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A Tale of Two Negotiators

ADR Prof Blog - Sun, 2021-08-01 18:26
When President Trump was in office, I wrote a series of posts about his negotiation skills (or lack thereof) based on contemporary news accounts.  Despite having Republican majorities in both houses of Congress for his first two years in office, he generally was unable to negotiate for enactment of his policy objectives, most notably to … Continue reading A Tale of Two Negotiators →

Advocate General Szpunar in Micula: Achmea Irrelevant, but Commission Competent to Assess Award under EU State Aid Law

Kluwer Arbitration Blog - Sun, 2021-08-01 01:00

According to Advocate General Maciej Szpunar, the Micula case is symbolic of the ‘conflictual relationship’ between EU law and international investment law. Indeed, the European Commission has persistently objected to the execution of the ICSID award issued in Micula, not because of the principles of autonomy and mutual trust that underpinned the Achmea judgment, but on grounds of EU state aid law. On 1 July 2021, Advocate General Szpunar issued his opinion in Micula, advising the Court of Justice of the European Union (‘CJEU’) to set aside the Micula judgment of the General Court, which had found against the Commission. In the view of the Advocate General, the General Court had erred when ruling that the European Commission was not competent to assess whether the implementation of the ICSDID award was compatible with EU state aid law.

 

The Long Road to Luxembourg

In 2005, the Swedish brothers Micula and some of their companies commenced ICSID proceedings against Romania, challenging the withdrawal of tax incentives which were originally scheduled to remain in place until 2009 but had been terminated in order to ensure Romania’s compliance with EU state aid law upon accession. In 2013, the ICSID tribunal awarded approximately EUR 178 million in damages to the claimants, finding that Romania had breached the fair and equitable treatment standard prescribed in the Romania-Sweden BIT. Already during the arbitral proceedings, the European Commission had argued that any compensation granted for the withdrawal of the tax benefits would be subject to EU state aid law. In 2015, the Commission adopted a decision, finding that any compensation paid by Romania under the ICSID award constituted incompatible state aid which would have to be recovered by Romania. In 2019, the General Court annulled the Commission’s decision, ruling that the latter had lacked the competence to assess the compatibility of the ICSID award with EU state aid law, since the award effectuated a right to compensation which arose when Romania repealed the tax incentives, i.e. before Romania’s accession to the EU (see earlier blog here).

 

The Nuances of Achmea

Since the Micula arbitration was based on an intra-EU BIT, it is unsurprising that arguments based on Achmea appeared during the proceedings in Luxembourg. The General Court had briefly addressed the point, dismissing the relevance of Achmea to the Micula case. Since the General Court had found that the Micula case, unlike the Achmea case, concerned events predating Romania’s accession to the EU, the Micula tribunal was not bound to apply EU law. Nonetheless, it was argued in cross-appeal by Spain, supported by the Commission and Poland, that the rationale of the Achmea judgment applied to the Micula arbitration and that, for that reason, the Miculas’ application for annulment of the Commission’s state aid decision was inadmissible.

Advocate General Szpunar expressed ‘some doubts’ as to whether the annulment application would be inadmissible even if the arbitration would have been incompatible with EU law. He noted, in footnote 11 to the opinion, that the incompatibility of the arbitration with EU law would not automatically have ‘the effect of placing an obligation on the applicants to repay the compensation’, while ‘the annulment of the decision at issue would necessarily have an impact on their situation, since that decision determines whether they may keep the payments made by Romania’.

In any event, the Advocate General rejected the substance of Spain’s cross-appeal. While Achmea implied that all arbitration proceedings initiated on the basis of an intra-EU BIT are incompatible with EU law, this approach was ‘debatable’ in respect of proceedings initiated before a state’s accession to the EU. The Advocate General agreed with the cross-appellants that EU law applied to the Micula arbitration proceedings as of Romania’s accession to the EU on grounds of the principle of the immediate applicability of EU law to the future effects of a situation that arose before accession, but this did not yet answer the question of compatibility.

The Advocate General noted that Achmea was concerned with the risks posed to the autonomy of EU law by arbitration proceedings in which EU law might be interpreted or applied. In the view of the Advocate General, all intra-EU BITs carry this risk, irrespective of whether it can be conclusively determined that a specific dispute involves the interpretation or application of EU law. Nevertheless, in the case of an arbitration initiated before accession, ‘no dispute capable of concerning the interpretation or the application of EU law is removed from the judicial system of the European Union’. The Advocate General considered that if instead of an arbitral tribunal, a Romanian court had been hearing the Micula dispute, it would not have been able to make a preliminary reference to the CJEU even after accession, since ‘the Court does not have jurisdiction to rule on the interpretation of EU law in a dispute concerning a situation that arose before accession’.

As to the principle of mutual trust, the Advocate General observed that this principle does not apply in relationships between the EU and third states. Precisely because of the lack of trust between EU member states and third states, the European Commission had promoted the conclusion of BITs between member states and aspiring member states in central and eastern Europe. The arbitration clause in these BITs served to compensate for the absence of mutual trust and to ensure an effective remedy for investors of member states in these states prior to their accession to the EU. Accordingly, the Advocate General considered it ‘lawful’ that a tribunal that was validly seized on the basis of a BIT whose conclusion had been encouraged by the EU would not relinquish jurisdiction upon the respondent state’s accession to the EU, ‘since the arbitration proceedings made it possible before accession, on the same basis as the principle of mutual trust after accession, to ensure the protection of investors’ rights’.

 

The Timing of State Aid

The main appeal questioned whether the European Commission had been competent to assess the arbitral award under EU state aid law. In this context, the parties debated the moment in time when any state aid allegedly granted in connection with the award was actually granted. Citing Magdeburger Mühlenwerke, the Advocate General noted that state aid is granted at the moment ‘that the right to receive it is conferred on the beneficiary under the applicable national rules’. For that reason, not the moment of payment was the decisive criterion, but the moment of ‘the acquisition, by the recipient of the aid measure at issue, of a definitive right to receive it, and the corresponding commitment, by the State, to grant the aid’. In the view of the Advocate General, the Micula tribunal retroactively established the existence of a right to compensation that, prior to the award, did not definitively exist but was actually contested by Romania. Accordingly, the alleged aid measure was granted at the moment when the right to compensation was recognised by the tribunal or when the award was implemented by Romania, i.e. after accession. Accordingly, contrary to the General Court’s ruling, the Advocate General concluded that the Commission was competent to assess the compatibility of the award with EU state aid law.

The Advocate General’s conclusion on the timing of the state aid measure logically implied a rejection of the General Court’s finding that the Commission had wrongly qualified the award as an ‘advantage’, which is one of the criteria of state aid as defined in Article 107 TFEU. According to the General Court, EU law was not applicable to the compensation at issue and the Miculas could therefore rely on the Asteris judgment, which draws a distinction between compensation for damages and an advantage in the sense of EU state aid law. Advocate General Szpunar, however, had already established that EU law applied to the compensation, since it was awarded after Romania’s accession to the EU.

Moreover, he noted that the General Court had failed to address other reasons why the award might not qualify as compensation for damages in the sense of Asteris. For instance, the Commission had argued that Asteris only applied in the context of the general rules on civil liability under domestic law and not in the context of arbitration proceedings, and that the Romanian Competition Council had classified the original tax incentives as state aid under the 1995 association agreement between the European Economic Communities and Romania. In the view of the Advocate General, the General Court should have engaged with these arguments.

 

Concluding Remarks

Timing is everything in the Micula saga. Because of the complex timeline of the events, including arbitration proceedings commenced before Romania’s accession to the EU but concluded after accession, a variety of arguments have been raised in respect of the applicability of EU law to this particular case. According to Advocate General Szpunar, the Micula proceedings are not affected by the Achmea judgment because the arbitration concerned events before accession and was commenced before accession. At the same time, the fact that the award was rendered after accession gave the European Commission competence to assess the award under EU state aid law. If the Court follows this opinion, the case will be referred back to the General Court which will have to assess whether the Commission was not only competent but also right to qualify the award as incompatible state aid. The answer to this question will likely have implications beyond the Micula case, given the Commission’s continuing reliance on the state aid argument.

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The Contents of Journal of International Arbitration, Volume 38, Issue 4 (August 2021)

Kluwer Arbitration Blog - Sat, 2021-07-31 02:09

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

 

Gary Born, The 1933 Directives on Arbitration of the German Reich: Echoes of the Past?

In 1933, the National Socialist government of the German Reich issued a collection of directives regarding the use of arbitration to resolve disputes, focused specifically on disputes between the Reich and private parties. The 1933 Directives made a number of general criticisms of the arbitral process as a means of adjudication, and relied upon these criticisms to significantly restrict the use of arbitration to resolve disputes with German state entities. The Reich Directives provide a neglected, but instructive, historical perspective on arbitration law and practice in Germany, both in the 1930s and before. At the same time, parts of the 1933 Directives also have unmistakable parallels to current debates about investor-state and commercial arbitration. Among other things, the Directives contain recommendations regarding the drafting of arbitration agreements and the conduct of arbitral proceedings which, while in some areas outdated, could in other respects be mistaken for current discussions regarding best practices in international commercial and investment arbitration. More importantly, the Directives’ criticisms of the arbitral process, and the National Socialists’ rationales for those criticisms, have striking analogues to aspects of contemporary debates about investment arbitration and proposals to abandon or restrict investment arbitration. Those parallels raise important, if uncomfortable, questions about these contemporary critiques and proposals for reform.

 

Darius Chan & Sidharrth Rajagopal, To Stay or Not to Stay? A Clash of Arbitration and Insolvency Regimes

In the wake of the global Coronavirus disease 2019 (COVID-19) pandemic, a rise in creditor-initiated winding-up proceedings is likely to be impending in coming years (See e.g., RCMA Asia Pte. Ltd. v. Sun Electric Power Pte. Ltd. [2020] SGHC 205). At the same time, geopolitical developments, such as the scale and ambition of Belt & Road Initiative projects, have raised questions over the issue of debt sustainability. Given the prevalence of arbitration clauses in modern international commercial and project agreements, the interplay and relationship between insolvency and dispute resolution, and especially arbitration, requires careful attention. While the intersections between the arbitration and insolvency regimes are numerous and multi-faceted, (Jennifer Permesly et al., ‘IBA Toolkit on Insolvency and Arbitration’, International Bar Association (March 2021, last accessed 18 April 2021) the impact of an arbitration clause on winding-up petitions has attracted recent case law. The English, Hong Kong, and Singapore courts have each taken differing approaches to the question of how to deal with winding-up petitions presented over disputed debts that are subject to an arbitration clause. On one end of the spectrum, the Hong Kong courts currently appear to prefer a relatively more creditor-friendly approach. On the other hand, the Singapore Court of Appeal recently laid down a relatively more debtor-friendly approach. Undertaking a comparative analysis of the approaches taken by different common law jurisdiction, this article argues that the Singapore Court of Appeal’s approach is preferable. However, at least for courts in United Nations Commission on International Trade Law (UNCITRAL) Model Law jurisdictions (or jurisdictions where the mandatory stay regime of the Model Law is adopted), they ought to find that a disputed debt subject to an arbitration clause falls within the scope of the mandatory stay regime under the Model Law. This article further suggests a possible way in which the approach of the Singapore Court of Appeal can be reconciled with the mandatory stay regime under Singapore’s enactment of the Model Law.

 

Rekha Rangachari, Kabir Duggal & Peter L. Schmidt, Evolution of 28 U.S.C. § 1783: An Unexplored Tool to Support International Arbitration?

In certain disputes, it may be important to acquire evidence from the other party, but it is difficult to do so because the international arbitration process envisions only a limited form of discovery from the opposing party in the form of document production. There is, however, the potential of an unexplored option in US law to help fill this void. 28 U.S.C. § 1783, also known as the ‘Walsh Act’, enables a United States court, under certain circumstances, to subpoena a national or resident of the United States who is in a foreign country to personally appear as a witness before the court, or before someone designated by the court, or to produce specific testimony or documents. Considering the ubiquity of American parties in international disputes, section 1783 has the potential to become an important tool in the arsenal of a disputes lawyer. Indeed, considering how section 1782 has been increasingly applied in international arbitration, it is possible that section 1783 might evolve as an important component in considering strategies for international arbitration. Like section 1782, however, due to its lack of use to date and vague statutory language, its applicability to various forms of international arbitrations remains an unfortunately open question. But it still has the potential to change international arbitration as we know it.

 

Bianca Böhme, Recent Efforts to Curb Investment Treaty Shopping: How Effective Are They?

In recent years it can be observed that states increasingly introduce explicit limitations to the practice of treaty shopping in their investment agreements. Accordingly, substantive ratione personae requirements, denial of benefits clauses, and anti-circumvention clauses are often included in newly signed investment treaties. In addition to these new drafting trends, arbitral tribunals have developed an implicit limitation in the form of the abuse of process doctrine to sanction the most egregious forms of treaty shopping. While these drafting trends as well as arbitral practice can curb undesired treaty shopping to a certain extent, this article argues that only a multilateral reform effort is able to truly prevent this practice from occurring.

 

Joshua Paine, Global Telecom Holding v. Canada: Interpreting and Applying Reservations and Carve-Outs in Investment Treaties

Within investment treaties, reservations and carve-outs perform a crucial role in balancing investment protection and liberalization with competing regulatory interests of States. While carve-outs for taxation matters have been interpreted and applied by a significant number of investment treaty tribunals, carve-outs concerning other issues and reservations have been adjudicated much less frequently. The recent Award in Global Telecom Holding v. Canada raises several key questions of treaty interpretation concerning a reservation by Canada in the Canada–Egypt Bilateral Investment Treaty (BIT), and a carve-out, which removed from investor-State arbitration decisions by either Party not to permit the establishment or acquisition of a business enterprise. This case comment critically analyses the approach to interpreting reservations and carve-outs adopted in the Award and the associated Dissenting Opinion. I suggest that it is through the application of the ordinary rules of treaty interpretation that adjudicators will locate the appropriate limits of reservations and carve-outs, and there is little justification for adopting a restrictive interpretation of such provisions. The case also demonstrates that interpretative inferences based on one treaty party’s other investment treaties must be approached with care.

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All Bark and No Bite? The Russian Supreme Court’s Refusal to Grant an Anti-Arbitration Injunction to a Sanctioned Company

Kluwer Arbitration Blog - Fri, 2021-07-30 02:00

In mid-2020, changes were enacted to the Russian Arbitrazh (Commercial) Procedure Code (“APC”) which established the exclusive jurisdiction of Russian Arbitrazh courts over cases where a Russian party is subject to sanctions or where the dispute has arisen out of sanctions. This raised concerns that sanctioned Russian parties would be able to easily avoid arbitration clauses they had entered into. However, the Russian Supreme Court has recently found that arbitration clauses with sanctioned Russian parties are only invalidated when sanctions render them incapable of being performed.

 

Background: The June 2020 Changes to the APC

On 18 June 2020, changes to the APC were enacted allowing sanctioned Russian parties to bring a claim at their place of residence or incorporation, provided that the same dispute had not already been brought before a foreign court or before an arbitral tribunal seated outside of Russia (Article 248.1(3) of the APC). Sanctioned Russian parties were also given the right to apply for an anti-suit injunction – a form of relief previously unknown to Russian law – in relation to such proceedings in foreign courts or arbitrations (Articles 248.1(3) and 248.2 of the APC). Article 248.1(4) of the APC notes that the provisions of this article “also apply” when the arbitration agreement is “incapable of being performed” due to the application of sanctions to one of the parties.

 

Uraltransmash Case

On their face, the jurisdictional provisions of the amended Article 248.1 of the APC are very broad. The decision of the Russian Supreme Court in the Uraltransmash case confirming the restrictive interpretation of this provision is thus welcome news.

In 2013, Uraltransmash, a Russian company, entered into a contract for the purchase of tramway cars with PESA Bydgoszcz (“PESA”), a Polish company. The Polish-law-governed contract contained an SCC arbitration clause. In May 2019, PESA commenced arbitration against Uraltransmash claiming over EUR 55 million in damages. Having initially participated in the arbitration for over two years, Uraltransmash – whose parent company Uralvagonzavod has since 2014 been subject to EU sanctions – later applied to the Arbitrazh Court for the Sverdlovsk Region seeking an anti-arbitration injunction against PESA.

Uraltransmash argued that the fact that it was subject to EU sanctions was in itself sufficient to grant the injunction under Articles 248.1(3) and 248.2 of the APC. The Arbitrazh Court for the Sverdlovsk Region disagreed, finding on 24 November 2020 that these provisions should be interpreted together with Article 248.1(4) of the APC, and that thus an anti-suit injunction may only be granted when sanctions render the arbitration agreement incapable of being performed.

With this in mind, the Arbitrazh Court noted that, despite the sanctions, Uraltransmash was able to fully participate in the SCC arbitration: it appointed a respected arbitrator, filed a number of submissions, appointed a Polish accounting expert witness and was advised by well-regarded Russian and Polish lawyers. The court was also unconvinced that the sanctions prevented Uraltransmash from paying advances on arbitrators’ fees, or from making payments to PESA. It found that Uraltransmash was subject only to fairly limited sectoral EU sanctions and not to more stringent sanctions envisaging asset freezes and travel restrictions. The fact that Uraltransmash was also subject to US sanctions was deemed irrelevant. For these reasons, the court refused to issue the anti-suit injunction.

On appeal, on 10 March 2021 the higher instance Arbitrazh Court for the Urals District upheld the decision of the lower court, agreeing with its reasoning and endorsing its interpretation of Article 248.1 of the APC. The Arbitrazh Court for the Urals District also noted that a contrary interpretation of the APC provisions would render international commercial transactions unstable and unpredictable.

The Russian Supreme Court likewise agreed with this interpretation of the relevant provisions of the APC, rejecting on 28 May 2021 an appeal in relation to the decisions of the lower courts.

While there is no system of binding precedent in Russia, it is nevertheless significant that the Russian Supreme Court adopted this stance in relation to the interpretation of the conditions for issuing an anti-suit injunction in relation to arbitrations involving sanctioned entities.

 

A Word of Caution: Instar Logistics v Neighbors Drilling

The Russian courts’ decisions in Uraltransmash can be contrasted with an earlier decision of the Ninth Arbitrazh Appellate Court of Moscow in the case of Instar Logistics v Neighbors Drilling (Case № А40-149566/2019). In that case, the claimant, who was subject to US sanctions, applied to the Russian courts to amend the ICC arbitration clause in its English-law-governed storage agreement with a US counterparty, citing the impossibility of performance of the arbitration clause due to the US sanctions with which the US respondent had to comply. While the claim was filed before the amendments to the APC had entered into force, the Ninth Arbitrazh Appellate Court on 10 February 2020 agreed with the decision of the lower court and held that the dispute should be heard in Russian courts. This decision was confirmed on appeal by the Arbitrazh Court for the Moscow District on 6 July 2020 and by the Russian Supreme Court on 12 October 2020. The fact that the US-incorporated respondent would have been unable to comply with an arbitral award against it due to US sanctions, somewhat bafflingly, was a key consideration (with the courts thus confusing the enforceability of the arbitration clause and that of the resulting award). In the view of the Russian courts, this created a procedural “imbalance” between the sanctioned Russian claimant and the US respondent. Unlike the courts in Uraltransmash, the courts in Instar Logistics did not undertake a detailed analysis as to whether the sanctioned claimant – who had not attempted to commence arbitration – would have been able to participate in it.

 

Conclusion and Implications

The Uraltransmash decision of the Russian Supreme Court limits the availability of anti-suit injunctions, as well as the avoidance of foreign arbitration clauses, to situations where the sanctions make the sanctioned entity’s participation in the arbitration impossible. This is undoubtedly a welcome development. As confirmed in a joint article by the ICC, LCIA and SCC, sanctions do not prevent sanctioned Russian parties from participating in arbitrations before these institutions. To the extent that the APC provisions dealing with sanctioned entities are interpreted in such a restrictive way, the risk of Russian parties being able to successfully avoid foreign-seated arbitrations and obtaining anti-suit injunctions against them would thus be relatively low.

Nevertheless, the Uraltransmash decision is fact-specific, with the sanctioned entity in question having participated in the SCC arbitration for over two years without any difficulties. A risk remains that, should, for instance, a sanctioned entity claim it is unable to participate in a foreign-seated arbitration at an earlier phase, or should there be any purported enforcement difficulties as a result of sanctions as per Instar Logistics, Russian courts may adopt a less arbitration-friendly approach.

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Ecuador’s Constitutional Court Rules in Favor of Ratification of the ICSID Convention

Kluwer Arbitration Blog - Fri, 2021-07-30 01:31

On 15 January 1986, Ecuador signed the Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID Convention”). During President Rafael Correa´s administration (2007-2017), President Correa publicly expressed his hostility towards the ICSID Convention and the international investment protection system. In 2008, Ecuador denounced over a third of its bilateral investment treaties (BITs). Later in 2009, President Correa issued Executive Decree Nº 1823 denouncing the ICSID Convention, terminating its application to Ecuador.

In the 2021 presidential elections, Guillermo Lasso, a former banker, was elected as the President of Ecuador. President Lasso has vowed to attract foreign investment and break away from the leftist policies adopted during the former administration. On 21 June 2021, Ecuador´s Ambassador to the United States, Ivonne Baki, signed the ICSID Convention. Pursuant to articles 147 and 418 of the Ecuador’s Constitution, the President has the power to sign and ratify international treaties. After signing a treaty, the President has the obligation to notify the National Assembly in the following 10 days before he can ratify it. Soon after the signature of the Convention, there was an ongoing discussion as to whether ratification of the ICSID Convention required the prior approval of the National Assembly pursuant to article 419 of the Constitution.

On 30 June 2021, the Constitutional Court ruled that the National Assembly did not need to approve the ratification, and therefore, the President can sign and ratify ICSID directly, under the condition that he notifies the National Assembly 10 days prior its ratification. President Lasso ratified the ICSID Convention on 16 July 2021, through the issuance Executive Decree No. 122.

 

Did the ICSID Convention require prior legislative approval according to the Constitution?

Pursuant to article 419 of the Constitution of Ecuador, the ratification of international treaties shall require the approval of the National Assembly where they: 1) refer to territorial or boundaries matters; 2) establish political or military alliances; 3) contain the commitment to enact, modify or repeal a law; 4) refer to rights guaranteed in the Constitution; 5) compromise the State´s economic policy to international financial institutions or international companies; 6) compromise the country to integration and trade agreements; 7) confer competences of the internal legal order to an international or supranational organization; or 8) compromise the country´s natural resources, water, biodiversity, etc. Local practitioners have different opinions on the scope of this article and its applicability to the ICSID Convention.

Under domestic laws, the Constitutional Court has the power to rule on the constitutionality of international treaties and the necessity of prior legislative approval. On 21 June 2021, President Lasso´s General Legal Secretary sent a petition to the Constitutional Court asking them to clarify whether the ratification of the ICSID Convention required legislative approval. In the office’s view, it did not.

As mentioned, the Constitutional Court ruled that ratification of the ICSID Convention did not require prior legislative approval. The Court reasoned that the Convention is an international treaty whose purpose is to create an international institution (ICSID) for the resolution of investment disputes. Since ICSID does not refer to territorial or boundary matters, does not create political or military alliances, does not contain a commitment to enact, modify or repeal a law, does not compromise the economic policy of the Ecuadorian State or compromise cultural or genetic heritage, it does not fall under the categories 1, 2, 3, 4, 5 and 8 established in article 419.

The Court then went on to analyze the two most debated categories under article 419:

Does the ICSID Convention bind the country to integration and trade agreements? The Court clarified that the ICSID Convention does not contain clauses creating obligations intended to regulate trade between its Member States, nor are there any provisions forcing States to enter into a process of economic integration. Although the preamble of the ICSID Convention does consider “the need for international cooperation for economic development” this does not imply that a trade or integration obligation is being acquired. The Court made a distinction between the purpose of a treaty and the effects that it creates, explaining that the sole mention of cooperation and economic development matters does not trigger article 419(6) of the Constitution.

Does the ICSID Convention confer competences of the internal legal order to an international or supranational organization? The Court reasoned that ICSID establishes the possibility, but not the obligation, to submit a dispute to its dispute resolution system. In other words, Ecuador is not forced by the ICSID Convention to submit to arbitration (or conciliation) all disputes falling under its jurisdiction. At the end of the day, investment arbitration, as commercial arbitration, is a creature of consent.  Hence, being a party to the ICSID Convention does not translate to automatic consent to arbitrate. Ecuador would have to consent on a separate instrument such as a BIT, a bilateral investment contract, or an investment protection law to arbitrate a specific investment dispute in order to be bound by such agreement. The Court also clarified that the ICSID Convention does not confer competences of its internal legal order to international bodies, because “the resolution of disputes between States is not a competence of internal legal order”. In the Court´s view, submitting investment disputes to ICSID arbitration (or to any other international forum) does not imply conferring competences of domestic legal order to international organizations.  Thus, the Court concluded that the ratification of the ICSID Convention did not fall under article 419 (7) of the Constitution.

It is worth noting that the voting in the Court´s Plenary was not unanimous. Six out of the nine Justices voted in favor of this decision, two Justices issued one dissenting opinion and one Justice voted against the ruling. On the dissenting opinion, Justices Ramiro Ávila and Enrique Herrería explained that article 422 of the Constitution contains a prohibition for the State to submit disputes to international arbitration, with the exception of controversies between States and Latin American nationals resolved in regional forums. The dissenting opinion went on and said that the most appropriate decision would have been to discuss such an important topic before the National Assembly, as it is the highest public deliberation institution representing the entire society. However, Article 422 of the Constitution prohibits Ecuador from signing treaties that submit jurisdiction to international arbitral tribunals in contractual or commercial disputes. Given that investment arbitration is a completely different creature from commercial arbitration, in the author’s opinion, there is no such a constitutional prohibition; and ICSID arbitration is therefore not incompatible with the Constitution.

 

Conclusion

 The ratification of the ICSID Convention did not require prior legislative approval and the Constitutional Court confirmed this by issuing a well-reasoned decision, which is very positive for the country. Ecuador´s return to the ICSID Convention shows the current administration´s compromise of protecting foreign investment and allows Ecuador to enter into important new agreements within the international community, which will contribute to Ecuador´s economic growth.

 

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A Conversation about Whiteness and Mediation

ADR Prof Blog - Thu, 2021-07-29 13:58
FOI Alyson Carrel (Northwestern) and LCSW Jasmine Atwell (Loyola ‘JD22) recently discussed Sharon Press and Ellen Deason’s new article, “Mediation: Embedded Assumptions of Whiteness?,” published in the Cardozo Journal of Conflict Resolution (and available on SSRN). Press and Deason’s article explores concepts from the book, Me and White Supremacy, as applied to the practice, process, … Continue reading A Conversation about Whiteness and Mediation →

The ECtHR Judgment in BEG SpA v Italy: A Human Right to a Conflict-Free Arbitrator? Part I

Kluwer Arbitration Blog - Thu, 2021-07-29 01:17

The relationship between commercial arbitration and European human rights law raises a number of conceptually difficult issues. How can the State be regarded as responsible at all for conduct of private arbitral proceedings? And how does the concept of an independent and impartial tribunal apply to a decision-making body appointed by the parties themselves?

The European Court of Human Rights (“ECtHR) has gradually assembled a jurisprudence on these questions in the context of the procedural guarantees of Article 6(1) of the European Convention on Human Rights (“Convention). Its latest contribution to the field is its judgment of 20 May 2021 in BEG SpA v Italy (BEGor the “judgment).

 

BEG SpA v Italy: The Facts

In 2000, BEG concluded a co-operation agreement with Enelpower SpA to develop and operate an Albanian hydroelectric power plant. Enelpower was a wholly owned subsidiary — previously an internal division — of ENEL, Italy’s State-owned power operator (which in 2000 was in the process of privatisation). The agreement contained a clause referring disputes to arbitration under the rules of the Arbitration Chamber of the Rome Chamber of Commerce (“ACR”). Under Article 21 of the ACR Rules, the agreement operated as a waiver of the right to bring a nullity appeal under Article 827 of the Italian Code of Civil Procedure (“CCP”).  In November 2000, BEG commenced an arbitration seeking termination of the agreement and the equivalent of some €130m in damages for breach.  BEG appointed GG as its arbitrator. Enelpower appointed NI. The parties appointed PDL as presiding arbitrator. He resigned and was replaced by AV.

Following a meeting of the tribunal on 25 November 2002, an award dismissing BEG’s claim was signed by a majority of the tribunal – NI and AV – without GG’s signature. The award was deposited with the Rome District Court on 6 December 2002 with a view to obtaining a decree of enforceability (Article 825 CCP).

At the heart of the subsequent Convention complaint lay an alleged conflict of interest affecting NI. At the time of his appointment by Enelpower, NI acted as counsel to its parent entity, ENEL, in unrelated judicial proceedings.  NI had also previously served as Vice-Chair and a Board member of ENEL between 1995 and 1996, overlapping with negotiation of the co-operation agreement. BEG maintained that it did not become aware of those matters until 5 December 2002 when its lawyers learned the information by chance.  ACR had invited the party-appointed arbitrators in February 2001 to disclose in writing any conflict of interest. GG stated that he had no conflict, but NI simply accepted appointment without explicitly declaring the absence of a conflict. On 6 December 2002, some 15 minutes after the deposit of the award, BEG submitted a request for NI’s removal.

As the domestic proceedings unfolded there were complex disagreements among the parties, the arbitrators and ACR about the sequence of events surrounding the award and BEG’s objection to NI. Following proceedings in the Rome District Court and Court of Appeal, the Court of Cassation eventually dismissed BEG’s nullity appeal in April 2009 (judgment, 24-37). BEG lodged its complaint with the ECtHR in January 2010, alleging violation of the Article 6(1) right to an independent and impartial tribunal.

 

A Short Detour: Mutu and Pechstein

The ECtHR previously analysed the relationship between Article 6 and arbitral proceedings in  Mutu and Pechstein v. Switzerland (2018). There, the ECtHR found Switzerland responsible for the conduct of proceedings before the (entirely private) Court of Arbitration for Sport (CAS), but dismissed on the facts the applicants’ complaints of lack of independence and impartiality on the part of the tribunal (see also here).

The ECtHR reasoned that a State is responsible for a dispute resolution procedure before a private law body such as the CAS because of its interaction with the State legal system. It held that determination of a dispute by arbitration is not necessarily incompatible with the Article 6(1) right of access to a court. Parties may agree to divert their private pecuniary disputes from a “classic” court to arbitration. However, because this results from a waiver of a Convention right, the ECtHR distinguishes between “voluntary” and “compulsory” submission to arbitration. A “voluntary”, and thus effective, waiver of Convention rights must be made “willingly, lawfully and unequivocally” and attracts “minimum safeguards” commensurate with its importance.  But where the applicant had no real choice but to agree to arbitration, the guarantees of Article 6 apply with full force.

The ECtHR recalled that under Article 6(1), a court must be sufficiently independent and must meet “subjective” and “objective” tests of impartiality. However, in arbitration “to which consent has been given freely, lawfully and unequivocally, the notions of independence and impartiality may be construed flexibly” given the role of the parties themselves in appointing the tribunal (judgment, 147).

On the facts, the ECtHR accepted that the Federal Supreme Court had fully investigated the question of independence and impartiality.  The constitutional arrangements of the CAS made it “similar to a judicial authority independent of the parties” (judgment, 157). However, Ms. Pechstein – unlike Mr. Mutu – had not made a “free and unequivocal” waiver of her Article 6(1) rights. Absent valid waiver of the right to a public hearing, the private hearing under the then CAS rules violated that element of Article 6(1).

Mutu and Pechstein left important questions unresolved. In what circumstances might the ECtHR go behind the evaluation of independence and impartiality by the domestic court? What does the “flexible” standard of independence and impartiality connote in practice? Is there a real difference between the “full” guarantees of Article 6(1) which apply to “compulsory” arbitration, and the standards applicable to “voluntary” arbitration (a question obscured by the significant factual differences between the two applicants’ cases)? What does the ECtHR’s case-law tell us about its attitude to arbitration more broadly?

 

BEG SpA v. Italy: The ECtHR’s Reasoning

This case – in which the Italian courts were seised of the matter between 2002 and 2010, and the ECtHR between 2011 and 2021 – is hardly a triumph of judicial expedition. The ECtHR was not assisted by having to address an exhaustive series of procedural objections by the Italian government to the admissibility of the claim, eventually resolved in BEG’s favour. That left admissibility turning on jurisdiction ratione personae – that is, the issue of State responsibility for the arbitral proceedings.

The ECtHR noted that Italian law “conferred jurisdiction on the domestic courts to examine the validity of arbitral awards”. Here, the courts had exercised that jurisdiction. The District Court’s decree gave the award “the force of law in the Italian legal order”, and the appellate courts “examined and dismissed” the nullity appeal (judgment, 65). The ECtHR therefore had jurisdiction to examine “the acts and omissions of the ACR as validated by the Italian domestic courts” (judgment, 66).

On the merits, the ECtHR first had to determine whether the right relied on had been effectively waived. It affirmed that the Article 6 “right to a court” does “not necessarily” mean access to a “court of law of the classic kind, integrated within the standard judicial machinery of the country”. A “tribunal” may be a body “set up to determine a limited number of specific issues”, so long it offers “the appropriate guarantees”. Thus “[a]rbitration clauses, which have undeniable advantages for the individuals concerned as well as for the administration of justice, do not in principle offend against the Convention” (judgment, 126). The ECtHR once more referred to the distinction between “voluntary” and “compulsory” arbitration. Here, it was common ground that the arbitration proceedings were voluntary in nature. Thus the focus was on whether the applicant waived “in an unequivocal manner… its right to have its dispute with Enelpower settled by an independent and impartial tribunal” (judgment, 136).

The ECtHR concluded:

  • BEG’s acceptance of the ACR arbitration pre-dated Enelpower’s appointment of NI as arbitrator (judgment, 137).
  • BEG’s omission to challenge NI’s original failure to make an explicit declaration about conflicts was not a waiver of its right to an independent and impartial tribunal. Article 6 of the ACR Rules compelled each arbitrator to indicate in their written declaration any relationship with the parties or interest in the subject-matter, hence the absence of an explicit disclosure entitled BEG to “legitimately presume” that none existed (judgment, 138-139).
  • The Government’s suggestion that BEG was “most probably aware”, through GG, of the links between NI and ENEL was “based on a presumption of knowledge which does not rest on any concrete evidence” of BEG’s knowledge (judgment, 140).
  • BEG had sought NI’s withdrawal as soon as it discovered his professional links with ENEL. BEG had appealed against the award on that basis, and the domestic courts duly considered the merits of its complaint. The facts “radically differed” from Suoveaniemi and others v. Finland, in which the ECtHR found an “unequivocal” waiver where a party failed to seek an arbitrator’s withdrawal after becoming aware of grounds of challenge. (judgment, 141-142).
  • There had therefore been no unequivocal waiver of impartiality, and the arbitration proceedings “had to afford the safeguards” of Article 6(1) (judgment, 143).

Turning to the substance, the ECtHR largely reiterated well-established principles including those stated in Mutu and Pechstein (compare BEG 128-133 with Mutu and Pechstein 140-144). However, it added some observations – nearly all based on previous authority about judicial proceedings – that provide interesting insight into its thinking on the application of Article 6(1) to arbitration.  Thus “…a tribunal’s member must be independent vis-a-vis the executive, Parliament, but also the parties” (judgment, 128).  As regards impartiality, “the objective test is functional in nature: for instance, professional, financial or personal links between a judge and a party to a case… may give rise to objectively justified misgivings as to the impartiality of the tribunal”. Thus the “nature and degree” of the connection is important (judgment, 131). As in Mutu and Pechstein, appearances matter because “what is at stake is the confidence which the courts in a democratic society must inspire in the public” (judgment, 132).

Applying those principles, the ECtHR held:

  • The “public” or “private” status of ENEL and Enelpower was irrelevant to NI’s independence and impartiality. What mattered were “the relationships between ENEL and Enelpower” (judgment, 144).
  • There was no evidence of “personal prejudice or bias” on NI’s part, hence no subjective lack of impartiality (judgment, 145).
  • NI served as Vice-Chair and Board member of ENEL when ENEL itself was directly negotiating the power plant project with BEG. Given the “importance and economic stakes” of the project, and regardless of whether he was personally aware of the negotiations, “NI’s senior role in the entity… whose subsidiary Enelpower would later oppose [BEG] in the arbitration proceedings, seen from the point of view of an external observer, could legitimately give rise to doubts as to his impartiality” (judgment, 148-149).
  • NI had acted as counsel to ENEL in concurrent civil proceedings, albeit concluded by a judgment of the Court of Cassation before appointment of the tribunal in the present case. However, when the concurrent dispute began, Enelpower was an internal division of ENEL and even after 1999 was still its wholly-controlled subsidiary. Since the domestic courts’ consideration of BEG’s nullity appeal, the CCP had been amended to broaden the grounds for removing an arbitrator “to an extent similar to ordinary courts of law” (a change the ECtHR noted “with interest”, judgment 150-152).

Overall, “NI’s impartiality was capable of being, or at least appearing, open to doubt and that [BEG’s] fears in this respect can be considered reasonable and well-founded.” There had been a violation of Article 6(1). (judgment,153-154). The ECtHR awarded €15,000 for non-pecuniary damage as just satisfaction under Article 41 (162-163).

In the wake of BEG, is a contracting State now in principle answerable under the Convention for the conduct of all private arbitral proceedings taking place within its jurisdiction? What does the case tell us about the relationship between the independence and impartiality test developed in the international arbitration context on the one hand, and the ECtHR’s application of Article 6 to arbitral proceedings on the other? These questions are addressed in the remaining post in this series (Part II).

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The ECtHR Judgment in BEG SpA v Italy: A Human Right to a Conflict-Free Arbitrator? Part II

Kluwer Arbitration Blog - Thu, 2021-07-29 01:15

In the wake of BEG (see Part I), what conclusions can we draw about the place of arbitral independence and impartiality in the ECtHR’s Article 6 jurisprudence?

 

State Responsibility and Private Arbitral Proceedings

Is a contracting State now in principle answerable under the Convention for the conduct of all private arbitral proceedings taking place within its jurisdiction, or is the position more nuanced?

The ECtHR has rejected any suggestion that the responsibility of the State, or the operation of the guarantee of independence and impartiality itself, is dependent on there being some “public” character to the underlying arbitral proceedings – whether in the shape of a public law arbitral institution (Mutu and Pechstein) or a public sector party to the proceedings (BEG).  In BEG, the ECtHR affirmed that the key mechanism for engaging responsibility is the interaction between arbitration and the State’s legal order. Interestingly the ECtHR noted that the Rome Chamber of Commerce was a “local authority established under public law” (judgment [63]). However, its articulated reasons for accepting jurisdiction ratione personae make no reference to that and essentially match those in Mutu and Pechstein (where the ECtHR expressly recognised the private character of the CAS).

On that basis, it is not easy to see what sort of arbitral proceeding taking place within a Contracting State might escape the ambit of the Convention. Every Contracting State confers some jurisdiction on its courts to assist or supervise arbitral proceedings seated within its territory, and to enforce awards made in proceedings seated there or elsewhere. The requirement to exhaust domestic remedies means that any case reaching the ECtHR merits stage has been the subject of an exercise of jurisdiction by the competent national court. The territorial limitation in Article 1 of the Convention to matters within a State’s “jurisdiction” may raise interesting questions at the margins – for example, where the alleged breach arises in arbitral proceedings seated, and physically held, outside the State concerned. Investor-State arbitration under the auspices of ICSID, a creature of public international law, raises delicate issues of allocation of responsibility. Even then, a Convention issue could conceivably arise if the Contracting State authorities enforce an award alleged to result from patent disregard of the safeguards contemplated by Article 6.

 

Waiver

It is now firmly settled that in applying the doctrine of waiver to arbitration, the ECtHR will carefully distinguish between different elements of the rights guaranteed by Article 6(1). The ECtHR affirmed in BEG its relaxed approach to parties conferring jurisdiction – over “pecuniary” disputes at any rate – on a body other than a “classic” State court. The ECtHR made clear that it recognised the benefits, for the parties themselves and the wider public interest, of enabling parties to opt for arbitration by waiving their Article 6(1) “right to a court”.  But equally clear is the much finer-grained approach the ECtHR takes to any suggestion that a party has consequently renounced the procedural guarantees ordinarily expected of civil justice.  BEG demonstrates that even in a “voluntary” case, the ECtHR will carefully scrutinise not only the arguments of the respondent State but the conclusions of the national courts themselves.

This last point is of interest given the ECtHR’s repeated disclaimers of the role of “fourth instance” appeal against domestic judicial decisions (see generally, here and here).

Once more, the exhaustion requirement means that the domestic courts will nearly always have formed a view on the subject-matter of the Strasbourg complaint. But the crucial point is that the rights in play before the ECtHR are by definition human rights. The Italian courts focused on whether the challenge to NI was technically brought in time, and on supposed common knowledge about his background in the parties’ sphere of activity. But that fell far short of enquiring whether the evidence established BEG’s “free and unequivocal” renunciation of a Convention right.  It is precisely the need to ask the right question, and to answer it through a searching analysis of the facts, that constitutes the “minimum safeguard” commensurate with the importance of the right allegedly waived. In the absence of such an exercise by the domestic courts, the ECtHR not surprisingly conducted its own review of the evidence and reached a different conclusion.

This element of BEG carries important lessons for Contracting State courts – and arbitral tribunals and institutions themselves – determining questions of waiver of arbitrator conflicts under national law or arbitral rules. Those decisions must take proper account of the high value of the right to an independent and impartial tribunal. They must focus on evidence of what a party actually knew, rather than on what might supposedly be “common knowledge” within the arbitral or business community.

Also noteworthy is the ECtHR’s position on arbitrator disclosure. Its rejection of the domestic courts’ approach to NI’s silence on his links with Enel, which effectively placed the onus on BEG to discover those matters for itself, reinforces developments elsewhere such as the UK Supreme Court’s recognition in Halliburton v. Chubb (see also here) of a positive duty of disclosure of facts that might reveal a conflict.

 

Independence and Impartiality in Arbitral and Judicial Proceedings: Same Difference?

There is now a welcome convergence between the test for a disqualifying conflict developed in the international arbitration context and the ECtHR’s articulation of the Article 6 test for independence and impartiality. Neither requires actual proof of subjective bias. Compare the ECtHR’s repeated references to “legitimate doubts” with Gary Born’s 2014 formulation:

It is not necessary for a party challenging an arbitrator to demonstrate that the individual lacks independence or impartiality; it is instead sufficient to show that there is enough ‘doubt’ or ‘suspicion’ as to an arbitrator’s impartiality to justify either not appointing or removing the arbitrator.

(here pp. 1911 et seq. On the importance of appearances see also Halliburton 1, 54-55.)

However, in determining what is “enough” doubt, does the ECtHR now expect an arbitrator to meet the same measure of independence and impartiality as a State court judge?

As noted in Part I, in Mutu and Pechstein the ECtHR referred to the “flexible” application of the Article 6 standard to arbitration bearing in mind the parties’ role in appointing the tribunal, but gave no indication how that “flexibility” might manifest itself in practice. In Ms. Pechstein’s “compulsory” case the ECtHR appeared to assimilate the arbitral standard closely to the judicial standard. BEG was explicitly treated as a “voluntary” case. Yet every indication in the ECtHR’s formulation and application of the test is that there is no discernible difference between the judicial and arbitral standards of independence and impartiality. There is some logic to that. While the parties, rather than the State, appoint “their” tribunal, the whole point of examining the links (past and present) between an arbitrator and a party is precisely to ensure the tribunal’s objective separation from the parties.

The only explicit indication in BEG of a material difference in the standards applicable to judicial and arbitral proceedings concerned the question of waiver. At judgment, 141, the ECtHR commented:

By employing such a test… as regards the need for a voluntary and unequivocal waiver of the right to an impartial adjudicator… the Court emphasises that it has been developed in the context of arbitral proceedings…  without having to decide whether a similar waiver would be valid in the context of purely judicial proceedings

So it might be harder to establish an effective waiver of independence and impartiality in relation to a State court than an arbitral tribunal.  But once the ECtHR finds no valid waiver, the quality of independence and impartiality expected of an arbitral tribunal is essentially the same as, or not materially less than, that expected of a civil court hearing a comparable case. That appears to be so whether the submission to its jurisdiction was “compulsory” or “voluntary”.

 

Protection of Arbitral Integrity: Tough Love?

What about the ECtHR’s overall attitude to arbitration? Not everyone in the dispute resolution community will welcome the growing prospect of parties to arbitral proceedings “having a go” in Strasbourg after losing an arbitrator challenge in the domestic courts. In BEG, however, the ECtHR expressly acknowledged arbitration as a beneficial form of dispute resolution.  In other words the ECtHR’s insistence that arbitral proceedings observe the high procedural standards set by Article 6(1) is founded in a desire to ensure that arbitration maintains those beneficial qualities and thus its attractiveness. Just as insufficient guarantees of a judge’s independence from the executive may harm public confidence in the administration of justice (as the ECtHR observed in Mutu and Pechstein and BEG), the insufficiency of an arbitrator’s independence from a party is liable to harm the business community’s confidence in arbitral justice – to the detriment of arbitration itself. Tough love indeed.

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VIAC Rules Revision 2021 Part II: The New VIAC Rules of Investment Arbitration and Mediation

Kluwer Arbitration Blog - Wed, 2021-07-28 02:23

The Vienna International Arbitral Centre (VIAC) has further strengthened its arbitration offering by adopting brand new, stand-alone investment arbitration and mediation rules, the VIAC Rules of Investment Arbitration and Mediation (VRI), which entered into force on 1 July 2021. The VRI apply to disputes involving a State, a State-controlled entity or an intergovernmental organization that arise under a contract, treaty, statute or other instrument. The VRI are based on the well-tried Vienna Rules for commercial arbitration (which have been revised with effect of 1 July 2021), but contain certain adjustments to account for the unique features and needs of investment disputes involving the participation of sovereign parties and the consideration of public interest issues and matters of public policy. The VRI are a set of modern, flexible, cost-effective and efficient rules that address some of the major concerns expressed by States in the context of the ICSID Rules Amendment process and the UNCITRAL Working Group III discussions on ISDS reform. The working group that drafted the new Vienna Investment Rules was chaired by Claudia Annacker and consisted of representatives of the VIAC Board and Secretariat (in alphabetical order: Alice Fremuth-Wolf, Günther Horvath, Johanna Kathan-Spath, Dietmar Prager, Lucia Raimanova, Franz Schwarz and Nathalie Voser).

 

Some of the key features of the new VRI are presented below:

Jurisdictional requirements (Article 1): Although the VRI are a separate and specialized set of investment arbitration rules similar to the ICSID Convention and Rules, they do not lay down any particular requirements for the submission of disputes for resolution pursuant to the VRI. It is up to the parties to decide whether the VRI are suitable for the resolution of their dispute and if so, to agree their use in a contract, treaty, statute or any other instrument. As a result, there should be less time and cost spent on jurisdictional battles than in the case of ICSID arbitrations.

Joinder and Consolidation (Articles 14 and 15): In the case of contract-based arbitrations, the VRI specifically allow for the joinder of third parties. Unlike other arbitration rules, the VRI do not lay down any particular conditions for or limitations on joinder, but leave it to the tribunal to decide, upon hearing all parties and considering all relevant circumstances, whether a joinder is warranted in a given case. The VRI further provide that the VIAC Board may consolidate two or more proceedings pending before VIAC – irrespective of whether they arise under a contract, treaty, statute or other instrument and whether they involve the same parties, the same legal relationship or the same arbitration agreement – if the place of arbitration is the same and the parties agree to consolidation or the same arbitrator(s) were appointed. The VRI’s provisions on joinder and consolidation thus give tribunals and VIAC the flexibility and discretion needed to resolve complex, multi-party disputes in a fair and (cost-) efficient manner, and offer a response to the concerns arising from multiple proceedings identified by States in the context of the UNCITRAL Working Group III discussions.

Non-disputing party participation (Article 14a para. 1): In case of treaty and statute-based arbitrations, the VRI provide that the tribunal, after considering all relevant circumstances, may allow or invite submissions from non-disputing parties on factual or legal issues that are within the scope of the dispute submitted to arbitration.

Non-disputing treaty party participation (Article 14a para. 2): During the discussions in UNCITRAL Working Group III, States have expressed the need to enhance the consistency, coherence, predictability and correctness of ISDS awards inter alia by ensuring a better State control over the interpretation of investment treaties. In response, the VRI specifically allow, in cases where the dispute arises under a treaty, the non-disputing treaty party to make written submissions on the interpretation of the treaty. The tribunal may also invite such submissions on its own initiative. A similar provision is also being discussed as part of the ICSID Rules Amendment process.

Early dismissal of frivolous claims (Article 24a): To decrease the length and cost of the arbitration, the VRI allow for the dismissal of frivolous claims at an early stage of the proceedings in an expedited process. A party may apply for early dismissal of a claim, counterclaim, or defense on the grounds that it is manifestly outside the jurisdiction of the tribunal, manifestly inadmissible or manifestly without legal merit. The application must be filed no later than 45 days after the constitution of the tribunal or the respondent’s first submission on the merits, whichever is earlier. The tribunal must rule on the application within 60 days of receiving the parties’ last written submission on the application.

Third party funding (Article 13a): In the ICSID Rules Amendment process and the UNCITRAL Working Group III, States have identified third party funding (TPF) as a major concern that calls for reform inter alia to address conflicts of interest of arbitrators and security for costs. To meet these concerns and ensure the independence and impartiality of arbitrators, the VRI require early disclosure of the existence of TPF. In addition, the VRI explicitly provide that the tribunal may, if it deems it necessary, order the disclosure of specific details of the TPF funding arrangement, the TPF’s interest in the outcome of the proceedings and whether the TPF has committed to undertake adverse costs liability. The VRI define TPF broadly to include any arrangement – whether for-profit or non-profit – to provide material support to a party to fund the costs of the proceedings, with the sole exception of contingency fee agreements with party representatives.

Efficient and speedy conduct of proceedings: Several provisions of the VRI aim to encourage the efficient and speedy resolution of the dispute. Thus, for example, under the VRI, jurisdictional objections must be raised no later than the first submission on the merits (Article 24(1)), disputes under 10 million EUR are to be decided by a sole arbitrator (Article 17(2)), hearings may be conducted other than in person (Article 30(1)), and the tribunal must render its award no later than 6 months after the last hearing or the last submission of the parties on the merits (Article 32(2).

Costs and security for costs (Articles 42-44 and 33(6)-(7)): One of the main practical attractions of arbitrating under the VRI are VIAC’s very affordable costs, especially when compared with other arbitral institutions. According to VIAC’s cost calculator, the fees charged for a 10 million EUR dispute with a panel of three arbitrators would be a maximum of 322.850,- EUR. Arbitration thus remains a viable option also for smaller investors and lower value disputes, which will likely be an important consideration particularly for parties from the CEE/CIS region. In addition, the VRI explicitly affirm the power of the tribunal to order security for costs. Contrary to tribunals sitting under other rules which have required the showing of exceptional circumstances amounting to bad faith or evidence of the investor’s impecuniousness to grant an order for security for costs, a tribunal sitting under the VRI will only require a showing that the “recoverability of a potential claim for costs is, with a sufficient degree of probability, at risk” (NB TPF is not in itself sufficient for a security for costs order under the VIR). Furthermore, if a party fails to comply with a security for costs order, the tribunal may, upon request, suspend in whole or in part, or terminate the proceedings. From the States’ perspective, the inability to recover awarded costs has been identified as an important concern, therefore, the security for costs provision of the VRI should provide comfort.

Transparency (Article 41): The VRI provide that VIAC may publish certain limited information on the arbitration proceedings as well as anonymized summaries or extracts of decisions and awards. The parties cannot opt out from this provision, but may agree on greater transparency for their proceedings, including by choosing to apply, in the case of treaty-based arbitrations, the UNCITRAL Transparency Rules.

Investment mediation: The VRI contain separate rules for the conduct of mediation of investment disputes as a flexible and cost-effective alternative to arbitration. Disputing parties may employ mediation independently from, or in conjunction with, arbitration. Where a mediation is followed by arbitration (or vica versa), VIAC will charge administrative fees only once. The VRI further provide that the tribunal may at any stage of the proceedings help the parties reach a settlement (Article 28(3)). The VRI thus service the need for effective dispute prevention and mitigation tools and alternative forms of dispute resolution solutions for investor-State disputes expressed by States in UNCITRAL Working Group III.

 

Conclusion:

The new VRI are a modern, cost-efficient alternative for States and State-controlled entities from the CEE/CIS region and elsewhere to resolve their investment disputes by way of arbitration and/or mediation. Some of the States in the region, such as Hungary, Belarus and Kyrgyzstan, have in recent years been rather active in concluding new BITs, and may well decide to include the VRI in their future treaties. The VRI are also a welcome new solution for SME investors and investors who seek to protect lower value investments, including investors from and in the CEE/CIS region.

With the adoption of the VRI, VIAC further strengthens its position as one of the favorite arbitral institutions for parties from the CEE/CIS region and beyond, and the VRI will no doubt quickly become a real competitor to the more traditional rules for the resolution of investment disputes.

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Arbitral Institutions’ Conflicts of Interest

Kluwer Arbitration Blog - Wed, 2021-07-28 01:00

Conflicts of interest between parties and arbitrators are common in arbitration proceedings. However, the academic community has not yet examined whether arbitral institutions may also run into conflicts of interest. This post will deal with this question and also examine measures that can mitigate any such risks of conflicts of interest for arbitral institutions.

The management and employees of arbitral institutions perform important procedural functions in support of arbitration proceedings. This can include, for example, providing and applying procedures for the selection, appointing or deciding on challenges of arbitrators, keeping records of the proceedings, and collecting and distributing arbitration fees. However, international legal instruments and best practice guidelines do not directly regulate any conflicts of interest on the side of arbitral institutions. For example, recent free trade agreements and investment protection agreements such as the CETA (see e.g. Annex 29-B); the Canada-Chile FTA (Article G-24), the EUSIPA (Art. 3.11); or the 2019 Netherlands Model BIT (Art. 20(6)), and rules of arbitral institutions (see e.g. Art. 11.4, 13.4 of the 2018 HKIAC Rules; and Art. 5(5) of the 2020 LCIA Rules) include broad lists of addressees of rules on disclosures of conflicts of interest but do not always include arbitral institutions. Even the IBA Guidelines on Conflicts of Interest in International Arbitration (the “IBA Guidelines”) do not regulate conflicts of interest arising within arbitral institutions. Perhaps the lack of regulation comes from the generally accepted assumption of neutrality surrounding the activities of arbitral institutions.

That said, some guidance on the issue can be found in internal regulations of arbitral institutions and occasionally in national legislation. For instance, one can consider this problem based on the regulations of the Russian Arbitration Center (“RAC”) at the Russian Institute of Modern Arbitration (“RIMA”):

 

The RAC Administrative Office Employees

Depending on the position of the RAC Administrative Office employee, the following situations may arise in case:

1) The employee acts as a tribunal assistant

The IBA Guidelines General Standard 5(b) imposes a duty of independence and impartiality on tribunal assistants, similar to the one imposed on arbitrators. Tribunal assistants, therefore, may be required to sign declarations of independence and impartiality. Accordingly, in the event of a conflict of interest, a RAC Administrative Office employee acting as a tribunal assistant must notify the parties, the tribunal and the RAC Executive Administrator of the conflict, and may even be required to terminate his/her mandate in the respective arbitration (Article 40 (3) RAC Arbitration Rules). In the latter case, the RAC Executive Administrator would appoint another employee of the RAC Administrative Office as tribunal assistant.

 

2) The employee is involved in case management activities

An employee may be involved in case management activities by, for example, preparing the case and other files in relation to the constitution of the arbitral tribunal. Article 3.4 of the RAC Internal Rules obliges RAC Administrative Office personnel to avoid any conflicts of interest, and if a conflict occurs, to immediately stop the performance of functions concerning the relevant arbitration proceedings1)There is a discrepancy between the English and Russian versions of the RAC Arbitration Rules: the English version states that “If a conflict of interests occurs, the personnel shall immediately cease performance of their functions with respect to the relevant arbitrator and notify the Executive Administrator” (emphasis added), while the Russian version provides that the performance of the respective functions shall be ceased “…with respect to the relevant arbitration…”. The authors believe the broader provision in the Russian-language version prevails in that case. This provision is under revision in the updated version of the RAC Arbitration Rules, which are available for public consultation. jQuery('#footnote_plugin_tooltip_38105_24_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38105_24_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and notify the RAC Executive Administrator. In this case, the RAC Executive Administrator should appoint another employee to perform the relevant case management functions.

 

3) The employee performs administrative secretary functions unrelated to a specific case

When there is no direct connection to the participants of the arbitration, no conflicts of interest arise. However, if an administrative secretary becomes aware of any circumstances that may lead to a conflict of interest, Article 7.4 of the RAC Internal Rules obliges the employee to inform the RAC Executive Administrator, who should take appropriate measures. In practice, this may involve, amongst other things, the exclusion of the employee from case-related correspondence, calls, denial of access to the case file in the RAC Online System of Arbitration.

 

The RAC Executive Administrator (Head of the RAC Administrative Office)

The RAC Executive Administrator is responsible for managing RAC’s day-to-day activities, including the activities of the RAC Administrative Office, and the administration of arbitration proceedings under the RAC Arbitration Rules.

As the RAC Executive Administrator’s powers are unique, it is difficult to resolve any potential conflicts of interest arising in relation to the RAC Executive Administrator. However, if such conflict does arise, despite the lack of direct provisions, it seems that the duties of the RAC Executive Administrator can be performed by a specially appointed RAC Administrative Office’s employee or a nominated deputy.

Another solution may be the delegation of the RAC Executive Administrator’s powers to a member or the Chairman of the RAC Board. Obviously, any such delegation shall suspend the execution of the member’s or Chairman’s duties in the RAC Board.

Similar options are offered by the VIAC (Article 4.5 VIAC Arbitration Rules) and the DIS (Article 7.2 DIS Rules): if it is impossible for the Secretary General to perform his/her duties, then one of the Board’s members (VIAC) or the Deputy Secretary General or another employee (DIS) shall perform these duties.

Alternatively, the SIAC Rules (Rule 1.3) widely define the term “President” by including President, any Vice President and Registrar, thus overcoming possible conflicts of interest situations.

 

Members of the RAC Board

It is commonplace that members of a decision-making body such as the RAC Board shall not perform their functions of appointing arbitrators, deciding challenges and others if they run into conflicts of interest (Art. 7.6 RAC Internal Rules).

In this case, the RAC Board member shall immediately notify other Board members and the RAC Executive Administrator of a conflict and shall not participate in any decision-making with respect to that arbitration.

National laws also remain relevant. For instance, in Russia, a conflict of interest is prohibited in the performance of arbitral institution’s activities (Article 46 of the Federal Law on Arbitration), if one of the parties is:

(1) the non-profit organization, under which the institution was established;

(2) its founder(s); and/or

(3) the person(s) and its affiliates, who are part of the institution’s governing bodies and are competent to decide questions about the appointment, challenge and termination of the arbitrator’s powers.

Thus, given the importance of conflict-free arbitration proceedings, members of the appointing authority are strongly encouraged to avoid and disclose any conflicts of interest.

 

Conclusion

Arbitration institutions are represented by individuals, with their own ties and connections. This may result in conflicts of interest with the participants in arbitral proceedings. Taking into account the duty of neutrality that arbitral institutions should adhere to, connections of the institutions’ employees and affiliates should be disclosed.

With the increase in the number of arbitral proceedings, we may see the development of principles on the topic of conflicts of interest within arbitral institutions. At the moment, the interplay between arbitral institutions and the participants of arbitral proceedings has not been sufficiently developed, but knowledge of institutional rules and domestic law on these matters may assist parties and tribunals to navigate at least some of these issues as they arise.

References[+]

References ↑1 There is a discrepancy between the English and Russian versions of the RAC Arbitration Rules: the English version states that “If a conflict of interests occurs, the personnel shall immediately cease performance of their functions with respect to the relevant arbitrator and notify the Executive Administrator” (emphasis added), while the Russian version provides that the performance of the respective functions shall be ceased “…with respect to the relevant arbitration…”. The authors believe the broader provision in the Russian-language version prevails in that case. This provision is under revision in the updated version of the RAC Arbitration Rules, which are available for public consultation. function footnote_expand_reference_container_38105_24() { jQuery('#footnote_references_container_38105_24').show(); jQuery('#footnote_reference_container_collapse_button_38105_24').text('−'); } function footnote_collapse_reference_container_38105_24() { jQuery('#footnote_references_container_38105_24').hide(); jQuery('#footnote_reference_container_collapse_button_38105_24').text('+'); } function footnote_expand_collapse_reference_container_38105_24() { if (jQuery('#footnote_references_container_38105_24').is(':hidden')) { footnote_expand_reference_container_38105_24(); } else { footnote_collapse_reference_container_38105_24(); } } function footnote_moveToReference_38105_24(p_str_TargetID) { footnote_expand_reference_container_38105_24(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38105_24(p_str_TargetID) { footnote_expand_reference_container_38105_24(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Anti-Arbitration Injunctions in Malaysia: Where to Now?

Kluwer Arbitration Blog - Tue, 2021-07-27 01:00

AIAC YPG

An increasing number of anti-arbitration injunctions applications have come before the Malaysian courts within the last two years. Anti-arbitration injunctions can take various forms but are essentially judicial orders restraining the initiation or continuation of arbitration proceedings in Malaysia or, as the case may be, a foreign jurisdiction. What has emerged from the Malaysian courts is a two-track approach that lowers the bar for curial intervention where an anti-arbitration injunction is sought by a non-signatory to an arbitration agreement. Notably, this deviates from the reluctance of other common law jurisdictions to grant this exceptional relief (here). Additionally, when restraining foreign-seated arbitrations, Malaysian courts have also appeared to adopt a lighter touch approach than that used in other parts of the Commonwealth. These post discusses the question whether a reconsideration of the current Malaysian approach to anti-arbitration injunctions might be beneficial.

 

The modern treatment of anti-arbitration injunctions in Malaysia were studied in the line of cases leading to the Malaysian Federal Court’s decision in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors [2019] 5 MLJ 1. Jaya Sudhir involved a dispute between three shareholders as to whether a shareholders’ agreement (containing an arbitration clause) permitted an executed transfer of shares to a third party investor. The shareholders commenced a Malaysian arbitration to which the investor was not privy. Concerned that an arbitration award given in its absence could adversely affect its proprietary rights to the shares, the investor applied to the Malaysian High Court for an injunction to restrain the arbitration.

 

The Malaysian Federal Court allowed the anti-arbitration injunction and delivered a noteworthy decision. It found that an anti-arbitration injunction sought by a non-party to an arbitration agreement should not be determined any differently from an ordinary interlocutory injunction. This was because the Malaysian Arbitration Act 2005 and its policy objectives were inapplicable to non-arbitral parties, and should be disregarded when determining such applications. Therefore, the Federal Court held that when a non-party applies to restrain arbitral proceedings, Malaysian courts should apply the general test for interlocutory injunctions – in essence, the test in American Cyanamid.

 

In so assessing, the Malaysian Federal Court placed significant weight on achieving the “fairest approach to all parties [in the application]”, in particular whether:

 

  • the target arbitration would affect the interests of non-parties;
  • there is a risk of parallel proceedings; and
  • there is a risk of inconsistent decisions arising from the arbitration.

 

A Departure from Wider Common Law?

An argument throughout the Jaya Sudhir cases was that anti-arbitration injunctions should be assessed differently from ordinary interlocutory injunctions and that the court’s discretion to grant anti-arbitration injunctions should be exercised sparingly with due regard to the principles of domestic arbitral legislation. To that end, anti-arbitration injunctions should be subjected to the more stringent test in the English case of J Jarvis and Sons Ltd v Blue Circle Dartford Estates Ltd [2007] EWHC 1262 (TCC), requiring applicants to demonstrate the following to obtain an anti-arbitration injunction:

 

  • the injunction must not cause injustice to the claimant in the arbitration; and
  • the continuance of the arbitration must be oppressive, vexatious, unconscionable or an abuse of process.

 

The higher threshold is generally thought to apply as an anti-arbitration injunction involves an interference with the fundamental principle of international arbitration that courts should generally uphold, and therefore not interfere with arbitration agreements. However, the Federal Court found that the J Jarvis test would only apply to injunctions sought by a party to an arbitration agreement, and not the scenario before it where the application was brought by a non-party. This effectively created a two-track approach to determining anti-arbitration injunctions in Malaysia that would depend on the contracting status of the applicant.

 

It is interesting to note that this finding was based upon the Federal Court’s survey of English and Hong Kong case law, which it concluded did not support the application of the J Jarvis test to non-parties to an arbitration agreement. However, it appears that prior to the Federal Court’s decision, the English courts have applied the J Jarvis principles in situations where anti-arbitration injunctions were sought by non-parties. An example is Excalibur Ventures LLC v Texas Keystone Inc and others [2011] EWHC 1624 (Comm) where the English court, applying J Jarvis principles, granted an injunction to restrain a New York-seated arbitration where there was a strong arguable case that the applicant was not a party to the arbitration agreement.

 

Post-Jaya Sudhir

Following the Federal Court’s decision in Jaya Sudhir, anti-arbitration injunctions have again come before the Malaysian courts on several occasions. On two such occasions, the High Court demonstrated the differential approach to anti-arbitration injunctions applications by parties and non-parties to a Malaysian arbitration, as adopted by the Federal Court in Jaya Sudhir (FELDA Investment Corporation Sdn Bhd v Synergy Promenade Sdn Bhd [2020] MLJU 1465; Federal Land Development Authority v Tan Sri Haji Mohd. Isa Bin Dato’ Haji Abdul Samad [2021] 8 MLJ 214).

 

Interestingly, the Malaysian courts also had two opportunities to consider injunctions to restrain arbitrations seated outside Malaysia, specifically London (MISC Berhad v Cockett Marine Oil (Asia) Pte Ltd [2021] MLJU 563) and Madrid (Government of Malaysia v Nurhima Kiram Fornan & Ors [2020] MLJU 425). The injunctions sought were granted by the High Court in both instances. These are noteworthy decisions as they illustrate the Malaysian court’s approach to anti-arbitration injunctions in its capacity as a court not having supervisory jurisdiction over the relevant arbitration proceedings.

 

The High Court did not consider Jaya Sudhir on both occasions above but  focussed on whether there was a valid arbitration agreement binding the applicants. This was found in the negative in both cases. In Nurhima, this negative finding (premised on sovereign immunity) was sufficient for the granting of the relief sought and the court did not consider any tests for interlocutory injunctions. Meanwhile, in MISC Berhad, the High Court applied the general test for interlocutory injunctions. At first glance, this mirrors the substance of the Federal Court’s decision in Jaya Sudhir.

 

Two observations arise from the MISC Berhad and Nurhima decisions. First, the High Court did not refer to the possibility of a more stringent test applying to granting of anti-arbitration injunctions. Second, and more fundamentally, there was also no discussion of the wider common law position that where the arbitration to be restrained has a foreign seat, a court should be cautious about intervening and should do so only as an exceptional step (see Sabbagh v Khoury and others [2019] EWCA Civ 1219). Although Malaysian law has consistently strived to align itself to English law, these cases appear to be different. In general, supervision of an arbitration is reserved to the courts of the arbitral seat, which the English courts have recognised is a principle of the New York Convention.

 

Conclusion

The Malaysian experience with anti-arbitration injunctions over the past two years shows that there are unanswered questions in its jurisprudence on this relief. It is hoped that the Malaysian courts will give further guidance on its approach in restraining foreign-seated arbitration, in particular its views on the general reservation of judicial intervention to curial courts. It is also hoped that the courts will grant anti-arbitration injunctions sought by non-parties sparingly. A potential risk of the current two-track approach is that applications for anti-arbitration injunctions could be used as a backdoor to ventilate substantial jurisdictional challenges before national courts where such issues are generally reserved for arbitral tribunals, as reflected in the court’s approach to applications to stay of court proceedings pending arbitration. That said, anti-arbitration injunctions raise complex questions where arbitration law and policy intersect with third party interests. It is hoped that the Malaysian courts will deal with these anti-arbitration injunctions with a view to preserve the integrity of arbitration agreements, prevent unnecessary delays and give effect to parties’ choices on desired dispute resolution forum.

 

 

 

 

 

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The Paris Court of Appeal Rules that the Brussels I Recast Regulation is Inapplicable to Liability Claims against Arbitrators

Kluwer Arbitration Blog - Mon, 2021-07-26 02:00

In a judgment dated 22 June 2021, the Paris Court of Appeal ruled that liability claims against arbitrators fall within the “arbitration exception” of Article 1(2)(d) of the Brussels I recast regulation, leading to the application of French private international law rules to determine the competent courts. The Paris Court of Appeal further considered that French courts have jurisdiction to hear the claim on the basis that the seat of the arbitration, located in France, constituted the place where the arbitrators’ services were performed (the applicable jurisdiction criteria under French private international law rules). This post discusses the jurisdictional question raised before the Paris Court of Appeal, as regards liability claims against arbitrators.

 

Factual Background and First Instance Decision

A Qatari and an Emirati company, both active in the automotive industry, started ICC arbitration proceedings pertaining to the non-renewal of contractual arrangements. The seat of the arbitral tribunal was formally in Paris, but the three arbitrators were domiciled in Germany and the hearing and the deliberation took place in Germany. The award, rendered in favour of the Emirati company, was challenged by the Qatari company before the French courts on the basis that one of the arbitrators omitted to mention the links between his law firm and the group of the Emirati company. The Paris Court of Appeal annulled the award by a judgment dated 27 March 2018 because of the arbitrator’s breach of his disclosure obligations. Said judgment was confirmed by the French Supreme Court.

The Qatari company then claimed damages against this arbitrator before the French Court of First Instance (Tribunal judiciaire), which held – on 31 March 2021 – that the Brussels I recast regulation was applicable to the claim but that French courts did not have international jurisdiction on the basis of Article 7(1) of the Brussels I recast regulation. Pursuant to this provision, the courts competent to hear claims pertaining to an agreement for the provision of services are the courts of the Member State where, under the contract, the services were provided or should have been provided. In the opinion of the Tribunal judiciaire, the fact that the award was deemed to be rendered in Paris (as stated by the applicable terms of reference and Article 32(3) of the 2021 ICC Rules), the seat of the proceedings, would be “fictitious” and insufficient to consider that the parties’ intention would have been for the services to be performed in France. The Tribunal judiciaire ruled that the arbitrator’s activities were primarily performed in Germany, which was the country of domicile of the arbitrator and where the hearing and the arbitral tribunal’s deliberation were held.

The Qatari company appealed this decision before the Paris Court of Appeal on 26 April 2021.

 

Is the Brussels I Recast Regulation Applicable to Liability Claims against Arbitrators?

According to Article 1(2)(d) of the Brussels I recast regulation, the regulation is not applicable to “arbitration”. In view of the debates of the scope of this so-called “arbitration exception” under the Brussels Convention and the Brussels I regulation, the predecessor to the Brussels I recast regulation, a new recital 12 was added to the latter, which provides that:

“[…] this Regulation should not apply to any action or ancillary proceedings relating to, in particular, the establishment of an arbitral tribunal, the powers of arbitrators, the conduct of an arbitration procedure or any other aspects of such a procedure, nor to any action or judgment concerning the annulment, review, appeal, recognition or enforcement of an arbitral award”.

As underlined by the Paris Court of Appeal, the list of excluded proceedings encompassed in the arbitration exception is thus not exhaustive.

Referring to the CJEU’s Marc Rich case (Case C-190/89 of 25 July 1991), where the CJEU held that Member States “intended to exclude arbitration in its entirety, including proceedings brought before national courts” (para. 18), the Paris Court of Appeal considered that:

An action to hold an arbitrator liable after the annulment of an arbitral award based on the arbitrator’s failure to disclose is closely linked to the constitution of the arbitral tribunal and to the conduct of the arbitration, since it aims at assessing whether the arbitrator has carried out, in accordance with their obligations under his arbitration contract, his mission, which is part of the implementation of the arbitration.

This action is thus an arbitration matter, even if it is governed by general tort law” (paras. 26-27; free translation).

It could be argued that, following West Tankers (Case C-185/07 of 10 February 2009), where the CJEU ruled that anti-suit injunctions based on the existence of an arbitration agreement fell within the scope of the Brussels I recast regulation, the case law of the CJEU has evolved towards a more restrictive approach of the arbitration exception than its approach in Marc Rich. However, according to many commentators (see, for instance, this contribution), the decision may have been explained by the specificity of the case and the willingness of the CJEU to preclude anti-suit injunctions among EU courts. What the position of the CJEU would have been with respect to liability claims against arbitrators, if the Paris Court of Appeal had referred the question to the CJEU, is thus uncertain.

If the solution reached by the Paris Court of Appeal were to be upheld, it would mean that the recognition and enforcement of judgments over the liability of arbitrators would not benefit from the regime provided for by the Brussels I recast regulation (which provides for limited grounds for refusal of enforcement and recognition, and abolishes the necessity to go through exequatur proceedings in the Member State where enforcement is sought).

 

Where do Arbitrators Provide their Services?

Having concluded that the Brussels I recast regulation was inapplicable, the Paris Court of Appeal had to apply French domestic private international law. In accordance with Article 46 of the French Code of Civil Procedure, the defendant may, in addition to the courts of the domicile of the defendant, seize the courts of the country where the contractual services were performed.

The Court ruled that such place was determined by the seat of the arbitration, on the basis of the below reasoning:

In international arbitration, unless otherwise agreed by the parties, the State court of the place where the service was provided for the purpose of ruling on an action for liability brought against the arbitrator in the performance of the arbitration contract is the court in whose jurisdiction the seat of the arbitration is located.

Indeed, the arbitrator’s contract is part of the mixed nature of arbitration, contractual by its source and jurisdictional by its purpose, and derives from the arbitration agreement to which it is closely linked.

Thus, an arbitrator’s service consists in the performance of his or her mission to settle the dispute submitted to him or her by the parties and includes the rendering of an award at the seat of the arbitration chosen by the parties or in agreement with them.

There is therefore a need, in view of the particular nature of the arbitrator’s contract, closely linked to the arbitration agreement, to consider that the place of performance of the arbitrator’s services is at the seat, even though the arbitration proceedings and the arbitrators’ deliberation may, by agreement between the parties, have taken place at other places.” (paras. 30-33, free translation)

As the seat of the arbitration was Paris (France), the Paris Court of Appeal held that French courts had international jurisdiction over the claim and quashed the Tribunal judiciaire’s decision.

Favouring the seat of the arbitration as the applicable criterion in order to localise the performance of the arbitrator’s services, rather than a number of factual circumstances (as held by the Tribunal judiciaire), has the benefit of enhancing legal certainty. While it was clear in this case that the all of these factual circumstances pointed to Germany (as the three arbitrators were domiciled in Germany and all the procedural steps took place in Germany in practice), this may be less clear in many international arbitrations where the factual circumstances do not point to a single state. Focusing on the seat, rather than these factual criteria, also appears to be more in line with the parties’ intent in a case, such as the one at hand, where the terms of reference provide that (i) the arbitral tribunal may hold the hearing wherever it deems appropriate without impacting the seat of the arbitration and (ii) awards are deemed to be rendered at the seat.

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Limits, Latitude, and Lacunae: Rare Set-aside of Award in CBX v CBZ

Kluwer Arbitration Blog - Mon, 2021-07-26 01:30

The Singapore Court of Appeal (“CA”) recently handed down CBX and anor v CBZ and ors [2021] SGCA(I) 3 (“CBX”), setting aside, exceptionally, the awards.1)The views expressed in this article are solely the views of the authors, and are not representative of the organisations they are affiliated with. jQuery('#footnote_plugin_tooltip_38158_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Significantly, the law was clarified, to a certain extent, in three key areas:

  1. The risk of an issue which arises late in an arbitration, or is not properly pleaded, falling outside the terms or scope of submission to arbitration, rendering an award (or part of an award) which determines the issue liable to be set aside under Article 34(2)(a)(iii) of the Model Law.
  2. Whether the parties’ agreement on a point can exclude the tribunal’s jurisdiction to determine that point.
  3. Whether a costs award can survive the setting aside of elements of an award, and if not, how costs may then be determined.

 

Facts

CBX arose from two sale and purchase agreements governed by Thai law for the sale and purchase of shares in a company which indirectly owned windfarm projects (the “SPAs”), some of which were incomplete.

Disputes between the parties gave rise in June 2016 to two Singapore-seated ICC arbitrations (the “Arbitrations”). The Arbitrations were heard together by the same Tribunal, and led to, inter alia, two Phase II Partial Awards (“PAs”) and a Final Award (Costs) (the “Costs Award”) in 2019 in favour of the sellers under the SPAs (the “Sellers”). The buyers under the SPAs (the “Buyers”) then applied to set aside parts of the PAs and, consequentially, the whole of the Costs Award.

The impugned parts of the PAs concerned the Tribunal’s decisions that (i) the Buyers pay the Sellers certain amounts described as the “Remaining Amounts”; and (ii) 15% compound interest p.a. should run on those amounts (the “Compound Interest Orders”).

The Remaining Amounts had originally been claimed in the Arbitrations on the basis that they were due because their due dates had been accelerated by the Buyers’ defaults or conduct. The Tribunal did not accept this claim, but instead ordered that the Buyers make payment of the Remaining Amounts when they became due in any event, without acceleration ie. on the Completion of Development dates of the windfarm projects which were incomplete, and other dates thereafter, none of which had occurred at the time of post-hearing briefs but some of which occurred before the PAs were issued (the “Future Dates”).

The Compound Interest Orders were for 15% compound interest p.a. to apply to the Remaining Amounts. They were made following what the Tribunal later described as a “regrettable oversight” on its part as the parties had in fact agreed during the Arbitrations (and prior to the end of the evidentiary hearing) that the compounding of interest was unlawful and unenforceable under Thai law.2)CBX at [7]. jQuery('#footnote_plugin_tooltip_38158_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The applications to set aside were made on the grounds that the Tribunal had exceeded its jurisdiction and/or failed to afford the Buyers a reasonable opportunity to present their case in relation to whether they were obliged to pay the Remaining Amounts on the Future Dates, and that the awards contravened Singapore’s public policy. Anselmo Reyes IJ dismissed the applications in full. The Buyers appealed.

 

CA’s Judgment

The CA allowed the appeal.

The CA observed in relation to the Remaining Amounts that while the arbitration clauses in the SPAs had provided that “[t]he [Terms of Reference] (“ToRs”) shall not include a list of issues to be determined”, the ToRs themselves indicated that they were subject to Article 23(4) of the ICC Rules, which provides as follows:

After the Terms of Reference have been signed or approved by the Court, no party shall make new claims which fall outside the limits of the Terms of Reference unless it has been authorized to do so by the arbitral tribunal, which shall consider the nature of such new claims, the stage of the arbitration and other relevant circumstances.

The CA held that Article 23(4) clearly contemplated “express consideration and determination” by the Tribunal of whether a new claim should be permitted. However, the Tribunal had failed to determine whether the Sellers should be permitted to pursue any claim to the Remaining Amounts other than on an accelerated basis, and had ignored the Buyer’s objections in their post-hearing briefs to the Tribunal taking jurisdiction over this dispute.

As for the Compound Interest Orders, they fell away given the decision on the Remaining Amounts, but the CA nonetheless observed that they too would have been set aside because the parties had agreed that as a question of Thai law, compounding was unenforceable. The CA held that the parties’ agreement had restricted the scope of the matters which they needed and agreed to submit to the decision of the Tribunal, and that the Compound Interest Orders, which were contrary to the parties’ agreement, were necessarily in excess of jurisdiction.

The CA found that, as well as falling outside the scope of the submission to arbitration, the Tribunal’s decision on the Remaining Amounts and the Compound Interest Orders both involved breaches of the rules of natural justice – given the absence of a sufficient opportunity afforded to the parties to present their case – warranting the decisions being set aside under section 24(b) of Singapore’s International Arbitration Act (Cap 143A, 2002 Rev Ed) (the “IAA”).

The CA also set aside the Costs Award.

 

Analysis

Limits of a Tribunal’s Jurisdiction

The most important takeaway of CBX is likely to be its treatment of issues which arise late in the day and/or are not properly pleaded. The CA was unequivocal that any new claim or cause of action must be clearly identified and admitted by the tribunal, even if that were to occur only by conduct rather than by express words or a pleading amendment.3)At [51]. jQuery('#footnote_plugin_tooltip_38158_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Future tribunals and parties may thus wish to expressly identify such late-arising issues and the extent to which they fall within the terms and scope of the submission to arbitration.

In ICC arbitrations, this consideration is all the more acute given that ToRs require the issues in dispute to be expressly set out, yet it is very common for tribunals and parties to not fully elucidate the issues in their ToRs and instead to insert a “catch-all” phrase defining the issues as “those contained in the parties’ pleadings and submissions”  including “such other issues as may arise during the course of the arbitration”.4)See, for example, CBX at [45]. jQuery('#footnote_plugin_tooltip_38158_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); CBX has starkly demonstrated the risks of the “catch-all” approach, in that the absence of clear definitions may lead to issues being so fluid that parties/tribunals lose sight of Article 23(4) of the ICC Rules 2017 (and 2021).

A closely allied observation is that, in practice, tribunals will have to grapple with striking a balance between deciding the real issues in dispute between the parties – which may well evolve and crystallise only during the final merits hearing, or even thereafter – and ensuring that the parties have had a reasonable opportunity to present their cases. PT Prima International Development v Kempinski Hotels SA and other appeals [2012] 4 SLR 98 (“PT Prima”) marked an instance where the Court pointed to a plethora of factors illustrating that, unlike in CBX, the late-arising issue had been fully addressed by both parties, who had not in any event raised any jurisdictional objections. CBX squarely addresses PT Prima, and points to a number of relevant considerations in determining whether the new claim has been admitted and/or if parties have had a reasonable opportunity to address it. These include, inter alia, precisely when the new development in question arose,5)At [51]. jQuery('#footnote_plugin_tooltip_38158_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); whether the new cause of action relates to matters arising only after the award, if at all,6)At [51]. jQuery('#footnote_plugin_tooltip_38158_27_6').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the conduct of the parties in having “embraced” (or otherwise) the new issue(s), whether expressly or by conduct,7)At [52]. jQuery('#footnote_plugin_tooltip_38158_27_7').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and the opportunity the parties had to address that issue.8)At [52]. jQuery('#footnote_plugin_tooltip_38158_27_8').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Ultimately, this will be highly fact-specific, and tribunals may be incentivised to expressly clarify potential new points of dispute which arise late in the day.

The Latitude Afforded by Agreement

In relation to the CA’s observations that the parties’ agreement can, in effect, exclude certain matters from the tribunal’s jurisdiction altogether,9)At [93]. jQuery('#footnote_plugin_tooltip_38158_27_9').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the CA’s conclusion on the Compound Interest Orders is no doubt sound, but the bold affirmation of the centrality of the parties’ consent is also significant. In particular, the CA left open the question of how far the parties’ agreement can curtail the tribunal’s jurisdiction. For instance, can parties legitimately agree on an obvious falsehood for the purposes of an arbitration, and would the tribunal be bound by such agreement? On one hand, an answer in the affirmative would accord with the resounding emphasis placed on consent in the arbitral context, but the lines do get blurred where the parties’ agreement entails, for instance, a legal nullity (such as assuming the existence of a discretion which does not exist) or an illegal position (such as ignoring that certain criminal transactions are void). In the latter context in particular, there may also be a real risk of the resulting arbitral award being set aside on public policy grounds. Parties’ agreed positions may also have effects on separate proceedings by virtue of the doctrine of res judicata.

Ultimately, the CA acknowledged that the effect of the parties’ agreement was not absolute, particularly where the said agreement conflicts with some overriding mandatory provision of the law governing the parties’ transaction.10)At [93]. jQuery('#footnote_plugin_tooltip_38158_27_10').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This hints at the limits of parties’ consent in contouring the ambit of a tribunal’s jurisdiction, and, together with the other complications on this point raised above, will no doubt be expounded on in future cases.

A Lacuna in the Law

The third observation we make concerns the Costs Award. As a preliminary point, there may be questions over when, if ever, costs awards may survive the setting aside of part or all of a substantive award, particularly following the CA’s observations that, when considering whether a costs award can survive the setting aside of an element or elements of the substantive award, “[j]ustice will commonly require” that the costs award be set aside.11)At [75]. jQuery('#footnote_plugin_tooltip_38158_27_11').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_11', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Nonetheless, the more pressing point arising from CBX relates to what happens after a costs award is set aside. The CA concluded that it was for the parties to “advise themselves and to agree or decide how to proceed”,12)At [80]. jQuery('#footnote_plugin_tooltip_38158_27_12').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_12', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); potentially by having the tribunal sit to issue a fresh costs award.

This arose because the CA found that it did not have the power to award costs for the arbitration in this context suo motu. Section 10 of the IAA enables an arbitral tribunal’s own ruling on jurisdiction to be appealed to the Court, and section 10(7) specifically provides that in making a ruling or decision under that section that the arbitral tribunal has no jurisdiction, the arbitral tribunal or the Courts may make an award or order of costs of the proceedings, including the arbitral proceedings. However, and crucially, there is no equivalent provision for that in the general provisions relating to setting aside in section 24 of the IAA and Article 34 of the Model Law.13)At [82]. jQuery('#footnote_plugin_tooltip_38158_27_13').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_13', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The CA also noted that its decision in AKN and another v ALC and others and other appeals [2015] 3 SLR 488may indicate that, as a matter of law… the issue of an invalid or partially invalid award renders a tribunal functus officio even in respect of matters such as costs”,14)At [84]. jQuery('#footnote_plugin_tooltip_38158_27_14').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_14', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); which would again preclude the remitting of the question of costs to the tribunal (absent an express provision akin to section 10(7) of the IAA). This gives rise to the unsatisfactory position where there is no real recourse if parties are unable to agree how costs should be determined following the setting aside of an award of costs. To that end, it is hoped that the legislature will act on the CA’s invitation set out in CBX to enact the relevant reforms.15)At [85]. jQuery('#footnote_plugin_tooltip_38158_27_15').tooltip({ tip: '#footnote_plugin_tooltip_text_38158_27_15', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

References[+]

References ↑1 The views expressed in this article are solely the views of the authors, and are not representative of the organisations they are affiliated with. ↑2 CBX at [7]. ↑3, ↑5, ↑6 At [51]. ↑4 See, for example, CBX at [45]. ↑7, ↑8 At [52]. ↑9, ↑10 At [93]. ↑11 At [75]. ↑12 At [80]. ↑13 At [82]. ↑14 At [84]. ↑15 At [85]. function footnote_expand_reference_container_38158_27() { jQuery('#footnote_references_container_38158_27').show(); jQuery('#footnote_reference_container_collapse_button_38158_27').text('−'); } function footnote_collapse_reference_container_38158_27() { jQuery('#footnote_references_container_38158_27').hide(); jQuery('#footnote_reference_container_collapse_button_38158_27').text('+'); } function footnote_expand_collapse_reference_container_38158_27() { if (jQuery('#footnote_references_container_38158_27').is(':hidden')) { footnote_expand_reference_container_38158_27(); } else { footnote_collapse_reference_container_38158_27(); } } function footnote_moveToReference_38158_27(p_str_TargetID) { footnote_expand_reference_container_38158_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38158_27(p_str_TargetID) { footnote_expand_reference_container_38158_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Guidance from Ukraine: Are Emergency Arbitration Decisions in Investment Treaty Disputes Enforceable?

Kluwer Arbitration Blog - Sun, 2021-07-25 01:00

The institution of emergency arbitration (EA), in general, and its usage in investment treaty-based disputes, in particular, is a relatively new procedural tool. In investment disputes, EA has reportedly been carried out in practice only under the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (the “SCC Rules”). Conducting EA proceedings in investment disputes is usually associated with some procedural questions, including issues related to the jurisdiction of an EA, fairness of the proceedings given the very tight time limits, etc. Another question of major importance is whether EA decisions are enforceable at the seat and in foreign jurisdictions. This is the question I deal with here, focusing on the enforceability of EA decisions from the SCC in the Ukraine, as Ukraine is the first known jurisdiction in which attempts have been made to enforce EA decisions in investment treaty disputes. In this post I will briefly review what the law says, then how it was applied by Ukrainian courts, and finally what conclusions could be drawn from the analyzed cases.

 

The Law

According to Section 27 of the Swedish Arbitration Act, EA decisions are not awards on substance, and therefore could not be recognized as enforceable in Sweden. Paradoxically, SCC EA decisions may perhaps be enforced abroad. For example, under part 3A of Hong Kong Arbitration Ordinance, the award of relief through EA, whether in or outside Hong Kong, is enforceable in the same manner as orders or directions of the local court, but only with the leave of the local court. Yet, many jurisdictions’ arbitration laws remain silent on the question of EA awards’ enforceability.

One more debatable issue which may impact enforceability relates to terminology. Depending on the applicable arbitral rules, the EA decision could be coined as a “decision”, “order”, or “award”. For example, almost all EA decisions in investment disputes under the SCC Rules were coined “awards”. Notwithstanding this, whether terminology renders the product enforceable under the New York Convention (“NY Convention”) ultimately depends on the position of the local court at the place of enforcement.

Whether EA decisions will be treated as “awards” under the NY Convention has not yet produced a uniform view amongst domestic courts. The debate boils down to whether an EA decision has “binding effect” and should be treated with “finality”. It follows from the wording of the NY Convention that once the award becomes binding, but not necessarily final, it could be recognized and enforced. It is clear that the EA awards, as any interim awards, are not final, as they could be set aside or amended by the arbitral tribunal. At the same time, they are binding for the parties when rendered (e.g. see art. 9 of the Appendix II of the SCC Rules). Binding effect of the EA awards leads to the conclusion that they should be enforceable under NY Convention.

At the end of the day, in absence of express provisions in the domestic law, it is the court at the place of enforcement that decides whether the EA decision is enforceable.

 

The Legal Position in Ukraine

Attempts to enforce EA decisions in investment treaty disputes have been made in two cases. In JKX Oil & Gas plc et al. v. Ukraine (JKX case) in 2018 and in VEB.RF v. Ukraine (VEB case) in early 2021, the Supreme Court rejected recognition and enforcement of two EA awards rendered under the SCC Rules on public policy grounds under the NY Convention. The bottom line is this: the court treated the EA awards as binding and final, moving ahead to hear the grounds under which such awards can be refused enforcement as outlined under Article V. Conversely, the court did not engage with an exclusionary plea, i.e. that the award cannot be enforced per se.

 

JKX case

In the JKX case, the EA ordered Ukraine to refrain from imposing rental payments on the production of gas by JKX’s Ukrainian subsidiary in excess of the rate of 28% (applicable until 21 July 2014), as opposed to the 55% rate that was established under Ukrainian tax law afterwards.

The Supreme Court found that the EA award in fact changed the rates prescribed by the Ukrainian tax law. In view of the court it was not acceptable since according to the Ukrainian tax code taxation issues were regulated by the code and could not be established or amended by other acts. In such situation the court concluded that the EA award contradicted to Ukrainian public policy, and could not be recognized and enforced based on art. V(2)(b) NYC.

 

VEB case

Before VEB’s application for recognition and enforcement of the EA award in Ukraine, the Ukrainian Supreme Court had already recognized and enforced in Ukraine a PCA arbitral award in another investment treaty arbitration case, Everest Estate LLC et al. v. The Russian Federation (Everest Estate case). According to the PCA award in the Everest Estate case, the Russian Federation as the respondent state was obliged to pay compensation for illegal expropriation of assets of the Ukrainian investors in Crimea. When applying for recognition and enforcement of PCA award the claimants requested the Ukrainian court to grant interim measures. Namely they requested the attachment of Prominvestbank PJSC shares (the Ukrainian subsidiary of the Russian state bank, VEB) as those shares were allegedly owned by the Russian Federation. The request was granted.

EA proceedings in the VEB case related to the mentioned decision of the Ukrainian court to attach Prominvestbank PJSC shares. The claimant – the Russian state bank VEB – requested the SCC EA, and the request was granted, to temporarily seize Ukraine from attaching shares of Prominvestbank PJSC and selling them on the auction.

Considering the background of the Everest Estate case, in the VEB case the Supreme Court found that recognition and enforcement of the EA award would de facto preclude the execution of the PCA award in Everest Estate case, which had already been enforced by the Ukrainian court. The cornerstone of the reasoning of the Supreme Court was reference to the Ukrainian Constitution, under which the basic principles of justice in Ukraine included the binding force of judicial decisions. Thus, if VEB’s application to recognize and enforce the EA award was upheld, it would have undermined the binding force of the other decision of the Ukrainian Supreme Court, enforcing the PCA award, which is contrary to public policy.

On this background recognition and enforcement of the EA award was denied with reference to art. V.2(b) NY Convention.

 

Conclusion

The described cases illustrate that in Ukraine foreign EA decisions are considered as awards for the purposes of enforcement and therefore, NY Convention is applicable in such cases ipso facto. In both cases the EA decisions were designated as ‘awards’. Although these awards – as all EA awards – did not decide the disputes on substance and provided only for interim relief, the courts of all instances without express analysis of the issue consistently treated the EA decisions as awards in terms of the NY Convention and directly proceeded with analysis of its provisions. In a situation when practice of enforcement of EA decisions is only emerging and there is no consistent approach as to whether EA decisions are covered by the NY Convention, any positive example, such as these Ukrainian examples, is welcomed and adds to the “arbitration friendly” status of the respective jurisdiction.

When recognition and enforcement of the EA decision in an investment treaty-based dispute is sought under the NY Convention, public policy under art. V(2)(b) may become the central ground to deny recognition and enforcement. Since the boundaries of national public policy are not fixed, a respondent state may base its objections to recognition and enforcement on a wide range of arguments. Herewith, while reviewing the arbitral awards granting monetary compensation for infringement of international investment law, more sophisticated reasoning might be required from local courts to refuse recognition and enforcement of such awards based on local public policy. EA decisions as a rule order specific performance from a respondent state which is to be implemented within its national legal framework. Hence, when it comes to reviewing such decisions, more doors are open for the local courts to explain why the EA decision and the performance it prescribes to the respondent state offends the public policy of the latter.

At the same time, one should keep in mind that the above Ukrainian cases are based on very specific circumstances. Thus, the recognition and enforcement of the EA decision in investment treaty-based dispute under the NY Convention will depend on the interpretation of the notion of public policy by courts at the enforcement jurisdiction and the nature of the relief granted by the EA. Nevertheless, the practice of conducting EA proceedings in investment disputes and subsequently seeking the enforcement of the EA decisions is at its inception. The Ukrainian guidance may contribute to the debate on enforceability of EA decisions and the overall efficiency of using EA mechanisms in investment treaty disputes.

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Mandatory Laws Applicable to an Arbitration: A View from Australia

Kluwer Arbitration Blog - Sat, 2021-07-24 01:51

There have been significant legal developments in recent times in Australia concerning the proper choice of law applicable to an arbitration agreement. Cases have centred on how to give effect to parties’ choice. But there are other laws which, despite not being chosen by the parties as the law applicable to the arbitration agreement, may nonetheless impact on the validity of the arbitration agreement. A mandatory law of the forum where the contract is to be performed may render the arbitration agreement invalid. Applicable mandatory laws may also affect the arbitrability of claims.

Proper context

As a preliminary point, the proper choice of law may differ depending on the precise issue raised.  The choice of law in question may concern:

  • Formation and existence of an arbitration agreement (in Australia, the proper choice of law is the law of the forum, see Dialogue Consulting Pty Ltd v Instagram Inc (Dialogue) [2020] FCA 1846 at [215]); or
  • Validity or scope of an arbitration agreement (see a previous Kluwer Blog for a detailed reference to the choice of law principles in Enka Insaat Ve Sanayi AS v OOO Insurance Company Chubb (Enka v Chubb) [2020] UKSC 38).

The choice of law principles enunciated by the majority and minority judges in Enka v Chubb place weight on the law chosen by the parties. The majority at [60] (and Lord Sales at [266]) concluded that an express choice of law applicable to the main contract will often also constitute an express choice of law for the arbitration agreement. Failing an express choice, the second stage involves considering whether an implied choice has been made. The third stage is the law that has the closest and most real connection with the arbitration agreement, which will usually be the seat.

Lord Burrows (dissenting) also placed weight on the law chosen by the parties in deciding that an implied choice of law for the main contract should be carried across to the arbitration agreement (at [260]).

Presently, no Australian court has considered the choice of law principles enunciated in Enka v Chubb, although the “three-stage” choice of law approach to determine questions of validity and scope of an arbitration agreement was recently affirmed in Dialogue (at [474], [483]).  Australian choice of law principles thereby also place significant weight to the parties’ choice of law.

However, it is questionable whether Australian courts will wholly adopt the majority’s approach in Enka v Chubb regarding the validation principle. In Rinehart v Hancock Propsecting Pty Ltd [2019] HCA 13 at [21], the majority were not prepared to adopt the presumptive interpretive principle in Fiona Trust & Holding Coporation v Privalov [2007] UKHL 40. However, Edelman J (at [83]) indicated that as part of the conventional contextual approach to contractual interpretation weight should be placed on the consideration that reasonable parties would wish to have a dispute determined in a single forum. See also Lepcanfin Pty Ltd v Lepfin Pty Ltd [2020] NSWCA 155 at [92]-[93].

Recently, an Australian Federal Court judge expressed, extra-judically, a preference for the minority’s approach in Enka v Chubb; see CIArb Australian Branch and Federal Court of Australia Webinar.

Federal Court decision in Freedom Foods

There are other laws, despite not being chosen by the parties as the law applicable to the arbitration agreement, may nonetheless impact on its validity. Australian examples include an arbitration agreement found in:

The last example was recognised in Freedom Foods Pty Ltd v Blue Diamond Growers (Freedom Foods) [2021] FCA 172 at [138].

Freedom Foods involved a licence agreement for the manufacture and sale of almond milk products in Australia. After a careful analysis, the licence agreement was held to not qualify as a franchise agreement within the meaning of the Franchising Code with the consequence that the arbitration agreement was valid (Freedom Foods at [140]).

The case nonetheless highights that mandatory forum laws applying by virtue of where the contract is to be performed can impact on the validity of an arbitration agreement despite the parties expressly choosing a different law to govern the contract and choosing a seat in different country (Freedom Foods at [138]).

Mandatory laws impacting on substantive dispute

Another feature worth highlighting from Freedom Foods is that a mandatory law can affect the outcome of a substantive dispute where the parties have chosen a different law to apply to the main contract.

In Freedom Foods an Australian mandatory statutory law prohibiting misleading or deceptive conduct occurring in trade or commerce applied to the dispute despite the parties explicitly choosing the law of California to govern their contract and selecting Sacramento in California as the seat of the arbitration (see s 18 of the Australian Consumer Law).

This result is uncontentious. Mandatory laws form the framework of laws that may apply to a dispute that the parties have agreed to resolve by arbitration. Party autonomy does not override applicable laws; Gary Born, International Commercial Arbitration (Kluwer Law International, 3rd edition) Chapter 19, p.2913-5, cited with approval in PT Prima International Development v Kempinski Hotels SA [2012] SGCA 35 at [72].

Mandatory laws impacting on arbitrability

Another complication is whether such statutory claims are arbitrable and by which law that should be determined.

The question in Freedom Foods was whether the statutory claims of misleading or deceptive conduct made against Blue Diamond Growers were arbitrable in the Californian arbitration.  Specifically, whether the claims were “capable of settlement by arbitration” under s 7(2)(b) of Australia’s International Arbitration Act 1974 (Cth), being Australian domestic law implementation of Article II of the New York Convention.

Blue Diamond Growers (a Californian company) gave undertakings accepting that the arbitrator must apply Australian statutory laws prohibiting misleading or deceptive conduct (at [66]) and that it would be applied in the arbitration (at [141]). The issue in contention was whether the arbitrator could actually do so (at [87]). There was differing expert opinion presented to the court, with one expert expressing an opinion that such claims could be heard and determined in a Californian arbitration and the other that it could not.

Ultimately, the Court preferred the expert evidence that concluded that such Australian statutory claims were arbitrable in the Californian arbitration (at [87]).

Comments

The outcome in Freedom Foods affirms the ability of parties to choose to resolve their dispute in a single forum, that includes mandatory statutory claims, notwithstanding their choice of a foreign law applicable to the contract and a foreign seat.

The consideration given to the arbitrability of mandatory statutory claims with reference to a foreign law in Freedom Foodsappears to involve a departure from Comandate Marine Corporation v Pan Australia Shipping Pty Ltd (Comandate) [2006] FCAFC 192, where the Full Court considered that arbitrability of the dispute should be determined according to Australian law, being the domestic law of the judicial enforcement forum.

Further, in Comandate the question of how the dispute would be resolved by the arbitrator in light of mandatory Australian statutory law, when English law was chosen by the parties, was considered to be a matter for the arbitrator, which would not be pre-empted by the court; [237], [241]. This approach has been reiterated in Dialogue (at [436]). The court in Comandate was content to rely on an undertaking by Comandate Marine to allow the arbitrator to determine all the issues between the parties (at [241]) which was noted in the orders (at [255]).  The court found it unnecessary in view of the undertaking to consider evidence as to how the mandatory law would be applied in the arbitration (at [241]).

The approach in Freedom Foods seems to accord more closely with Tomolugen Holdings Ltd v Silica Investors Ltd [2015] SGCA 57 at [72], where the Singapore Court of Appeal considered that it “would be pointless for a court to stay court proceedings in favour of arbitration where the applicable law does not permit the subject matter of the dispute to be resolved by arbitration as it may lead to an award without force or legal value”.

When is it appropriate to leave the matter to the arbitrator?  In Larsen Oil and Gas Pte Ltd v Petroprod Ltd [2011] SGCA 21 at [26], the court was well placed to anticipate the enforceability of an award where the contract was governed by Singapore law. Australian courts, predominately, are content to accept undertakings to ensure that the foreign arbitration will not circumvent the application of mandatory Australian law and not compromise award enforceability.

 

 

 

 

 

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Why It Is Especially Important That States Not Ratify the Hague Choice of Court Agreements Convention, Part I

Kluwer Arbitration Blog - Thu, 2021-07-22 21:25

In a series of recent posts (Part I, Part II and Part III), I argued that states should not ratify the Hague Choice of Court Agreements Convention (“Convention”) and, if they had already done so, that they should denounce the Convention.  Two good friends, Trevor Hartley and João Ribeiro-Bidaoui, recently responded on Kluwer Arbitration Blog and elsewhere, disagreeing with my views.

These responses confirm the need to engage in an objective evaluation of the Convention and the importance of this subject.  In addition, these responses are also highly illuminating: although they are intended to do the opposite, Professor Hartley’s and Mr. Ribeiro’s replies confirm and powerfully underscore the grave defects of the Convention, the threats that the Convention poses to the rule of law and international commerce, and the need for states not to ratify the Convention.

 

New York Convention: The Model or Not?

Both Professor Hartley and Mr. Ribeiro begin their discussions by denying that the New York Convention provided a model for the Convention.  As Professor Hartley puts it, “[t]he Brussels Regulation, rather than the New York Convention, was in fact the model for the Hague Convention.”  According to Mr. Ribeiro, comparisons with the New York Convention are a “fundamental misconception of the genesis and purpose of the [Choice of Court] Convention” that “invalidates the very basis of Born’s indictment.”

These efforts to distance the Convention from the New York Convention are highly inaccurate, both historically and architecturally.  Historically, the Convention’s various promoters have repeatedly and explicitly linked it to the New York Convention, while virtually never doing so with respect to the Brussels Regulation.  The Hague Conference’s Explanatory Report, co-authored by Professor Hartley, explains “[t]he hope is that the Convention will do for choice of court agreements what the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 10 June 1958 has done for arbitration agreements.”  To the same effect, Professor Hartley has written elsewhere that “[t]he New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of June 10, 1958 is one of the most successful conventions in the legal sphere.  The hope is that the Hague Choice-of-Court Convention will prove equally successful.”1)Trevor C. Hartley, The Hague Choice-of-Court Convention, 31(3) E.L. Rev. 414, 423 (2006). jQuery('#footnote_plugin_tooltip_38144_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38144_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  Or, as Mr. Ribeiro’s predecessor as the First Secretary of the Permanent Bureau, Andrea Schulz, put it: “It is hoped that the new Convention will do for choice-of-court agreements what the highly successful 1958 New York Convention does for arbitration agreements.”2)Andrea Schulz, The Hague Convention of 30 June 2005 on Choice of Court Agreements, 2 J. Priv. Int’l L. 243, 267-68 (2006). jQuery('#footnote_plugin_tooltip_38144_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38144_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  And, as Louise Ellen Teitz, one of the individuals acknowledged as a contributor to Mr. Ribeiro’s response, previously wrote, the Convention is “the litigation analogue for the New York Convention because it seeks to provide an equal and viable alternative to arbitration.”

These and numerous other similar characterizations of the Convention and its aspirations are historically authentic, in contrast to the revisionist efforts undertaken by Professor Hartley and Mr. Ribeiro in their posts.  They are also substantively and structurally accurate.  The Convention deals with choice-of-court agreements and judgments based on such agreements, just as the New York Convention deals with arbitration agreements and resulting arbitral awards; neither Convention deals with other bases of jurisdiction nor types of decisions.  Likewise, and critically, both Conventions aspire to be global and universal, open to (and, in the case of the Convention, vigorously promoted to) all states.  (These points are explored in a thoughtful recent post by Thomas Grant and F. Scott Kieff, also criticizing the Convention.)

In contrast to the two Conventions, the Brussels Regulation deals with all types of jurisdictional bases (including numerous non-consensual jurisdictional bases, such as domicile, incorporation, necessary party status, and the like) and all types of judgments – not just forum selection and arbitration agreements and their resulting judgments.  Likewise, the Brussels Regulation is emphatically not global or universal, but a regional European instrument, linked to a regional integration project and regional political and judicial institutions.  Thus, there is a world of difference between the character of the Brussels Regulation and that of the Convention, while there are very close parallels between the Convention and the New York Convention – which is why the Convention’s drafters and promoters, quoted above, have hitherto always analogized it to, and based its fundamental structure and aspirations on, the New York Convention, and not on the Brussels Regulation.

This structural analogue between the Convention and the New York Convention has highly important practical consequences.  The Convention is global, meaning that any state can accede to it; indeed, the Convention aspires to being universal.  That means that states with the world’s most corrupt, least independent and least experienced courts may, and likely will, become Contracting Parties to the Convention, with none of the institutional and political safeguards that exist under the Brussels Regulation.  As discussed below, this has several highly important consequences for assessing the Convention’s wisdom and suitability.

 

The Brussels Regulation:  Professor Hartley’s Surprise

Before examining these points, however, it is both surprising and highly revealing that Professor Hartley now asserts, contrary to the Convention’s Explanatory Report and the vast majority of prior commentary, that “[t]he Brussels Regulation … was in fact the model for the [] Convention.”   If that were indeed accurate, notwithstanding what all the Convention’s promoters have previously said, it would be a further serious indictment of the Convention.

There are extraordinarily important differences between the rules appropriate for forum selection and judgment recognition on a global basis (like the Convention) and those appropriate on a regional basis (like the Brussels Regulation).  The Brussels Regulation applies within a limited number of relatively similar European states, linked by both an integration project and common judicial and legislative organs (i.e., the European Court of Justice and the EU Parliament, Council and Commission).  Recognizing judgments and forum selection provisions within this limited (and quantifiably known) community, with central judicial and legislative institutions and safeguards, is utterly different from recognizing those things globally, from any state in the world, and without central adjudicative or other safeguards.

Relying on the Brussels Regulation to justify the Convention is therefore not a defense of the Convention but, in Mr. Ribeiro’s words, a very serious indictment.  There are serious questions as to whether the Brussels Regulation works even within the European Union.  In any event, however, it is entirely inappropriate to extend for global application a regional mechanism that is designed for a specific and singular political and legal context.  Relatedly, one must also ask why states like the United States, China and regions like Latin America, and elsewhere, would wish to replace their own legal systems, and long-standing private international law rules, in favor of a multilateral framework, based on the Brussels Regulation, that was designed by the EU for European use.

Despite this, the Convention’s provisions do what Professor Hartley now acknowledges – namely, dilute important protections of the New York Convention for party autonomy and procedural regularity and integrity, based upon selected provisions of the Brussels Regulation.  In particular, as discussed below and in an accompanying post, the Convention gives final, unreviewable authority to the putatively chosen court to determine whether a valid choice-of-court agreement exists, materially diluting Article V(1)(a) of the New York Convention, while also significantly weakening the protections for procedural regularity contained in Articles V(1)(b) and V(1)(d) of the New York Convention.  Transposing these aspects of the Brussels Regulation to an international context is, as noted above, deeply unsatisfactory.

 

The Choice of Court Convention: Open Doors for Corrupt Courts and Judgments

Importantly, neither Professor Hartley nor Mr. Ribeiro challenges the uniform findings of Transparency International, Freedom House and other respected non-profit organizations regarding endemic corruption and lack of judicial independence is many parts of the world.  On the contrary, Professor Hartley acknowledges, with notable understatement, that there are many “countr[ies] where judicial corruption is a problem.”  Similarly, while noting the existence of “highly efficient, effective commercial courts” in a few states, Mr. Ribeiro concedes that “weaknesses in some court systems cannot be ignored.”

If “some” means “most” or “many,” it is correct.  One can take one’s pick of the countries in the bottom two-thirds of whichever index of corruption one prefers — Afghanistan, Syria, Yemen, Venezuela, Sudan, Libya, Somalia, Congo, and Burundi, as well as China, Russia and countless other states.  The simple, if unpleasant, truth is that a very large number of judicial systems around the world lack either integrity, basic competence or judicial independence.  Despite that, under the Convention, the judgments of all these states would be subject to mandatory recognition under the Convention (without the protections of the New York Convention and without the institutional structure and other characteristics of the EU).

Professor Hartley responds that “none of these countries is a Party to the Hague Convention; so choice-of-court agreements designating their courts would not be covered.”  That is the Convention’s promoters’ best defense, but it is, for obvious reasons, wholly unsatisfactory.  The critical point is that the Convention is open to all these states for ratification.  These states may not be Contracting Parties today, but the Hague Conference and its promoters certainly intend for them to become Contracting Parties in two, five or ten years.  And then, when tainted Sudanese, Venezuelan, Libyan, Russian or Chinese judgments for hundreds of millions of Euro or dollars must be recognized against U.K., Portuguese, Singaporean or other businesses under the Convention, Professor Hartley’s observation will provide no solace to local shareholders, workers, suppliers and communities.

This post continues in Part II.

References[+]

References ↑1 Trevor C. Hartley, The Hague Choice-of-Court Convention, 31(3) E.L. Rev. 414, 423 (2006). ↑2 Andrea Schulz, The Hague Convention of 30 June 2005 on Choice of Court Agreements, 2 J. Priv. Int’l L. 243, 267-68 (2006). function footnote_expand_reference_container_38144_30() { jQuery('#footnote_references_container_38144_30').show(); jQuery('#footnote_reference_container_collapse_button_38144_30').text('−'); } function footnote_collapse_reference_container_38144_30() { jQuery('#footnote_references_container_38144_30').hide(); jQuery('#footnote_reference_container_collapse_button_38144_30').text('+'); } function footnote_expand_collapse_reference_container_38144_30() { if (jQuery('#footnote_references_container_38144_30').is(':hidden')) { footnote_expand_reference_container_38144_30(); } else { footnote_collapse_reference_container_38144_30(); } } function footnote_moveToReference_38144_30(p_str_TargetID) { footnote_expand_reference_container_38144_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38144_30(p_str_TargetID) { footnote_expand_reference_container_38144_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Why It Is Especially Important That States Not Ratify the Hague Choice of Court Agreements Convention, Part II

Kluwer Arbitration Blog - Thu, 2021-07-22 21:00

This post continues from Part I.

Party Autonomy and Consent:  How the Convention Undermines Them

My previous posts argued that the Convention undermines vital protections that existing law provides for party autonomy and genuine consent.  In response, Mr. Ribeiro argues that the Convention advances notions of party autonomy: it supposedly serves to “enable parties to make an effective choice” and “for that choice to be respected” and “allows both parties to make their choice freely and consciously.”  That is wrong: in fact, the Convention undermines party autonomy and poses distinct threats of denials of justice.

In Mr. Ribeiro’s words, under the Convention, “the chosen court can make a final and unreviewable decision regarding the core question of whether there is a valid choice of court agreement (Article 5(1), Article 9(a)).”  This is a dramatic departure from both existing private international law rules in most developed jurisdictions (in which the recognizing court must re-examine the jurisdictional basis for a foreign judgment) and the treatment of arbitration agreements under Articles V(1)(a) and V(1)(c) of the New York Convention (in which the recognition court may re-examine the existence, validity and scope of the arbitration agreement underlying an award).

Allowing the putatively chosen court to determine – in a final and unreviewable manner – its own jurisdiction is a radical change from existing law.  It is also highly problematic: it permits the courts of all of the countries identified above (from Afghanistan to Zambia) to determine that foreign parties have consented to their jurisdiction and to issue largely unreviewable judgments either in favor of or against them.  The ills resulting from this regime are likely to be exacerbated by the increasing desire of states to establish and vigorously promote their own assertedly “international” courts (like the Chinese International Commercial Court or similar state-sponsored initiatives in a number of other jurisdictions), producing incentives to both procure and uphold choice-of-court agreements.  None of this advances party autonomy; rather, this threatens party autonomy, by removing long-standing safeguards, applied in recognition forums, that are designed to ensure that parties really did consent to a particular dispute resolution mechanism.

Mr. Ribeiro half-heartedly suggests that international arbitration is no better at protecting party autonomy than the Convention because some commentators “have argued strongly that courts should not be allowed to second-guess arbitrators’ decisions on jurisdiction.”  That is fundamentally inaccurate.  As Articles V(1)(a) and V(1)(c) of the New York Convention specifically provide, arbitral awards may be denied recognition based on the recognition court’s determination that there was no valid arbitration agreement or that the scope of that agreement was exceeded.  Contrary to Mr. Ribeiro’s mis-citation of a single prior post that I authored on this issue, the works of virtually every commentator on the New York Convention underscore the fact that recognition courts conduct de novo review of jurisdictional determinations under Article V(1)(a), while annulment courts conduct the same review under Article 34(2)(a)(i) of the UNCITRAL Model Law.  The Convention’s abandonment of these protections is a radical and dangerous departure from existing law.

Mr. Ribeiro attempts to conceal the extent of this departure by asserting that the Convention merely adopts the “quasi-universal rule that the law of the forum governs matters of procedure, including jurisdiction.”  There is no such rule and there never was.  Mr. Ribeiro’s archaic rule that the lex fori governs matters of procedure has nothing to with either jurisdiction or the recognition of judgments; it concerns only the details of the procedural conduct of adjudicative proceedings (such as rules of evidence, pleadings and the like).  Rather, the universal rule, under virtually every other judgment recognition convention, as well as the New York Convention, the Inter-American Convention on International Commercial Arbitration, and the European Convention on International Commercial Arbitration, is that the recognition court may review the jurisdictional basis for the subject judgment or award.

 

Procedural Regularity and Integrity: How the Convention Threatens Them Too

My previous posts also argued that the Convention threatens the rule of law by requiring recognition of corrupt or procedurally unfair or irregular judgments.  Professor Hartley and Mr. Ribeiro respond that the Convention provides adequate safeguards for the procedural fairness and regularity of proceedings leading to judgments subject to the Convention.  Those responses also only underscore the Convention’s defects.

Mr. Ribeiro acknowledges that, under the Convention, “there should be only limited scope to argue, for example, that the procedures of the foreign court were not appropriate”; that acknowledgement is correct, because Article 9(e) of the Convention provides only for non-recognition where “the specific proceedings leading to the judgment” were unfair – not where a particular court, or for that matter, the entire legal system of a national or sub-national territory, lacked independence or was corrupt.  Professor Hartley and Mr. Ribeiro also acknowledge that the Convention omits the highly-important guarantees for due process and procedural regularity contained in Articles V(1)(b) and V(1)(d) of the New York Convention.

That is deeply unsatisfactory.  The Convention once more departs radically from existing law – which, in virtually all developed jurisdictions, permits recognition courts to inquire into the fairness and independence of both individual foreign litigations and foreign judicial systems, while Articles V(1)(b) and V(1)(d) of the New York Convention do the same for arbitral proceedings.  This inquiry is not provided for under the Convention, which also specifically excludes the possibility of challenges to the independence or integrity of foreign legal systems.

Professor Hartley and Mr. Ribeiro claim that truly corrupt foreign judgments can be denied recognition under the Convention, by reason of Article 9(e)’s general public policy exception.  That appeal to the public policy exception is unsettling; it is apparently predicated on the novel and surprising argument that the exception should swallow the rule.  The public policy exception is designed, in virtually all private international law contexts, as an exceptional escape device that permits a state to invoke its own law and policy in rare and unusual cases.

That type of exception is an entirely inadequate means of dealing with a problem that is already well-known and clearly-defined – namely, endemic corruption and lack of judicial independence in many legal systems – and that is already addressed through well-established rules requiring inquiry in recognition courts into the integrity, fairness and procedures of foreign adjudicative proceedings.  The proper way to deal with issues of procedural fairness is to do so transparently and specifically, as previous Hague Conference conventions have done, not by appealing to an inherently uncertain public policy exception.  Basic due process rights and protections against corruption and political interference are too important to be left to the vague catch-all of a public policy exception.

 

Other Hague Judgments Convention: How the Convention Omits Their Protections

It is in this respect in particular that the silence of Professor Hartley and Mr. Ribeiro about other Hague Conference judgments conventions is also striking.  As previously noted, the 1971 Hague Convention on the Recognition and Enforcement of Foreign Judgments included, in Article 21, a provision that the Convention would apply only where two Contracting States had agreed to its application on a bilateral basis.  Similarly, the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments included, in Article 29, a provision allowing states to opt-out of the Convention’s application as to any other Contracting State.

In both cases, these provisions applied even where jurisdiction over the judgment-debtor was undisputed (and indisputable), including where it was established by consent.  The reason for these provisions, under both of these Hague Conventions, was the pervasive doubts about the integrity, independence and competence of courts in many countries – which led to insistence on provisions allowing Contracting States to opt-out of application of the relevant Hague Convention as to such states.  Critically, the Convention omits those safeguards.  Tellingly, Professor Hartley and Mr. Ribeiro make no effort to address or justify that omission.

 

Supposedly Enhancing Judicial Integrity and Competence

Finally, Mr. Ribeiro argues that, if nothing else, the Convention will “enhance the rule of law, which, in turn, has the welcome corollary of incrementally developing judiciaries and judicial cooperation.”  He, alongside Professor Hartley, suggests that, by recognizing judgments from countries with “under-developed or allegedly corrupt judiciaries in the global arena,” the Convention will advance the rule of law and incrementally improve those judiciaries.

That is highly unrealistic.  It is reminiscent of the European Court of Justice’s principle of “mutual trust” that EU Member State courts will properly apply EU law, even if experience shows that they don’t.  That principle is naive and unsatisfactory in the European context (as Professor Hartley has previously (and quite persuasively) emphasized).  It is vastly more unsatisfactory in a global context.

Stated simply, Mr. Ribeiro’s argument is that by requiring recognition of judgments of corrupt or non-independent courts, the Convention will induce those courts to be less corrupt and more independent.  Mr. Ribeiro does not address, or appear concerned by, the fact that doing so would entail individual denials of justice to individual litigants along the way towards “incrementally developing judiciaries” – an approach that entails serious departures from the rule of law.  Moreover, there is no conceivable empirical justification for Mr. Ribeiro’s speculation that recognizing corrupt judgments will induce courts not to be corrupt; on the contrary, doing so would likely encourage them to continue their corrupt, but profitable, ways, by giving global effect to their illegally-procured judgments.  Rather, denying recognition of corrupt judgments – and explaining publicly the reasons for doing so – is the proper way to discourage corruption and to create incentives for rendering independent and honest judgments.  Yet the Convention would significantly inhibit exactly this from happening.

 

Bad International Treaties Don’t Improve the Rule of Law

Finally, Mr. Ribeiro also argues, more generally, that it is preferable to “have an international system governing choice of court agreements, … instead [of] a myriad of domestic and regional regimes,” and that advancing the Hague Conference’s work generally is desirable.  The Convention is not rescued by appeals to the asserted general superiority of international law, as compared to domestic law, or by institutional appeals for the Hague Conference.

It may well be that a properly drafted international treaty governing choice-of-court agreements would be preferable to existing law.  But the Convention is just not that treaty; it is a gravely flawed instrument that threatens the rule of law.  Replacing long-standing domestic and regional law with bad international treaties is not progress; it is damaging to the rule of law and to international commerce, which such treaties are meant to serve.  And promoting the Convention is not good for the Hague Conference, for exactly the same reasons: persuading states to adopt flawed treaties will not strengthen, but ultimately weak, both the Conference and its other treaties.

There may well be good reasons for the Hague Conference to think and draft again – providing a new choice-of-court convention for international consideration.  That is not a reason, however, for any state to ratify, or remain a Contracting Party to, the current Convention.

 

Conclusion: Don’t Blame Businesses for A Bad Convention

Professor Hartley concludes his defense of the Convention as follows: “If the parties insist [sic] on choosing the courts of a state where judicial corruption is a problem, they have only themselves to blame.”  That is inaccurate, but it usefully illustrates the Convention’s fundamental weakness.

It is fundamentally wrong to say that if parties choose corrupt courts, “they have only themselves to blame.”  Today, that may be partially true, because the consequences of such choices are relatively limited: most national courts will deny recognition of corrupt judgments and companies will have only themselves to blame for the expense and distraction of litigation.

Under the Convention, however, corrupt judgments would be subject to mandatory recognition – as part of the Hague Conference’s goal of “incrementally developing judiciaries.”  In those cases, it would not be just ill-advised or commercially-vulnerable businesses who accept choices of corrupt or inept courts that would have “themselves to blame.”  Instead, it would be the Convention, and the national legislatures that ratified it, that would be to blame for the recognition of these courts’ judgments; it would be the Convention, and its promoters, that removed existing, long-standing and vital protections that exist for party autonomy and against corrupt and otherwise tainted judgments, thereby facilitating the recognition of such judgments.  When that occurs, Professor Hartley’s question of who to blame would be asked with heightened attention and care.

For the reasons I have previously summarized, states therefore should not ratify the Convention and, if they have done so, they should take steps to denounce it.

 

 

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Three New ABA Books Hot Off the Press!

ADR Prof Blog - Thu, 2021-07-22 12:24
The ABA Section of Dispute Resolution published three books this year that you, your colleagues, and your students might be interested in. Mediating Legal Disputes: Effective Techniques to Resolve Cases, Second Edition, by Dwight Golann. Psychology for Lawyers: Understanding the Human Factors in Negotiation, Litigation, and Decision Making, Second Edition, by Jennifer K. Robbennolt and … Continue reading Three New ABA Books Hot Off the Press! →

Scrutinizing the 2005 Hague Convention: Two Further Reasons to Keep Arbitration a Viable Option

Kluwer Arbitration Blog - Wed, 2021-07-21 21:20

Gary Born, in a three-part series in Kluwer Arbitration Blog last month, addressed why States should not participate in the 2005 Hague Convention on Choice Of Court Agreements (“Hague Convention”). We assume that readers are familiar with Mr. Born’s posts (available as Part IPart II, and Part III), and so we will confine ourselves to recalling this proposition in Mr. Born’s argument: the 2005 Hague Convention, though drafted and promoted as a sort of congener to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”), is so very different from the New York Convention that to equate the two is to make a fundamental mistake. We agree with the cogent reasons that Mr. Born supplies to explain why equating the Hague Convention and the New York Convention is a mistake. We also think that readers would benefit from considering a further difference between the two Conventions: because they address different subject matter—judgments adopted by courts, on the one hand, awards adopted by arbitral tribunals, on the other hand—the courts that apply them are not likely to do so in a similar way. As we will suggest, there are grounds to be concerned that courts will be more deferential to foreign judgments than to foreign awards, and this would be so, even if the terms of the treaties were all but identical.

To start with the terms—which are analogous but not identical—both Conventions are built around provisions that require contracting States to recognize as binding, and to enforce, certain decisions reached by foreign dispute settlement organs. Obligations to recognize and enforce are contained in Article 8 of the Hague Convention and Article III of the New York Convention. Both Conventions also contain provisions permitting contracting States to refuse to recognize or enforce—Article 9 and Article V, respectively.

Let us, for convenience, refer to these latter two provisions as “scrutiny provisions,” because they reserve an option for the contracting States to scrutinize the instruments that the treaties otherwise obligate the contracting States to recognize and enforce. We use this expression without prejudice to the precise modalities of reasoning and procedure that a judge or other authority (though in practice typically a judge) might be called upon to apply under the two Conventions.

Comparing the scrutiny provisions, one sees that they display structural and substantive likeness, at least to a degree. Mr. Born amply demonstrates that the formal similarities are largely illusory and outweighed by the differences.

However, even to the extent that the drafting suggests an intention to produce similar outcomes, there are grounds to be concerned that, in practice, courts implementing the two Conventions will approach them differently and that dissimilar outcomes will result. At least two factors are likely to influence judges to apply the Hague Convention’s scrutiny provisions more leniently than they apply the corresponding provisions of the New York Convention.

First, under the Hague Convention, it is a judgment that the judge is invited to scrutinize, which is to say an authoritative decision reached by a public officer in the judiciary. Notwithstanding the empirical evidence gathered, for example, by the UN Development Programme, the International Bar Association, and Transparency International, that the judiciary in many countries lack independence or competence or both, the formal trappings of the judiciary are likely to impart to the judgment a patina of credibility. We do not posit that this is a factor that a judge would articulate. We suggest, even, that this factor may exert its influence in less than conscious ways, even on perfectly self-aware judges. The influence that we have in mind is in the nature of one of those subtle prejudices that arise from verbal cues, feelings of solidarity, and professional amour propre.  That foreign judges, not arbitrators, are involved here, on the terms of the Hague Convention, should not matter. But, when the advocates of the Convention say that those terms, when implemented, will place much the same scrutiny on foreign judgments that the scrutiny provisions of the New York Convention place on arbitral awards, skepticism is in order. We suggest that the scrutiny will not in practice be the same, and this is in part because judges will treat other judges differently than they treat arbitrators.

It is interesting to note that empirical research seems to identify a latent preference for decisions reached by organs labeled “courts” over organs labeled “arbitral tribunals.” A study concerning investor-State dispute settlement (ISDS) recently found that, all else being equal, the general public prefers decisions reached by judges to decisions reached by arbitrators. We argue elsewhere (in a forthcoming article) that further study is needed, before confident conclusions can be reached as to what, precisely, the general public finds suspect about arbitration; we think that, when it comes to ISDS cases involving issues that attract considerable public attention, the public profile of the individuals who make the decisions may matter more than the institutional format—court or arbitral tribunal—in which the decisions are made.1)Grant & Kieff, Appointing Arbitrators: Tenure, public confidence, and a middle road for ISDS reform, forthcoming in Michigan Journal of International Law (2022). jQuery('#footnote_plugin_tooltip_38140_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Judges are not the general public, and so a study of public sentiment at large is even less sure a guide to how judges think. Moreover, the judges applying the Hague Convention will deal with a much larger number and diversity of decisions than do tribunals arbitrating investor-State claims. The professionalism of the judge, one would hope, would prevail over the sorts of sentiment that, evidently, lead the general public to have a priori confidence in courts and suspicion toward arbitral tribunals. However, judges do not live in a vacuum. The evident popular current against arbitration—which presumably extends beyond ISDS—should not influence judges, but in practice, at least in some instances, it might.

A second factor may influence judges to apply the Hague Convention provisions more leniently as well. In most courts, there exists a nexus of considerations relating to deference toward other sovereigns—considerations that are denoted variously across countries and settings as “comity,” “non-justiciability,” “act of state,” etc., that caution judges against second-guessing the legal acts of foreign governments.2)As to comity and act of state in the US setting, see the classic articulation in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 408-11 (1964) and id. at 417-18 (“To permit the validity of the acts of one sovereign state to be re-examined and perhaps condemned by the courts of another would very certainly imperil the amicable relations between governments and vex the peace of nations” (internal quotation marks omitted)). Notwithstanding statutory enactments to qualify and confine those doctrines, disputation continues. See Federal Republic of Germany v. Philipp, 141 S.Ct. 703, 709-711 (2021). As to non-justiciability, see the excellent summary of the case law by Dapo Akande (current UK candidate for election to the International Law Commission). jQuery('#footnote_plugin_tooltip_38140_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Added to these considerations are doctrines, also present in many countries, that call on judges to exercise deference to executive officers of their own country in matters that pertain to foreign affairs.3)As to the US jurisprudence and related academic commentary, see David H. Moore, Beyond One Voice, 98 Minn. L. Rev. 953 (2014). For a recent précis of the English jurisprudence, see Mrs. Justice Roberts’ judgment in MM v. NA (Declaration of Marital Status: Unrecognised State) [2020] EWHC 93 (Fam), paras. 17-36 (Jan. 22, 2020). jQuery('#footnote_plugin_tooltip_38140_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The Hague Convention, unlike the New York Convention, addresses itself to the work product of other sovereigns (national courts being organs of the States to which they belong)4)See International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, draft art. 4(1): 2001 I.L.C. Yearbook Vol. II, Part Two, p. 40; and id. Comment (6), pp. 40-41. jQuery('#footnote_plugin_tooltip_38140_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and in this way is involved in sovereign-to-sovereign relations—a linkage absent (or much less pronounced) in the New York Convention, which addresses itself to arbitral awards, the work product of private arbitrators.

True, judges applying the Hague Convention are supplied a self-contained régime5)We use the expression “self-contained régime” to indicate that the Convention is intended to set the terms for recognition and enforcement, not that it seals the process of decision hermetically against any and all other rules. We take note the caveats identified some time ago against exaggerated notions of self-containment in treaty systems, as to which see Bruno Simma & Dirk Pulkowski, Of Planets and the Universe: Self-contained Regimes in International Law, 17(3) Eur’n J. Int’l L. 483-529 (2006). jQuery('#footnote_plugin_tooltip_38140_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); for addressing the judgments that parties call upon them to recognize. The nexus of considerations that we identify here should not enter the picture, except to the extent required by formal reasons contained in the applicable law. From the standpoint of the judicial function as properly discharged, those considerations are otherwise irrelevant: none of the considerations here should influence judges to apply anything less than the scrutiny to foreign judgments that the Hague Convention invites. The likelihood, however, is that these considerations will influence judges. They will shift the judges’ frame of mind toward deference, rather than scrutiny.

Both of the factors that we identify here owe to the circumstance that it will be judgments of foreign judges comprising foreign courts, rather than awards of arbitrators comprising arbitral tribunals, that the Hague Convention will call on judges to recognize and enforce. Mr. Born adduces reasons to doubt the analogy that champions of the Hague Convention make between the Hague Convention and the New York Convention. We think those reasons, which are reasons of both black letter law and empirical evidence, are salient. We also think that the factors that we have suggested here, though largely of a socio-legal character, support much the same conclusion. Judicial determinations will simply tend to get less scrutiny than arbitral awards. Judges called on to recognize and enforce foreign decisions—whether by courts or by arbitral tribunals—should focus on the substantive and procedural merits of each decision, not on the mere label of how the decision is reached or by whom it is reached.6)Of course, how and by whom a decision is reached matter in a variety of ways and are properly considered by a judge. Our concern here is that mere labels—e.g. “court proceedings” versus “arbitral proceedings”; “judgment” versus “arbitral award”—might influence judges independently of those considerations properly considered in reaching a legal decision jQuery('#footnote_plugin_tooltip_38140_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The risk is that, in practice, the label will affect the scrutiny that a judge places on any decision under review. This is a further reason why we join Mr. Born in his conclusion that to participate in the Hague Convention is unlikely to serve the interests either of parties seeking fair and competent settlement of their disputes or the general interest in building and maintaining rule of law.

Arbitration, with its principle of party autonomy and its backstop of New York Convention scrutiny, continues to offer the better choice. As Chief Justice of Singapore Sundaresh Menon has described it, party autonomy is “the cornerstone of arbitration. Party autonomy finds its expression in the parties’ voluntary submission and participation in arbitration in a form and manner of their choosing, which extends also to the manner of appointing and constituting the tribunal.”7)Sundaresh Menon, Adjudicator, advocate or something in between? Coming to terms with the role of the party-appointed arbitrator, 83 Arbitration 185, 195 (2017), citing Gary Born, International Commercial Arbitration, 2nd edn (2014) 1639. jQuery('#footnote_plugin_tooltip_38140_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_38140_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Prudent parties can ensure that arbitrators are carefully selected for their demonstrated track record of professionalism in the conduct of live proceedings and for producing carefully written opinions firmly grounded in the factual record and applicable legal texts. Determinations made through such a process serve the interests of the parties, any courts involved, as well as all interested policy-makers and members of the public.

 

 

 

 

 

 

 

 

 

 

 

 

 

References[+]

References ↑1 Grant & Kieff, Appointing Arbitrators: Tenure, public confidence, and a middle road for ISDS reform, forthcoming in Michigan Journal of International Law (2022). ↑2 As to comity and act of state in the US setting, see the classic articulation in Banco Nacional de Cuba v. Sabbatino, 376 U.S. 398, 408-11 (1964) and id. at 417-18 (“To permit the validity of the acts of one sovereign state to be re-examined and perhaps condemned by the courts of another would very certainly imperil the amicable relations between governments and vex the peace of nations” (internal quotation marks omitted)). Notwithstanding statutory enactments to qualify and confine those doctrines, disputation continues. See Federal Republic of Germany v. Philipp, 141 S.Ct. 703, 709-711 (2021). As to non-justiciability, see the excellent summary of the case law by Dapo Akande (current UK candidate for election to the International Law Commission). ↑3 As to the US jurisprudence and related academic commentary, see David H. Moore, Beyond One Voice, 98 Minn. L. Rev. 953 (2014). For a recent précis of the English jurisprudence, see Mrs. Justice Roberts’ judgment in MM v. NA (Declaration of Marital Status: Unrecognised State) [2020] EWHC 93 (Fam), paras. 17-36 (Jan. 22, 2020). ↑4 See International Law Commission, Draft Articles on Responsibility of States for Internationally Wrongful Acts, draft art. 4(1): 2001 I.L.C. Yearbook Vol. II, Part Two, p. 40; and id. Comment (6), pp. 40-41. ↑5 We use the expression “self-contained régime” to indicate that the Convention is intended to set the terms for recognition and enforcement, not that it seals the process of decision hermetically against any and all other rules. We take note the caveats identified some time ago against exaggerated notions of self-containment in treaty systems, as to which see Bruno Simma & Dirk Pulkowski, Of Planets and the Universe: Self-contained Regimes in International Law, 17(3) Eur’n J. Int’l L. 483-529 (2006). ↑6 Of course, how and by whom a decision is reached matter in a variety of ways and are properly considered by a judge. Our concern here is that mere labels—e.g. “court proceedings” versus “arbitral proceedings”; “judgment” versus “arbitral award”—might influence judges independently of those considerations properly considered in reaching a legal decision ↑7 Sundaresh Menon, Adjudicator, advocate or something in between? Coming to terms with the role of the party-appointed arbitrator, 83 Arbitration 185, 195 (2017), citing Gary Born, International Commercial Arbitration, 2nd edn (2014) 1639. function footnote_expand_reference_container_38140_30() { jQuery('#footnote_references_container_38140_30').show(); jQuery('#footnote_reference_container_collapse_button_38140_30').text('−'); } function footnote_collapse_reference_container_38140_30() { jQuery('#footnote_references_container_38140_30').hide(); jQuery('#footnote_reference_container_collapse_button_38140_30').text('+'); } function footnote_expand_collapse_reference_container_38140_30() { if (jQuery('#footnote_references_container_38140_30').is(':hidden')) { footnote_expand_reference_container_38140_30(); } else { footnote_collapse_reference_container_38140_30(); } } function footnote_moveToReference_38140_30(p_str_TargetID) { footnote_expand_reference_container_38140_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38140_30(p_str_TargetID) { footnote_expand_reference_container_38140_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Hailing the HCCH (Hague) 2005 Choice of Court Convention, A Response to Gary Born

Kluwer Arbitration Blog - Tue, 2021-07-20 21:24

The HCCH 2005 Choice of Court Convention (“Convention“), adopted over fifteen years ago, has recently become the subject of damning criticism from Gary Born in a series of posts published on the Blog (see Part I, Part II, and Part III). In the series, Born dramatically suggests that states bound by the Convention should denounce it, and that other states, including those like the United States, China, and Israel whose signature foreshadows ratification, should discontinue their work. Now that the Convention appears to stand in the dock, it seems fitting to respond, firmly, against the charges laid at the Convention’s feet.

In Part I of his series, Born asserts: “the Convention seeks to transpose the New York Convention’s legal regime, which was designed specifically for international arbitration, to the very different context of forum selection clauses and national court judgments.” Not only is this a fundamental misconception of the genesis and purpose of the Convention, one that invalidates the very basis of Born’s indictment, but it also applies an incorrect standard when comparing the Convention to the New York Convention. First, the negotiators were well aware of the differences between, on the one hand, exclusive choice of court agreements and judgments based upon them, and, on the other, international arbitration clauses and the judicial recognition and enforcement of their resulting awards. This is why they drafted an instrument specifically tailored to choice of court agreements and the court judgments that are issued pursuant to this.1) Trevor Hartley & Masato Dogauchi, Hague Conference on Private International Law Convention of 30 June 2005 on Choice of Court Agreements Explanatory Report, para 1. Cited by Born. jQuery('#footnote_plugin_tooltip_38142_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38142_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Second, the proper standard for a realistic and fair appreciation of the Convention is the kaleidoscopic treatment of choice of court agreements, and the uncertainty and unpredictability that judgments based upon such agreements face in the absence of a global legal regime.

The two instruments are, therefore, each in their own field, comparable with respect to their ultimate objectives, and different as regards their structures, precisely because of the differences between the fields. As such, arbitration and litigation ought to be regarded as co-ordinates rather than rivals.

This post responds to Born’s key arguments, asserting that: (1) both the Convention and the HCCH more generally have a role to play in enhancing judicial integrity and competence, (2) the Convention does not dilute safeguards of party autonomy, and (3) the Convention contains sufficient safeguards to guarantee procedural fairness.

 

Enhancing Judicial Integrity and Competence: Benefits of the HCCH (Hague) System

Born’s call to arms against the Convention suggests a prevalence of under-developed or allegedly corrupt judiciaries in the global arena. While the weaknesses in some court systems cannot be ignored, a rise in highly efficient, effective commercial courts has been witnessed over the past decade, with talented and experienced judges, working with integrity within transnational litigation and enhancing its accessibility, especially for micro-, small- and medium-sized entreprises. And that is why states are increasingly aware that this Convention is crucial to the development of judicial cooperation (e.g., between the United Kingdom and the European Union following Brexit) and the role it plays in the development of a transnational system of international commercial courts.

More broadly, joining a HCCH Convention means joining a system of transnational litigation – the HCCH (Hague) system – with a plethora of experiences and decades of case law on topics ranging from service of process, taking of evidence, legal aid, and choice of law, as well as an infrastructure of central authorities, all aiding the operation of cross-border dispute resolution. The HCCH system contributes, therefore, to enhance the rule of law, which, in turn, has the welcome corollary of incrementally developing judiciaries and judicial cooperation. This has a positive impact on international arbitration. The arbitral system cannot operate autonomously and as Born repeatedly emphasises, itself relies on judiciaries to exercise supervisory jurisdiction and to recognise and enforce arbitral awards.

There are also specific benefits to states who choose to join the Convention that reach beyond the content of the provisions themselves. In the context of this debate on the interpretation of Article 9, a particular benefit is the regular convening of Special Commission meetings where contracting parties may consider the practical operation of specific HCCH instruments.2)Article 24 of the Convention jQuery('#footnote_plugin_tooltip_38142_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38142_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The Special Commission can issue authoritative recommendations and advice on uniform interpretation of the Convention,3)Article 23 jQuery('#footnote_plugin_tooltip_38142_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38142_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); including sharing of good practices and facilitation of judicial dialogue. Indeed, the Special Commission can resolve the real and practical issues faced by the Convention, removing the need for any more ink to be spilled. There is no equivalent mechanism in the arbitration realm.

By joining the Convention, states ensure that judgments rendered by their courts can circulate in accordance with international standards. More contracting parties mean more international accountability and more foreseeability in circulation of judgments. That means more rule of law at the international level, not less, as Born daringly suggests.

 

Party Autonomy

The main criticism that Born levels at the Convention’s treatment of party autonomy is that the chosen court can make a final and unreviewable decision regarding the core question of whether there is a valid choice of court agreement (Article 5(1), Article 9(a)). Unlike the New York Convention, the enforcing court does not have the opportunity to review that decision (in the absence of particular circumstances to be discussed below). This is in line with a quasi-universal rule that the law of the forum governs matters of procedure, including jurisdiction – forum regit processum.4) Wolfgang Hau, Proceedings, law governing, in Encyclopedia of Private International Law. Cheltenham, UK: Edward Elgar Publishing Limited (2017). jQuery('#footnote_plugin_tooltip_38142_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_38142_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

At this point, one cannot avoid noting that the provision allowing judicial review has not always been seen as a benefit of the New York Convention. Commentators in the arbitration community, including Born, have argued strongly that courts should not be allowed to second-guess arbitrators’ decisions on jurisdiction. It is thus surprising that one of those same commentators now argues that multiple levels of court review on questions of jurisdiction are a benefit of the arbitral system – even more so in the light of Born’s vehement criticism of the integrity of courts in many countries around the world (see in particular Part III of Born’s series).

A more consistent and constructive approach would suggest that the courts should have a residual role in reviewing decisions on jurisdiction which excessively or fundamentally offend notions of due process. And the Convention, indeed, contains scope for such review in its provisions on public policy (Article 9(e)) (discussed below).

Once it is understood that the chosen court is allowed to make the final determination on the validity of the choice of court agreement, absent anything contrary to public policy, the question of whether the chosen court of the parties is deemed to be “good” or “bad” is largely dependent on the parties’ circumstances. In Part II of his series, Born suggests that the Convention “is subjecting the players to arbitrary, incompetent and corrupt decisions by foreign referees.” This perspective is skewed; the Convention does not subject the parties to any court, rather the parties subject themselves. By excluding, from its scope, typical contracts between parties with uneven bargaining power, such as consumer and employment agreements, the Convention allows both parties to make their choice freely and consciously, akin to any arbitration agreement. Other than the residual scrutiny on public policy grounds, policing the parties’ choice is undesirable and runs counter to the principle of party autonomy. Born’s argument is even more puzzling when we know that, in accordance with the UNCITRAL Model Law on International Commercial Arbitration, judicial assistance and supervision of the arbitral process is a cornerstone of the system. How the same courts would show distinct levels of integrity when dealing with choice of court agreements as compared with assisting arbitral tribunals and enforcing their awards remains a mystery.

Crucially, choice of court agreements under the Convention are consensual and thus litigation in the chosen forum is predominantly consensual; comparing it with the benefits of arbitration, real or perceived, is irrelevant. Regardless of whether the Convention is in operation, there will be choice of court agreements. The real question is whether it is preferable to have choice of court agreements subject to an international system of enforcement, or to have agreements without such a mechanism, and potentially leading to conflicting judgments.

 

Procedural Fairness

One of the central criticisms levelled by Born at the Convention is its alleged failure to safeguard procedural fairness. As Hartley points out in another response to Born’s recent three-part series, the wide ranging grounds in Article 9 of the Convention are sufficient to address such concerns.

Provided that certain jurisdictional criteria are met, there should be only limited scope to argue, for example, that the procedures of the foreign court were not appropriate. However, where there has been a denial of procedural fairness in the proceedings, such as a failure to provide due notice, denial of an opportunity to be heard, corruption or lack of a fair trial, the case should fall squarely within the Convention’s Article 9(e) ground to refuse recognition or enforcement. In Part III of his series, Born criticises a so-called “two-pronged standard of proof”. However, it is, in fact, the New York Convention itself which introduces a “two pronged” approach to procedural fairness and procedural public policy. Enforcing courts address many cases involving procedural fairness under either Article V(1)(b)(d) (procedural grounds) or Article V(2) (public policy grounds) or both. There is no clear delineation in the New York Convention, or in national caselaw, as to the boundaries between the two provisions. Moreover, contrary to Born’s assertion in Part III of his series, the fact that the Convention avoids this overlap does not in any way mean that enforcing courts need to “dilute” the procedural fairness in Article V(1)(b) of the New York Convention, or the procedural fairness standard in the U.S. Supreme Court decision Hilton v Guyot. It is not envisaged that either of those mechanisms would allow for a “broad scale attack”5) Ronald A. Brand & Paul M. Herrup, The 2005 Hague Convention on Choice of Court Agreements: Commentary and Documents 118 (3rd ed. 2008). jQuery('#footnote_plugin_tooltip_38142_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_38142_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); on a foreign legal system, but appropriate allegations of procedural unfairness can be considered under those provisions. In that respect, Article 9(e) of the Convention offers a comparable protection in its field.

 

Conclusion

The main purpose of the Convention is to enable parties to make an effective choice, for that choice to be respected and judgments from the chosen court enforced. And to accurately and fairly assess the benefits of the Convention, we must be careful through which lens we view its value and accomplishments. The spheres of transnational litigation and arbitration in which these Conventions operate have substantial, inherent differences, hence, as pointed out above, different structures.

The international community should insist that the only appropriate question is this: is it preferable to have an international system governing choice of court agreements, or instead a myriad of domestic and regional regimes? That is the alternative option against which the Convention’s success must be measured. Considering the key criticisms levelled at the Convention, it is difficult to see how a common international framework could be more prone to undermine party autonomy than an array of domestic regimes. It is also inconceivable that judicial corruption would thrive more under a global standard monitored by the international community than in the absence of one.

Party autonomy is an underlying principle of both the New York Convention and the Convention. It may be implemented variedly in the different instruments but should not be categorically rejected solely because forum selection clauses designate judges and not arbitrators.

The jury is asked to commend Born’s seminal work in the field of international arbitration, but to reject the indictment against the Convention. The New York Convention and the Convention each have their own field of application and their own specific structure and features. Both will continue to be necessary in a world where arbitration agreements and exclusive choice of court agreements coexist, and both are here to stay.

 

The author heads the Transnational Litigation Team, and oversees the operation of the HCCH 2005 Choice of Court Convention, at the Permanent Bureau of the Hague Conference on Private International Law. Previously, he was Head of the UNCITRAL Regional Centre for Asia and the Pacific, and between 2013 and 2018, he was in charge of promoting the 1958 New York Convention in that region.

The author wishes to give special thanks to David Holloway (barrister and arbitrator at Outer Temple Chambers, London and Dubai) who contributed substantively to the article with his extensive experience and knowledge. The article also benefitted from generous, insightful and authoritative contributions and comments by Christophe Bernasconi (Secretary General of the HCCH), Ning Zhao (Senior Legal Officer at the Permanent Bureau of the HCCH), Hans van Loon (former Secretary General of the HCCH), Marta Pertegás (former First Secretary of the HCCH, who oversaw work relating to the Choice of Court Convention), Louise Ellen Teitz (former First Secretary of the HCCH and member of the US delegation to the Diplomatic Session adopting the Choice of Court Convention), and Danielle Carrington, intern at the Permanent Bureau of the HCCH. All remaining errors are the author’s.

References[+]

References ↑1 Trevor Hartley & Masato Dogauchi, Hague Conference on Private International Law Convention of 30 June 2005 on Choice of Court Agreements Explanatory Report, para 1. Cited by Born. ↑2 Article 24 of the Convention ↑3 Article 23 ↑4 Wolfgang Hau, Proceedings, law governing, in Encyclopedia of Private International Law. Cheltenham, UK: Edward Elgar Publishing Limited (2017). ↑5 Ronald A. Brand & Paul M. Herrup, The 2005 Hague Convention on Choice of Court Agreements: Commentary and Documents 118 (3rd ed. 2008). function footnote_expand_reference_container_38142_27() { jQuery('#footnote_references_container_38142_27').show(); jQuery('#footnote_reference_container_collapse_button_38142_27').text('−'); } function footnote_collapse_reference_container_38142_27() { jQuery('#footnote_references_container_38142_27').hide(); jQuery('#footnote_reference_container_collapse_button_38142_27').text('+'); } function footnote_expand_collapse_reference_container_38142_27() { if (jQuery('#footnote_references_container_38142_27').is(':hidden')) { footnote_expand_reference_container_38142_27(); } else { footnote_collapse_reference_container_38142_27(); } } function footnote_moveToReference_38142_27(p_str_TargetID) { footnote_expand_reference_container_38142_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38142_27(p_str_TargetID) { footnote_expand_reference_container_38142_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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