mainland courts are more likely to enforce arbitral awards coming from Hong Kong than from foreign jurisdictions. The Arrangement Concerning Mutual Enforcement of Arbitral Awards made between Hong Kong and China has proven to work in enforcing awards and mainland China has taken steps to ensure international arbitration awards are given protections.

For the immediate future, Hong Kong and China remain intertwined in a way that favors international arbitration. China benefits from Hong Kong’s positioning as a global financial center and well-deserved reputation as the epicenter for the rule of law in Asia. China is surging forward with new economic initiatives. The Belt and Road initiative, representing US$900 billion of investment infrastructure investment, is expected to bring strong returns and, undoubtedly, international arbitration work. The growth of arbitration in mainland China, largely through CIETAC and many other impressive regional institutions like BAC/BIAC in Beijing and SCIA-SAC in Shenzhen will likely benefit mainland China and Hong Kong in providing a broad network of domestic and international arbitration resources. So long as Hong Kong and Beijing work to find a proper balance in their relationship that protects Hong Kong’s judicial independence, both will thrive from their relationship.

For both Singapore and Hong Kong, the next step is to move from being the leading regional Asian seats to leading global seats. For that, they need to demonstrate they can provide fair and independent dispute resolution – for Western and Asian parties – consistent with the leading seats in the West.

For Singapore, the challenge is to not lose sight of political pluralism and to expand beyond parochial interests by maintaining a judiciary which remains impartial and independent, by ensuring international arbitration initiatives are not driven largely by local interests and short-term economic goals and, relatedly, by providing genuine opportunities for non-local practitioners and arbitrators. As well, Singapore must find some way to manage its dependence on India for legal work. While Singapore will undoubtedly remain an important shipping port, it needs to find a way to remain relevant legally and economically as India develops its own infrastructure. If Singapore achieves these goals, Western and Asian parties will be comfortable looking to Singapore as a global seat.

Hong Kong has an advantage given the long history of its independent judiciary and its intimate access to mainland China. However, its challenge is to convince Beijing that democracy and an independent judiciary in Hong Kong will further long-term economic growth throughout China and not threaten state security. Hong Kong’s related challenge is to ensure Beijing understands that Hong Kong can’t be replaced. China has made extraordinary investment and generated extraordinary growth in the Pearl River Delta Economic Zone, just as it is now doing in many other parts of the country, but Beijing needs to understand that arbitral seats governed in socialist law will always be a second choice for foreign parties, particularly Western parties. If Hong Kong achieves these goals, Western and Asian parties will continue to hold it in high regard and it will be able to expand its base.

Certainly, practitioners in Singapore and Hong Kong, and in jurisdictions around the world, will have their own perspectives. Ironically, it’s a topic that can’t be too openly debated in Singapore or China given the political pressures that come to bear. But a genuine debate is needed for Hong Kong and Singapore to rise to the top of the Queen Mary seat survey.

Until then, it will remain mostly a topic for those whispered cocktail parties, those closed conference rooms – and, of course, the Kluwer Arbitration Blog.

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Call for Nominations for Best Article of 2018

ADR Prof Blog - Tue, 2019-01-01 12:46
From WFOI Ellen Deason: The AALS Section on Alternative Dispute Resolution is seeking nominations for the second annual Section Award for best article published in print or online in 2018 in the field of ADR. To be eligible, the article must be already published in a law review or other academic journal bearing a 2018 … Continue reading Call for Nominations for Best Article of 2018 →

Costs in International Arbitration – Are Changes Needed?

Kluwer Arbitration Blog - Tue, 2019-01-01 01:00

Neil Newing, Ryan Cable and Johnny Shearman

A little under ten years ago Sir Rupert Jackson proposed significant reforms to reduce the costs of litigation in England and Wales. It is fair to say that while his reforms have received both praise and criticism over the past decade, they are largely considered to have been a success in curtailing the costs of litigating in England. As this anniversary of reforms in English litigation approaches, it is an opportune moment to consider whether lessons can be learnt concerning the way in which costs are dealt with in international arbitration, without, crucially, undermining the advantages associated with the flexibility of arbitration as a dispute resolution method.

 

Costs in English Litigation

The fundamental principle in English civil litigation is that costs follow the event (i.e. the unsuccessful party pays the costs of the successful party). However, the court has a discretion as to the final amount awarded and it is, on a standard basis, typical for a successful party to recover approximately sixty per cent of its costs from the other side.

 

While the above principle has not changed, since Jackson’s reforms the approach taken by the English courts in respect of costs has. Costs management is now a significant component of case management in litigation. Costs budgets, one of Jackson’s more controversial reforms, are fixed early on in proceedings and consistently monitored and reviewed. Any request to increase the budget requires a party to convince the court why such an increase is reasonable and necessary in the circumstances. As such, costs have become a primary consideration from the outset.

 

With that being said, unless the parties otherwise agree, the court usually determines the final costs award in a separate hearing following the substantive judgment on the merits of the dispute. Costs are then determined on the basis of what is reasonable and proportionate, also taking into account the conduct of the parties. This requires the parties to provide each other, and the court, with a large amount of detail in respect of how their costs were incurred. As such, there are often two separate judgments: one dealing with the substantive dispute and one dealing with costs.

 

Costs in International Arbitration

Costs in arbitration usually fall into two broad categories: (i) costs of the arbitration (i.e. the costs of the tribunal and institution (if any)), and (ii) legal costs. The approach to these costs adopted in international arbitration largely mirrors that in English litigation in so far as costs are generally recoverable by the successful party. Commonly, the “costs of the arbitration” are awarded in full, whereas the legal costs may be reduced on the grounds of “reasonableness”. However, when it comes to the tribunal assessing these costs, this tends to be a far less forensic exercise than in costs proceedings in English litigation.

 

In determining costs, the tribunal may take into account various aggravating or mitigating factors such as; the level of success of a claim, the behaviour of the parties towards the efficient conduct of the arbitration, or the pursuit of unfounded arguments. See for example Articles 38(4) and (5) of the ICC Rules and Article 28.4 of the LCIA Rules. In this regard, it is notable that efficiency and cost-effectiveness appears to have been at the forefront of recent updates to institutional rules. For example, the new Vienna International Arbitral Centre (“VIAC“) rules which came into force in January 2018, place an explicit obligation on the parties and the tribunal to conduct proceedings in an efficient and cost-effective manner, with tribunals expressly permitted to take into consideration the parties’ efforts in this regard in making their decisions on costs (Articles 16.6, 28.1 and 38). Additionally, in what is a first under institutional rules, the VIAC secretary general is also able to consider the tribunal’s contribution to the conduct of efficient proceedings in determining the arbitrators’ fees. The VIAC secretary general has the authority to increase and decrease arbitrators’ fees by up to forty per cent in light of the efficient (or inefficient) conduct of the proceedings (Articles 16.6 and 44.7).

 

It is standard practice for issues of costs to be dealt with at the end of the arbitration, typically as part of the final award. This includes costs sought for interim applications – whilst it is common to include a request for those costs in the application, tribunals will often defer their determination until the conclusion of the proceedings as a whole, rather than deal with them at the time of ruling on the application.

 

What Can be Learnt from English Litigation?

Whilst rules driving toward time and cost-efficiency are helpful, they only serve to encourage the tribunal to have consideration to such issues in attempting to manage the conduct of parties. It is down to the tribunal to make clear that costs consequences can, and will, flow from clearly dilatory and unjustified conduct. To reinforce this notion, tribunals must be prepared to make the necessary costs orders in order for parties to take them seriously. The English courts frequently make such costs orders, which leads parties to think carefully before pursuing applications that may be without merit. Arbitral tribunals, on the other hand, commonly leave all issues of costs until the end of the matter and there is often little correlation between a party’s conduct and the final costs order, providing little to no deterrence for bad behaviour.

 

Tribunals, however, are not required to wait until their final award to deal with the issue of costs. As noted in the 2015 ICC Commission Report, ‘Decisions on Costs in International Arbitration’, most institutional rules and national arbitration legislation permit tribunals to allocate costs in partial awards which determine preliminary issues and to make awards or interim orders in respect of costs, including in connection with applications for interim relief and other procedural applications.

 

Thus, in instances where an application without merit was most likely made in an effort only to delay the proceedings, counsel can and should make submissions to the tribunal that costs be dealt with at the outcome of the application rather than being deferred. It may well be appropriate for the tribunal to deploy cost consequences at that time to curtail further such behaviour by the parties or to punish the party causing the delay. This is a common feature of English litigation and applications (if brought at all) are often settled before being heard in order to avoid the risks of immediate costs consequences. Arguably, this is an area where arbitral tribunals can learn from the English court’s approach. It is the tribunal’s duty to actively manage proceedings to be cost and time efficient and cost orders are a key tool available to achieve this.

 

Returning to Jackson (who now sits as an arbitrator), in a recent speech given at the 11th annual international conference for Law and Alternative Dispute Resolution, he called for cost budgeting to be used to tackle the high costs now associated with arbitration. He acknowledged that such cost management may only be suitable for lower value claims in the first instance, but he noted the success that such a regime can have: a reference to the English litigation system.

 

A very pared-down version of costs budgeting already exists in maritime arbitrations under the London Maritime Arbitrators Association’s terms. Parties are required to provide an estimate of their costs through to the end of the arbitration. The tribunal can then take this estimate into account when assessing recoverable costs. However, as to whether a more rigid regime should be adopted more widely (as put forward below) there is perhaps a fence to be sat on.

 

Where Does Arbitration Get It Right?

As already mentioned, English courts often deal with costs in separate proceedings following the substantive judgment. This is necessary due to the detailed nature of the process and often a specialist costs judge is required to determine this stage of the claim. In arbitration, however, costs can and often are dealt with together with the decision on the merits in one final award, saving both time and costs by avoiding lengthy further proceedings.

 

Here comes the fence. The lack of a rigid costs budgeting regime is an attractive quality of international arbitration. Its introduction would likely undermine the much-touted flexibility enjoyed by users and practitioners alike. The requirement for parties to prepare cost budgets, have them approved and then to slavishly monitor them would likely stymie the adaptability of the arbitration process. Furthermore, the confidential nature of arbitration would make it difficult for tribunals to compare costs when determining what is reasonable.

 

Therefore, given the existing reluctance of tribunals to consider the costs of even interim applications, it appears Jackson has another uphill struggle in front of him if he is to convince tribunals to consider the entire costs of the arbitration at the outset of the dispute.

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The New Year Arbitration Quiz

Kluwer Arbitration Blog - Sun, 2018-12-30 19:25

Michael McIlwrath

The New Year is upon us. You have a major submission that is now due and a hearing about to start in another case.  How did that happen?  Not to worry! To help you keep procrastinating, the Kluwer New Year’s International Arbitration Quiz is here to help.

As in years past, the first reader to submit the correct answers, or the first submission with the most correct answers, will win a dinner in Florence (not including travel or hotel) at your convenience and a free subscription to Kluwer Arbitration Blog for 12 months.  Please send your answers to [email protected] by 6 January 2019.

Answers will be published next week.

 

1. Which current prime minister of a European country had to resign from commercial arbitration appointments upon being named head of state?

a. Lars Løkke Rasmussen, Denmark

b. Giuseppe Conte, Italy

c. Dimitri Medvedev, Russia

d. Juha Sipilä, Finland

e. Emmanuel Macron, France

 

2. The “Singapore Convention” for the enforcement of mediated settlements was introduced at the 2014 UNCITRAL Working Group II session by which country?

a. Singapore

b. The United States of America

c. Ecuador

d. Australia

e. The Netherlands

 

3. Which set of arbitral rules incorporates a code of conduct for arbitrators, with the possibility of removal from pending proceedings and/or being stricken from future appointments for failing to adhere?

a. Milan Chamber of Arbitration (CAM)

b. International Centre for Dispute Resolution (ICDR)

c. Hong Kong International Arbitration Centre (HKIAC)

d. International Court of Arbitration of the International Chamber of Commerce (ICC)

e. North Antarctic Arbitration Court of McMurdo Sound (COLD)

 

4. Know your arbitrator! Match the following:

 

5. According to standardized data reported in 2018 by the ICC, LCIA, SIAC, HKIAC, and the ICDR, the average time to appoint a three-arbitrator tribunal in 2017 was:

a. 12 days

b. 23 days

c. 47 days

d. 81 days

e. Hah! There is no such data

 

6. In Rethinking Choice of Law (Eleven Publishing Int’l 2018), Gustavo Moser reviews a substantial body of empirical data that suggests the principle reason parties who choose to exclude the application of the UN Convention on the International Sale of Goods (CISG) from their contract choice of law provisions, do so because of:

a. Strategic preferences for a particular law that they do not wish the CISG to displace.

b. Ignorance of the CISG.

c. The two-year statute of limitations for liability for latent defects under Art. 39 of the CISG.

d. A perception that the CISG favors parties from common law countries, leading them to prefer instead the Prague Law on the Sale of Goods.

 

7. The ICCA/Queen Mary report on Third Party Funding in International Arbitration (2018) made which recommendation with respect to disclosure of funding agreements when determining requests for security for costs?

a. Arbitral tribunals should not require disclosure of the funding agreement, only the identity of the funder, because of the privileged and confidential nature of the agreement.

b. A tribunal may require disclosure of the third-party funding agreement in order to assess whether the funded party is impecunious, which is necessary to determine whether security for costs is warranted.

c. A tribunal may require the funder to disclose the funding agreement to determine whether the funder has agreed to pay an adverse costs award, not to determine whether the funded party is impecunious.

 

8. Participants in the Global Pound Conference ranked in-house counsel as having the greatest ability to influence the future of commercial dispute resolution. According to the data, which of the voting stakeholder groups shared this view the least?

a. Arbitrators, mediators, judges

b. External counsel

c. Government representatives (ministries of justice)

d. Academics

e. In-house counsel

 

9. “Happy Fun Time” refers to:

a. When parties settle their dispute and the arbitration institution refunds a substantial portion of the fees they advanced.

b. How arbitral tribunals refer to their Procedural Order n. 23.

c. The lighthearted discussion at the end of each episode of The Arbitration Station podcast.

d. Art. 11.8.4.2.76.3 of the IBA Guidelines of Conflicts of Interest, “the Yellow List”, which provides that arbitrators need not disclose more than three drinks with a party so long as the arbitrator paid for them.

 

10. Which of the following celebrities was not involved in a highly-publicized dispute over the initiation (or not) of an arbitration in 2018?

a. Stormy Daniels

b. Jay-Z

c. Donald Trump

d. Brad Pitt

 

11. Which of the following institutions offers ODR (online dispute resolution) for manufacturing disputes on the basis of documents only, and in which the arbitrators are engineers?

a. ICC Mediation and ADR Services

b. Hong Kong International Arbitration Centre (HKIAC)

c. Court of Arbitration of the Stockholm Chamber of Commerce (SCC)

d. Court of Innovative Arbitration (COIA)

e. International Centre for Dispute Resolution (ICDR)

 

12. Extra points. Write the conclusion of a joke that begins with the line below. We will publish our favorite response with the Answers to the Quiz.

An arbitrator, a law firm partner, and an in-house counsel walk into a bar together……………

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2019: the Year of the Big Harvest!

Kluwer Arbitration Blog - Sat, 2018-12-29 22:51

Nikos Lavranos

While the jury is still out on whether winter is coming or has already arrived regarding ISDS and investment treaties, I would rather turn to agriculture and use the metaphor of sowing the seeds and harvesting.

Since July 2010, when the European Commission published its very first Communication on ISDS and investment treaties, it has been relentless sowing the seeds for changing the current ISDS system for good. In the beginning, the Commission was rather careful and claimed that its efforts were build upon the Member States’ 50 years of “gold standard” BITs expertise, so the EU’s policy would “not be a revolution, but rather an evolution”. However, since the high times of the TTIP debate around 2013/14, the Commission – pushed by the European Parliament and anti-ISDS NGOs – has become much more active, self-assured and radical.

As will be highlighted below, the Commission has been sowing several plots of land in parallel and 2019 promises to be the year of the big harvest for the Commission and the Member States.

 

The Intra-EU BITs

Regarding the intra-EU BITs plot of land, the Commission had to be particularly patient and tenacious. Since the early 2000’s the Commission had been pushing the Member States to terminate their intra-EU BITs for their apparent incompatibility with EU law. Whereas most Member States failed to respond to that pressure, the number of intra-EU BITs cases was continuously increasing, while at the same time the Commission remained unsuccessful with its amicus curiae interventions to convince arbitral tribunals to relinquish their jurisdiction. Hence, the Commission eventually initiated infringement proceedings against five Member States, while the Achmea setting aside proceedings were unfolding before the German courts. The moment the German Bundesverfassungsgericht had submitted preliminary questions to the CJEU as to the compatibility of the ISDS provision in the relevant intra-EU BIT, the Commission knew that the time of harvest was coming. Indeed, the vaguely formulated Achmea judgment of the CJEU essentially forces the Member States to terminate their intra-EU BITs (and may even have a spill over effect on the ECT). Accordingly, one can expect that the Member States will take steps towards terminating the intra-EU BITs in 2019. Thus, soon the Commission can expect a big harvest by the termination of some 190 intra-EU BITs – potentially including their sunset clauses.

 

The “New Generation” EU Trade and Investment Agreements

Also, the second plot of land, namely of developing the so-called “new generation” EU trade and investment agreements, faced initial problems by using the wrong seeds and by failing to anticipate the heavy anti-ISDS/TTIP storms, which raged throughout Europe. Whereas the Commission first tried to save TTIP by incremental changes of the ISDS provisions, it became clear that there would be no chance of getting it approved by the European Parliament. Leaving TTIP unattended and letting it quietly die, the Commission turned its attention to the other treaties by using a different sort of seeds for CETA and EU-Vietnam FTA. The Commission replaced several important DNA bits of investment arbitration with DNA new bits, such as for example replacing the broad FET standard with a closed list of FET-breaches and by replacing the ISDS system with the investment court system (ICS). The new crop was fairly successful since the Commission was able to incorporate it into the EU-Mexico FTA and EU-Singapore FTA. However, Japan did not like this new crop, so it was not included in the EU-Japan FTA. Moreover, the ICS crop is not even part of the FTA negotiations with Australia and New Zealand. Hence, it seems that the Commission has lost appetite to include investment protection and dispute resolution provisions in its FTA. This, of course, has mainly to do with the fact that the CJEU did not give the EU full exclusive competence regarding the ISDS provisions.

Moreover, the fate of the ICS in CETA is still in the hands of the CJEU, which will render its Opinion in 2019. Thus, it remains to be seen whether the Commission will have a big harvest from that plot of land, though it seems unlikely that CJEU will spoil the harvest.

 

The MIC

The MIC plot of land, which lies next to the CETA plot, is a new testing ground to roll out a modified ICS crop for the global market. In the UNCITRAL glass houses in New York and Vienna, the Commission has been testing the idea of replacing ISDS with a multilateral investment court (MIC) with appeal tribunal on a global level. The first two rounds of tests have been concluded and the results look promising enough for launching the new crop in 2019 by tabling a draft text for a MIC. The Mauritius Convention will serve as an example, which will allow each State to decide whether, and if so, for which of their BITs they want to defer the disputes to the MIC. If all EU Member States, plus Canada, Singapore, Vietnam, Mexico and Mauritius sign up to it, this would arguably constitute a sufficiently sustainable basis. Thus, with some luck and good weather, the Commission could have the first MIC harvest in 2019.

 

The ECT

The fourth plot of land on which the Commission has been sowing for several years without much of a harvest is the ECT. As in the case of intra-EU BITs, the number of intra-EU ECT disputes against Member States has exploded, notably against Spain, but also – albeit at a much lower level – against Italy, Czech Republic, Slovak Republic and last but certainly not least Germany (Vattenfall). Also, in the ECT cases the Commission and the Member States have been so far unsuccessful in convincing ECT arbitral tribunals to refuse their jurisdiction. In addition, in contrast to intra-EU BITs, the ECT is a different type of – multilateral crop – and the applicability of the Achmea judgment on the ECT remains a matter of discussion. In spite of these obstacles, for the following reasons,  the poor harvest situation regarding the ECT may very well change in 2019.

First, preliminary questions as to the compatibility of ECT awards with EU law have been asked to the CJEU, though the CJEU will most likely not issue its judgment in 2019, that may be the case with the Opinion of the Advocate General. It would seem likely that the outcome will be similar to the Achmea judgment.

Second, the “modernization” process of the ECT will take off in 2019. This offers the Commission and the Member States an excellent opportunity to “disconnect” themselves from the ECT – either by adopting a unilateral declaration or, following the example of Italy, by withdrawing from the ECT. Indeed, this “modernization” process encompasses a whole range of ECT provisions, protection standards and principles, which could be “CETAarized”. For example, by replacing the open FET provision with  the closed list of FET breaches contained in CETA or by narrowing down the definitions of investor and investment. In short, 2019 could be a good year for a big ECT harvest for the Commission and the Member States.

 

The Unpredictable Art of Farming

The art of farming is not one for the faint of heart. The reality of farming is a lot of hard work and never knowing for sure if your crop will be a bounty or a loss until harvest time arrives. Everyone understands that weather conditions play a large role in determining how well farmers’ crops are growing, but the realities are subtle and vary from crop to crop.

However, with a little bit of luck and help from the CJEU, the Member States and some States, the Commission might be able to have some successful harvests for the various plots of land discussed above. In any event, the Commission has certainly been working hard for the past nine years in rooting out the weeds from the existing investment arbitration landscape.

A first assessment of the 2019 crop condition will take place at the EFILA Annual Conference on 31 January 2019.

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Commensalism in International Investment Arbitration: The Rule of Law and CSR in the New Dutch Model BIT

Kluwer Arbitration Blog - Sat, 2018-12-29 20:55

Marcin Menkes

Commensalism of IIL Critique

While the popular criticism of investment arbitration provides fertile ground for the academic proposals for ISDS reform, the latter hardly shape the development of (investment) law and even less so, its popular perception. Reform proposals are usually firmly grounded in positive law, and as such they are inherently constrained. Alternatively, general overhaul suggestions are taken with a pinch of salt for lack of normative basis.

We should thus cherish the opportunity when ambitious ideas can shape reality. This may be the case of the Netherlands draft model BIT, notably its two articles on the Rule of Law and Corporate Social Responsibility (CSR).

 

Dutch Trailblazers

Why could this Model BIT be a breakthrough? Two reasons: the geopolitical context and the unique position of the Dutch BITs. From the geopolitical perspective, populists swept through liberal democracies by questioning international order and normative constraints on governments. Sufficient to recall the U.S. withdrawal from UNESCO, the Paris climate agreement, the JCPOA, and UN Human Rights Council, and derailing TTIP, NAFTA and TPP talks. Obviously, the clash between yearning for freedom and security is nothing new. There is no reason to assume that this time the renouncement of Rule of Law (RoL) and Escape from Freedom will not take us on Road to Serfdom. Accordingly, despite the recent backlash against ISDS, the general public may soon reconsider its desirability.

As for the Dutch BITs, they are the second most-frequently used basis for bringing investment claims (1987–2016). If the Netherlands remains committed to curtailing tax evasion, notably through the new requirement of substantial business activities (Art. 1(b)(ii)), their attractiveness will drop. However, they will still constitute an important normative benchmark.

 

Investment Tug-of-War

The criticism of investment arbitration has various facets, but it mostly amounts to the “private, secret courts” disregarding public concerns. It reflects the phenomena of changing geometry, where social sympathies for “our” entrepreneur struggling against administration shift, once the “selfish” investor files a claim against “our” government. An investor is thus accused of reaping the benefits of a BIT without taking the host country’s interests into account. So far, the response has been to strengthen the government’s capacity to protect the public interest, notably with the right to regulate (Dutch Model BIT, art. 2(2)). Also, the other narrative – luring investors and then abusing the host advantage – entails broadening of treaty protection. Yet, waging a normative arms race creates the risk of losing the rationale behind International Investment Law (IIL).

 

 (Towards) the Dutch Formula

The striking feature of both strands of criticism is that they describe the investor-state interactions in some form of a symbiotic relationship: the commensalism of the foreign investor reaping the benefit of ISDS without a counter contribution, or parasitism, where the host-state, having locked-in the foreign investment, may strip it of profitability. Hence, two elements, and a missing link, deserve particular attention in the Dutch model BIT.

Starting with the Rule of Law, Art. 5 stipulates:

  1. The Contracting Parties shall guarantee the principles of good administrative behaviour, such as consistency, impartiality, independence, openness and transparency, in all issues that relate to the scope and aim of this Agreement.

  2. Each Contracting Party shall ensure that investors have access to effective mechanisms of dispute resolution and enforcement, such as judicial, quasi-judicial or administrative tribunals or procedures for the purpose of prompt review, which mechanisms should be fair, impartial, independent, transparent and based on the rule of law.

  3. As part of their duty to protect against business-related human rights abuse, the Contracting Parties must take appropriate steps to ensure, through judicial, administrative, legislative or other appropriate means, that when such abuses occur within their territory and/or jurisdiction those affected have access to effective remedy. These mechanisms should be fair, impartial, independent, transparent and based on the rule of law.

It is not an all-new provision. RoL lurks in various normative components of modern BITs. IIL can even be “squared with” the concept of RoL and the idea of “equality before the law”, which is inherent to it. And yet, it is hardly ever acknowledged explicite. Model treaties of Brazil, Colombia, Czech Republic, Germany, Mexico, the UK, or the US, or even those which are renowned for its progressive wording, as in India, do not stipulate RoL per se. Another progressive Norwegian model reaffirms the commitment to the Rule of Law in the preamble. So does the Austrian model or the Swiss Confederation-China FTA. More ambitious is the EU-Korea and EU-Vietnam Framework Agreement (RoL constitutes “an essential element” of the agreement).

As for the Dutch model, the wording of the RoL clause poses practical concerns. For instance, the notion of RoL appears both in the title of the above-mentioned article and its paragraphs 2-3, where it is just one of the prerequisites of dispute resolution and enforcement (the others—fairness, impartiality, independence, transparency—usually considered as pillars of RoL). Also, the article mentions administration and judiciary, which raises the question as to the applicability of RoL to the law-maker. All this is provided without mentioning the ephemeral normative contents of the RoL; as studies by the International Law Association on the Rule of Law and International Investment Law show, although RoL is a universal concept, its contents vary significantly between jurisdictions.

And yet, matched with specific duties under the Fair and Equitable Treatment clause (Art. 9(2)), this could be the first in a two-stage path towards equilibrium between host-state rights and duties vis-à-vis an investor. Instead of enumerating ever-new state competences, such a general clause should be paired with a clear acknowledgement of the public nature of IIL, the goals and purposes of the treaty and the respective socio-economic role of investors.

Furthermore, the RoL clause would serve as an antidote for a legitimacy crisis. Not only it can provide the formal and substantive underpinning for restoring legitimacy, but also be flexible enough to accommodate regional differences.

Equilibrium requires counterbalance. By virtue of Art. 7(2), the parties stipulate:

The Contracting Parties reaffirm the importance of each Contracting Party to encourage investors operating within its territory or subject to its jurisdiction to voluntarily incorporate into their internal policies those internationally recognized standards, guidelines and principles of corporate social responsibility that have been endorsed or are supported by that Party, such as the OECD Guidelines for Multinational Enterprises, the United Nations Guiding Principles on Business and Human Rights, and the Recommendation CM/REC(2016) of the Committee of Ministers to Member States on human rights and business.

A similar provision can be found in other BITs, such as the India model BIT, which calls on investors to “endeavour to voluntarily incorporate internationally recognized CSR standards” (similarly in the Brazil model BIT). States may undertake to adopt some CSR-fostering measures (e.g., investor duties stemming from domestic law). This mostly occurs through soft obligations (e.g., Canadian treaties, including the Canada–Nigeria BIT (2014) and the Canada–Mali BIT (2014), some EU treaties such as the EU–Vietnam Framework PCA and the Norwegian model BIT. Sometimes, CSR is merely signalled in the Preamble (China–Switzerland FTA (2013), Czech model BIT). However, some treaties include obligations binding directly on investors. For instance, the Morocco–Nigeria BIT (2016) obliges investors to conduct a social-impact assessment.

Hence, stressing the “importance” of “encouraging” investors to “voluntarily incorporate” CSR standards, even matched with the additional CSR-related duties (art. 7(1, 4)) and provisions on the sustainable development (Art. 6), is not overzealous. And yet, the whole could be greater than the sum of its parts.

 

 The Synergy of Investment Promotion and Protection

Trying to conceptualise the actual and desirable relationship between both articles, it is necessary to start with an acknowledgement that they are excluded from the scope of ISDS (Art. 16). When put in the normative context, RoL as an element of “promotion and facilitation” of investments (section 2) and CSR as an element of sustainable development (section 3), it turns out that both become subsequent steps in the normative tug-of-war. Is that all we can get?

Instead, RoL and CSR should in tandem perform the balancing function in the review of compatibility of a state’s actions with its duties towards an investor: 1) an interpretation guideline and 2) flexibility feature of the normative contents:

Ad. 1) This could take various normative embodiments, both in terms of treaty wording and arbitral practice. For instance, a normative test consisting of two factors: adherence to a particular RoL standard by the host-state compared with a CSR standard applied by the investor. Espousing a high or low level of the standards would influence a tribunal’s perception of public actions. In light of the local RoL acquis, on the one hand, and the investor’s approach to the social (and environmental) responsibilities, limitations of investor rights should be more or less likely to be read as, for instance, violating legitimate expectations or FET.

Ad 2) The advantage of flexible normative contents reflects a lack of a universal understanding of the normative contents of RoL (not to mention CSR standards). Accordingly, a model BIT should stipulate a fair equilibrium of rights, in which the normative contents would adapt to the specific context.

When it is seen from a broader perspective, the social capital constitutes the blood in the circulatory system of the liberal democracy and free-market. It allows entrusting power from one to another, subject to expectations that it will be exercised for the mutual benefit. Thus, investment arbitration is supposed to broaden cooperation networks beyond family and friends. To the contrary, the current legitimacy crisis undercuts ratio legis of ISDS, rendering it counter-efficient and economically unreasonable. Whether one believes that IIL is structurally tainted or that it compromised its original mission, restoring the trust between foreign investors, host states and host population is necessary for the subsistence of ISDS in the long run. Paradoxically, the broader crisis of liberal democracy provides a great opportunity for such a reform effort as the demand for impartial, yet trusted, investor-state arbitration will increase. The Netherlands is on the brink of such a major contribution to international law. The beauty of the new Model BIT is the opportunity to both address the most pressing challenges of IIL and harness its ever-greater legal complexity by restoring the conceptual underpinning of the system. Just to seize the opportunity.

 

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Paraguayan Court of Appeal Recognizes Arbitrators’ Powers to Decide Issues of Illegality and Corruption

Kluwer Arbitration Blog - Fri, 2018-12-28 18:00

Raul Pereira de Souza Fleury

In a decision from June 6, 2018, the Third Chamber of the Paraguayan Court of Appeal (the “Court”) decided an annulment application, recognizing that issues of illegality and corruption are arbitrable, as long as such decision does not imply the imposition of sanctions, something that is left to the local criminal courts1)Recurso de Nulidad interpuesto por el Abg. Hugo Enrique Cañiza en representación de la Secretaría del Ambiente c/ Proceso Arbitral caratulado: Taller RC de Crispín Ruffinelli c/ Secretaría Nacional del Ambiente (SEAM) s/ cumplimiento de contrato, A.I. No. 49, 6 June 2018, Civil and Commercial Court of Appeal of Asunción, Third Chamber. jQuery("#footnote_plugin_tooltip_7422_1").tooltip({ tip: "#footnote_plugin_tooltip_text_7422_1", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });

Although the issue is relatively settled in the international arbitration community 2) See Blackaby, Partasides et al., Redfern and Hunter on International Arbitration, p. 120; Lew, Mistelis and Kroll, Comparative International Commercial Arbitration, pp. 210, 215 jQuery("#footnote_plugin_tooltip_7422_2").tooltip({ tip: "#footnote_plugin_tooltip_text_7422_2", tipClass: "footnote_tooltip", effect: "fade", fadeOutSpeed: 100, predelay: 400, position: "top right", relative: true, offset: [10, 10] });, in the sense that arbitrators can rule on these matters, it is an important development for arbitration in Paraguay, considering the scarce jurisprudence related to recognition, enforcement and set aside of arbitration awards.

The case involved a contract between Taller RC (hereinafter “Claimant”) and the Paraguayan Environmental Secretariat (hereinafter “SEAM” for its Spanish acronym), for the provision of maintenance and repair services of SEAM’s vehicles. Claimant initiated arbitration after SEAM failed to pay several invoices for works performed under the contract. The sole arbitrator ruled in favor of Claimant, prompting SEAM to apply for the set aside of the award.

SEAM based its annulment application on article 40(b) of the Paraguayan Arbitration Act (the “PAA”), which has its origin in article 34(b) of the UNCITRAL Model Law, and article V(2) of the New York Convention,  SEAM argued that the controversy was not capable of being settled by arbitration under Paraguayan law and therefore, the award was contrary to public policy. SEAM’s main argument was that the Prosecutor’s Office needed to participate in the arbitration because a corruption and illegality complaint had been filed in relation to the contract which could result in criminal sanctions against the implicated officers.

Claimant, on its part, argued that the claim before the arbitrator concerned a breach of contract, a subject matter that is arbitrable under the PAA. Claimant also added that the claim did not seek a criminal penalty for SEAM, but only the payment of the unpaid invoices.

As such, the Court delimited its analysis on both of SEAM’s arguments, namely whether: (a) the dispute was arbitrable given an alleged necessary participation of the Prosecutor’s Office; and (b) the award was contrary to public policy.

  • Arbitrability of the dispute

Regarding the first issue, the Court reasoned that, while there was an open criminal cause for irregularities in the execution of the contract between Claimant and SEAM, such allegation of illegality did not “in itself deprive the arbitral tribunal of jurisdiction. On the contrary, it is generally held that the arbitral tribunal is entitled to hear the arguments and receive evidence, and to determine for itself the question of illegality.” The Court continued adding that “if in the course of an arbitration an allegation of corruption is made in clear terms, the arbitral tribunal has a clear duty to take it into consideration and decide whether it has been sufficiently proven or not.”

In this sense, the Court recognized a clear power of arbitrators to pursue the analysis of corruption allegations brought before them, irrespective of whether there is an ongoing criminal investigation pending resolution.

The Court concluded that the SEAM did not prove its allegation that the claim was not arbitrable because its only evidence on this matter was a memo from its Anticorruption Office recommending SEAM’s Minister to order an administrative investigation against the officers involved in the corruption allegations.

The Court then took the opportunity to clarify certain issues. First, it indicated that the fact that a criminal investigation was on course did not mean that the Prosecutor’s Office needs to participate in the arbitration, because in the criminal case, the Prosecutor has an active role, as plaintiff, whose main interest is the investigation and punishment of the crime. On the contrary, the claim submitted to arbitration was for the breach of a contract. Second, the Court addressed the administrative nature of the contract, explaining that nothing specific or ex-post laws prevented or limited the arbitrability of disputes arising from its performance.

  • Public policy violation

On the second issue, the Court clarified that while each State may have its definition of “public policy”, the story is different with arbitration, which is an “institution that develops from the autonomy of the parties with a transnational framework” and as such, adopted the definition of international or transnational public policy from the interim report of the Committee on International Commercial Arbitration of the International Law Association on the topic of public policy as a ground for refusing the recognition and enforcement of international arbitral awards, which comprises fundamental rules of natural law, principles of universal justice, jus cogens in public international law, and the general principles of morality accepted by what are referred to as “civilized nations”.

Under this premise, the Court explained that issues of corruption certainly raise questions of public policy, but such questions relate to the criminal and disciplinary consequences of corrupt actions, and not to the performance of the contract. Thus, since SEAM neither proved that there was a flagrant violation of the judicial and economic system, nor that the arbitration process violated the most basic and fundamental principles of justice, morality and customs, and that the dispute had the arbitrability requirements, the petition to set aside was denied.

As indicated above, the issue of the arbitrators’ powers to decide on issues of illegality and corruption in the execution and performance of a contract is relatively settled in the field of international arbitration, however, for a country in which arbitration is still in an “embryonic” stage, this decision is certainly welcomed. The Court made a clear distinction as to which matters pertaining to illegality and corruption are for national courts, and which ones can be decided by the arbitrators, that is, are arbitrable. This is in line with the modern approach based on the separability principle, according to which an arbitration clause, even though included in, and related to an underlying contract, is a separate and autonomous agreement. As such, a claim that the contract is invalid because it was procured by corrupt means, does not invalidate the arbitration clause contained in it, it only means that arbitrators can hear arguments and admit evidence to determine such questions of illegality and corruption underlying the contract.

The reasoning on the issue of public policy violation is also welcomed, since it provides for a standard that can be applied in future cases of annulment and enforcement before Paraguayan courts. As it is well known by arbitration practitioners, the issue of set aside and denial of enforcement on the grounds of public policy violation is always a tricky one. Each State may have its own definition and clarifying the standard of proof gives more security to practitioners that choose Paraguay as their seat.

There is still much to be done in Paraguay for the development of arbitration, in order to shorten the gap with the important players of the region, such as Brazil, Chile, and Argentina, however, each small step forward is welcomed and celebrated.

References   [ + ]

1. ↑ Recurso de Nulidad interpuesto por el Abg. Hugo Enrique Cañiza en representación de la Secretaría del Ambiente c/ Proceso Arbitral caratulado: Taller RC de Crispín Ruffinelli c/ Secretaría Nacional del Ambiente (SEAM) s/ cumplimiento de contrato, A.I. No. 49, 6 June 2018, Civil and Commercial Court of Appeal of Asunción, Third Chamber. 2. ↑ See Blackaby, Partasides et al., Redfern and Hunter on International Arbitration, p. 120; Lew, Mistelis and Kroll, Comparative International Commercial Arbitration, pp. 210, 215 function footnote_expand_reference_container() { jQuery("#footnote_references_container").show(); jQuery("#footnote_reference_container_collapse_button").text("-"); } function footnote_collapse_reference_container() { jQuery("#footnote_references_container").hide(); jQuery("#footnote_reference_container_collapse_button").text("+"); } function footnote_expand_collapse_reference_container() { if (jQuery("#footnote_references_container").is(":hidden")) { footnote_expand_reference_container(); } else { footnote_collapse_reference_container(); } } function footnote_moveToAnchor(p_str_TargetID) { footnote_expand_reference_container(); var l_obj_Target = jQuery("#" + p_str_TargetID); if(l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight/2 }, 1000); } }More from our authors: Arbitration in Belgium: A Practitioner’s Guide
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Arbitration in Argentina: More Positive Signs Towards Certainty?

Kluwer Arbitration Blog - Fri, 2018-12-28 16:54

Tomas Ambrosini and Leandro Caputo

Arbitration in Argentina is finally finding its way to certainty. On 4 July of this year, Argentina passed the International Commercial Arbitration Act, based on the UNCITRAL Model Law. Furthermore, Argentinian domestic courts have recently handed down arbitration-friendly decisions. In this regard, a new judgment just been issued by the Argentine Federal Supreme Court of Justice is of the utmost importance for the development of arbitration in the country.

On 6 November 2018, the Argentine Federal Supreme Court of Justice in re “Estado Nacional – Procuración del Tesoro Nacional s/ recurso directo” (“Estado Nacional”) held that the setting aside of an arbitral award is limited to the specific grounds for annulment set forth under the law and must be not treated as a recourse of appeal. The Supreme Court thus refused to enter into an analysis of the merits of the case. A number of conclusions can be drawn from this judgment:

First, the Supreme Court’s decision contributes to certainty for arbitration in Argentina by affirming the approach in the case “Ricardo Agustín López [et al.] v. Gemabiotech S.A.” (“López”), previously commented on this Blog. Said criterion is based on the limited scope of judicial intervention in annulment proceedings of an award. As the Supreme Court confirmed, pursuant to Argentine law, any recourse against an arbitral award cannot be based on the merits of the case.  Neither is the court allowed to review the merits of the arbitral tribunal’s decision.

In López, the Supreme Court referred to the grounds for annulment contained in the Civil and Commercial Procedural Code. Article 760 states that arbitral awards may be set aside if: (i) there is an essential flaw in the proceedings – which could include the failure to give reasons for the decision, constituting a violation of the due process of law, (ii) an award is rendered beyond the stipulated term, and (iii) an award is rendered on issues not listed as requiring resolution. In addition, Article 761 states that (iv) an award may be annulled if it contains incompatible and contradictory decisions.

Second, while the “López” case involved private parties, this new case involved the Argentine Federal State as a party to both the arbitration and judicial proceedings. The decision is not only regarded as a ratification of the previous criteria in “López” but extends its scope to arbitrations against the Argentine Federal State. It is promising that the Supreme Court decision in Estado Nacional rejected the Federal State’s attempt to reopen the merits of the case in recourse against a final award.

Long-established Supreme Court doctrine recognises the capacity of the Federal State to resort to arbitration in all matters not related with public policy or sovereignty issues, if agreed in a contract and authorized by law. Nonetheless, Article 1651 of the Civil and Commercial Code of Argentina expressly declares that disputes involving the Federal or local State are outside the scope of its arbitration provisions. By excluding the State from being subject to such provisions, the Federal Congress sought, at that time, to uphold a perceived advantage for the State in litigating before domestic courts, which are sometimes devoted to protecting the State from private individuals. The Supreme Court’s decision in “Estado Nacional” appears to retreat from this old-fashioned dogma.

Third, the new Supreme Court’s decision can be construed as a clarification of the isolated doctrine espoused by the controversial judgement in “José Cartellone Construcciones Civiles S.A. v. Hidronor S.A.” (“Cartellone”), decided in 2004. In that case, the Supreme Court ruled that an arbitral award is not subject to appeal, but judicial review is permitted if the arbitral award is unconstitutional, illegal or unreasonable.

Although the vague and imprecise wording that the Supreme Court used in “Cartellone” has led to ambiguities as to its intended scope, it raised concerns about the extent of judicial review that the Supreme Court permitted in applications for the annulment of arbitral awards. Despite this, the new Supreme Court’s decision appears to overrule the approach in “Cartellone”, upholding the limited scope of the annulment procedure under the Civil and Commercial Procedural Code.

Fourth, the new Supreme Court’s decision may shed some light on the interpretation of Article 1656 of the Civil and Commercial Code of Argentina. Although – following enactment of the International Commercial Arbitration Act – this provision now only applies to domestic arbitration, this controversial rule provides a non-waivable ground for a party to object in court to any award that is “contrary to the legal system”. The provision essentially creates a right of appeal against arbitral awards.

Argentine courts have, however, clarified some of the uncertainty created by these provisions. In this vein, courts have held that the wording in Article 1656 should be interpreted as a procedure for setting aside an award. Accordingly, three out of six of the chambers of the Commercial Court of Appeals have so far held that, under Argentine law, the remedy of annulment is the only available recourse against final awards.

The new Supreme Court judgment in “Estado Nacional”, together with its previous decision in “López”, may be understood as an affirmation of the lower courts’ line of reasoning. By recognizing that the only grounds for setting aside a final award are those contained in Articles 760 and 761 of the Civil and Commercial Procedural Code, the Supreme Court put an end to the possibility of a broad and mistaken interpretation of Article 1656 of the  Civil and Commercial Code of Argentina.

In sum, the new Supreme Court’s decision is in line with arbitral standards and procedure that Argentina has recently adopted and clarifies previous mistaken and inaccurate interpretations. Such pro-arbitration case law, together with the legal certainty accompanying the enactment of the International Commercial Arbitration Act, paves the way for further positive development of arbitration in Argentina, both relating to the resort to arbitration within the users in the country, along with setting Argentina up as a possible hub for international arbitration in the region.

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A Wind of Change! Tanzania’s Attitude towards Foreign Investors and International Arbitration

Kluwer Arbitration Blog - Fri, 2018-12-28 04:10

Ibrahim Amir

In 2014, Tanzania was identified as the top destination for foreign direct investment in East Africa by the United Nations Conference on Trade and Development (“UNCTAD”). Between 2011 and 2013, the country signed five new Bilateral Investment Treaties (“BITs”). With these, it would seem like the country is opening up and attracting foreign investors.

However, since the new government came to power in 2017, the country has shown a hostile attitude towards international arbitration. Tanzania’s current government has adopted a rather combative stance toward foreign investment. The government has also taken measures that have substantially changed investment conditions for foreign investors, especially those in the natural resources sector. Since 2017, and over the past several months, the government terminated its BIT with the Netherlands and passed several laws that limit foreign ownership of natural resources.  It has also limited the use of international arbitration in the country’s natural resources industry. These legislative reforms appear to reduce the country’s exposure to possible international investment claims, both contractual and treaty-based. These shifts in the regulatory framework, nonetheless, has proved to affect the country as the state is faced with a wave of new arbitration claims. The recent attitude by the Tanzanian government will discourage foreign investment, as most foreign investors prefer international arbitration as a method of resolving their disputes with states. This post intends to discuss the significant legislative changes in Tanzania over the past eighteen months.

 

Measures Taken by the Tanzanian Government towards Foreign Investors and International Arbitration:

 

(i) ‘International’ Arbitration is Prohibited in Disputes Related to the Country’s Natural Resource Sector

The first of these measures took place last year when Tanzania’s parliament passed three controversial pieces of legislation that made significant reforms to the legal and institutional frameworks governing oil, gas and mineral extraction. These are: (1) the Written Laws (Miscellaneous Amendments) Act 2017 (“Amendments Act”), (2) the Natural Wealth and Resources (Permanent Sovereignty) Act 2017 (“Sovereignty Act”) and (3) the Natural Wealth and Resources (Review and Re-Negotiation of Unconscionable Terms) Act 2017 (“Review and Renegotiation of Unconscionable Terms Act”). With these legislations, the government aimed at correcting the shortfalls in the way the country has been managing its natural resources and to significantly increase its control over mining, oil and gas operations in the country.

For instance, the Review and Renegotiation of Unconscionable Terms Act empowers the Government to renegotiate or remove terms from contracts relating to natural resources that the government deems ‘unconscionable.’ Under section 6(2)(i), any clause that subjects the “State to the jurisdiction of foreign laws and fora” is“deemed to be unconscionable.” This means that if a contract contains a clause that refers disputes to international arbitration, the clause might be deemed unconscionable and could be subject to renegotiation. If the investor, however, refuses to renegotiate or renegotiation fails, then the term ceases to have any effect and is treated as having been expunged (section 6 (3) (1) and section 7 (1)).

Furthermore, Section 11(2) of the Permanent Sovereignty Act prohibits investors from resorting to international dispute resolution mechanisms or any foreign court or tribunal. It stipulates that any “disputes arising from extraction, exploitation or acquisition and use of natural wealth and resources shall be adjudicated by judicial bodies or other organs established in the United Republic and in accordance with laws of Tanzania.” Section 11(3) further requires that “judicial bodies or other bodies established in the United Republic and application of laws of Tanzania shall be acknowledged and incorporated in any” contracts or agreements relating to natural resources. These provisions would appear to rule out any arbitration clause that makes reference to international arbitration bodies as well as the application of foreign laws to the dispute.

These changes in the regulatory framework dramatically alter the conditions that were in place for foreign investors in the country’s natural resources sector. As a result, the state has faced a wave of arbitration claims filed by many foreign investors.

 

(ii) ‘International’ Arbitration is Prohibited in Public Private Partnership  (“PPP”) Agreements

 Notwithstanding the pending cases brought against the country due to the 2017 legislative reform, in September this year, the government made another significant legislative reform when it passed a new law that bans international arbitration as a method for resolving investor-state disputes with the country. The Public-Private Partnership (Amendment) Act, No. 9 of 2018 came into force this past September. Under Section 22 of the Act (Dispute Resolution), any dispute arising during the course of the PPP agreement “shall in case of mediation or arbitration be adjudicated by judicial bodies or other organs established in Tanzania and in accordance with its laws.” Accordingly, ‘international’ arbitration is no longer permitted in the PPP Agreements particularly those projects relating to natural resources. This a key change to the old act (Public-Private Partnership Act, No. 19 of 2010) which permits foreign investors to resort to international arbitration under international bodies. Foreign investors in PPP agreements under the new Act are compelled and can only seek recourse over disputes through domestic courts and in accordance with Tanzanian laws.

As was the case with the 2017 reform, the government intends to ensure that investor disputes are resolved locally and that the government is not subject to international arbitration forums such as the International Centre for Settlement of investment Disputes (“ICSID”). It was reported that the Tanzanian government has said that it has no faith in multilateral arbitration bodies because they lack impartiality when it comes to resolving disputes between member countries and investors. Multilateral arbitration bodies, in the government’s view, were formed to protect the interests of investors, not member countries.It has also argued that international arbitration is inherently biased against developing countries and that there is no neutral ground in international arbitration.

 

(iii) Termination of the Tanzania-Netherlands BIT Which was Up for Renewal

The most recent major reform also occurred this past September when Tanzania terminated its BIT with the Netherlands. The state gave the Dutch government the notification of its intention to terminate the treaty ‘only hours’ before the October 1 deadline when the treaty was set to expire on April 1, 2019. Article 14 of the BIT states, “[u]nless notice of termination has been given by either Contracting Party at least six months before the date of the expiry of its validity, the present Agreement shall be extended tacitly for periods of ten years.” The reason for this move by the Tanzanian government is unclear considering that the termination notice/decision was given and made in the last minutes. It is unclear whether this move was directed only towards the Dutch BIT or whether the government will also terminate all its remaining BITs.

However, it was reported that NGO groups have pushed the country to take this step. The East African Strategic Group on Influencing Multi and Bi-lateral Trade and Investment Negotiations, as well as the Southern and Eastern Africa Trade Information and Negotiations Institute, also played a role in pushing the country to bring the BIT to an end. It was also reported that several civil society lobbyists from both countries met over the last summer to review the BIT and started a campaign for that purpose.

Unlike all other Tanzanian BITs which are in force, the Tanzanian-Dutch BIT is the only one which could be renewed automatically if neither party issues a notice of intention to terminate at least six months after its expiry. For this particular BIT, a deadline was set. Therefore, if Tanzania had not terminated the BIT before the said deadline, October 1, 2018, it would have been extended automatically to April 2029. The other remaining BITs in force grant Tanzania the right to give a notice of termination at any time after the initial ten years from the date of entry into force. Thus, it remains to be seen whether the Tanzanian government will end any of its remaining BITs in the near future. It also remains to be seen whether the state intends to formally denounce the ICSID Convention and other multilateral investment agreements providing for international arbitration.

To date, the country has signed 19 BITs, of which 10 were entered with European countries, 5 with Asian countries, 4 with African countries, and Canada. Remarkably, of the 19 BITs, only 11 are in force, and 2 were already terminated (Switzerland-Tanzania in 1965 and Netherlands-Tanzania in 2018). As to investment dispute, Tanzania has been a Respondent in several investment arbitration cases – six cases under ICSID and one case under the PCA. In these cases, investors have invoked an investment contract and different BITs. Three cases are pending before ICSID and the PCA, and four have already been concluded.

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Books relating to Communication and Conflict

Communication and Conflict Blog - Thu, 2018-12-27 11:29
This page contains a list of books, all of which relate to supporting effective interpersonal communication and conflict resolution
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