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Arbitral Freedom and Judicial Restraint: Iura Novit Curia in Gol Linhas Aereas SA v MatlinPatterson Global Opportunities Partners (Cayman) II LP and Others

Tue, 2022-08-30 01:21

For a judge to know the law may seem as obviously desirable as for a cook to know something of food. What goes for judges ought here to go for arbitrators. After all, overwhelmingly, parties choose lawyers as arbitrators in preference to industry or financial experts, for example. Yet say it in Latin and you will find yourself on far less certain ground. The doctrine of iura novit curia continues to raise difficulties in both common and civil law jurisdictions. In deciding an appeal from the Court of Appeal of the Cayman Islands, the British Privy Council addressed the issue authoritatively in Gol Linhas Aereas SA (formerly VRG Linhas Aereas SA) (Respondent) v Matlin Patterson Global Opportunities Partners (Cayman) II and others (Appellants) [2022] UKPC 21. The Privy Council dismissed an appeal against a decision recognizing the award of a Sao Paolo-seated arbitral tribunal in a commercial case conducted under the ICC Rules. The important decision is wide-ranging in its analysis of issue estoppel, the proper approach of the English and Cayman Island courts to construing Article V of the New York Convention, and the arbitral tribunal’s contested jurisdiction over the Appellants who were not signatories to the main contract. This note is confined to iura novit curia.

Although the Latin tag translates as “the court knows the laws”, the issue is not straightforwardly one of knowledge – Does an arbitrator know a statute? May an arbitrator check that an authority is still good law? – but of an arbitrator’s discretion ascertaining and applying the law independently of the parties’ submissions. In the judgment of the Cayman Islands Court of Appeal of 11 August 2020, Sir Bernard Rix JA cites academic commentary tracing the idea to Aristotle’s Rhetorics:

“Again, a litigant has clearly nothing to do but to show that the alleged fact is so or is not so, that it has happened or has not happened. As to whether a thing is important or unimportant, just or unjust, the judge must surely refuse to take his instructions from the litigants: he must decide for himself all such points as the law-giver has not already defined for him.” (para. 159)

The passage gives an extreme view of a judge responsive to the evidence, fully conversant with the laws, and entirely free to apply the law to the facts as he sees fit. In arbitration, that approach runs into several difficulties. Arbitrators are limited to deciding the issues submitted by the parties, and the parties’ right to be heard constrains arbitrators’ legal forays. Moreover, iura novit curia has its origins in civil law litigation, whereas common lawyers generally expect judges to rule narrowly on the arguments before them. Nonetheless, as the Court of Appeal found, having surveyed leading arbitral jurisdictions, “It is impossible to say in general that the doctrine is not recognised in international arbitration.” (para. 170)

In practice, the doctrine plays a limited role. Often, arbitrators will pre-empt difficulties by inviting extra submissions on a point of law, or, occasionally, sidestep difficult legal issues and decide a case very narrowly, for example, on the wording of the contract. Sometimes, international arbitrators cannot realistically make their own enquiries, because they know neither the laws of the relevant jurisdiction nor the language of the legal authorities. There can be no question of the tribunal knowing the law.

 

Background

The original arbitration arose out of a dispute over a share purchase and sale agreement. In simplified terms, the Respondent, Gol Linhas Aereas SA (“Gol”), is the universal successor to GTI SA, which bought the shares of the company that operated Gol Airlines from two subisidiaries of Volo Logistics LLC, established in turn by the Second and Third Appellants, MatlinPatterson Global Opportunities Partners II LP and MatlinPatterson Global Opportunities Partners II LLC (referred to as “the MP Funds”). Crucially, the MP Funds were not themselves sellers but third parties to the sale. However, as signatories to the addendum, they were party to all the terms of the contract and, as the tribunal found, to the arbitration agreement.

Gol brought a claim against the sellers and the MP Funds under a contractual price adjustment mechanism. Gol claimed a reduction to the initial purchase price because the sellers and MP Funds had fraudulently overstated the company’s working capital at the time of the transaction.

The arbitral tribunal found that an officer of the MP Funds, had fraudulently overstated the working capital, and that the sellers and the MP Funds were jointly and severally liable. Accordingly, it granted Gol damages of nearly BRL$ 93 million to compensate it for the discrepancy in the working capital, i.e., current assets less current liabilities.

Since the MP Funds were not straightforwardly sellers under the contract, Gol argued abuse of legal personality under Article 50 of the Brazilian Civil Code, which would enable the tribunal to lift the corporate veil and extend liability to them. The tribunal found Article 50 inapplicable, but, on the same factual findings, found the MP Funds liable for “third-party malice” under Article 148 of the Civil Code. This legal basis appeared in an expert legal opinion that Gol submitted in support of its case, but did not feature in its briefs.

When Gol sought recognition and enforcement of the award in the Cayman Islands, the MP Funds and their Cayman affiliate argued inter alia that the arbitral tribunal’s departure in its legal reasoning from the parties’ pleaded cases was grounds for refusing recognition under Article V(1)(b) of the New York Convention. Gol failed after a full hearing at first instance but succeeded before the Court of Appeal and Privy Council.

 

The Analysis of the Privy Council

In its judgment, the Privy Council attached particular weight to five considerations in rejecting the Appellants’ defence under Article V(1)(b):

Firstly, the Privy Council noted that the arbitral tribunal had based its decision entirely on facts that had been in issue, including the allegation of malice, and MP Funds had been free to dispute them.

Secondly, internationally, there was a range of opinion as to the extent to which an arbitral tribunal was free to base a decision on a legal principle that the parties had not had the opportunity to address. Legal cultures differed. In relation to the application of Article V(1)(b), a court should be reluctant to find a breach of “a fundamental and generally accepted requirement of procedural fairness”. (para. 103)

Thirdly, it was proper to consider the choice of Brazilian law as the law of the seat and the involvement of Brazilian lawyers appearing on both sides. Brazilian legal practice would have informed the parties’ expectations of the conduct of the arbitration. Significantly, the Brazilian courts found no violation of due process in the protracted setting aside proceedings.

Fourthly, the key factual issue was fraud and the tribunal’s legal reasoning based on that issue could not have come as a “complete surprise”. (para. 105)

Fifthly, the Privy Council acknowledged that to establish that a party was unable to present its case required not merely a showing that the procedure was “irregular or undesirable” but a showing of “fundamental unfairness which goes to the essence of the right to be heard”. (para. 106) Elsewhere in its judgment, it distinguished a party being unable to present its case from a party being impaired or facing constraints in doing so.

It dealt briefly with the issue of whether the arbitral tribunal had violated public policy under Article V(2)(b), since the Appellants had accepted that they could not succeed in this, if they failed to establish a defence to enforcement under Article V(1)(b). Similarly, the decision was not ultra petita under Article V(1)(c). The tribunal had, after all, awarded Gol the damages that it had sought from the arbitral tribunal or petitioned it for.

 

Conclusions

The analysis of the Privy Council is compelling. It recognizes that, internationally, legitimate procedural practices may differ significantly from those of domestic courts in the place of enforcement and that those practices should not be judged by parochial standards. The Privy Council also set a high standard for a defence to recognition under Article V(1)(b). More than any welcome legal pluralism, this makes it unlikely that arguments such as those of the Appellants will succeed in future cases.

Even so, the proper application of iura novit curia in arbitration remains elusive. Parties rarely adopt the sparse style of (the best) pleadings in English litigation. More often, their memorials are discursive, stating the same argument in marginally different ways across numerous documents, including expert reports. How fully and clearly must a party make a legal argument for the party to be said to be relying on it? Moreover, how great is a tribunal’s departure from the parties’ pleaded legal arguments under the applicable law? Here the judge at first instance held that the arbitral tribunal had decided in tort a claim pleaded in contract. To a lawyer in the English common law tradition that marks a radical departure from the pleaded cause of action, but it should not be assumed that other legal systems would view the departure as equally radical.

Generally, arbitrators have a proper concern to ensure that awards not only meet minimal standards of due process but also to involve the parties fully, giving them ample opportunity to address all relevant issues. However virtuosic, a well-reasoned award should not appear to have been conjured like a rabbit from a hat. Equally, tribunals need the legal toolkit to develop their own solutions if they are to resolve parties’ disputes fairly and finally. The fact that “baseball arbitration” is a special case, where an arbitrator must choose between one of the solutions proposed by the parties, reflects this common understanding.

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The Newest Proposal to Amend the Brazilian Arbitration Act: A Threat to Arbitration in Brazil?

Mon, 2022-08-29 01:07

The 1996 Brazilian Arbitration Act (the “BAA”), which subjects domestic and international arbitrations to the same set of rules, has been modified only once through the 2015 amendment (the “2015 Amendment”). On July 6, 2022, Brazilian party leaders signed a Motion of Urgency to bypass the standard legislative process – which usually comprises public consultations and lengthy steps in internal commissions – and called for a vote on a controversial bill to amend the BAA on an urgent basis, two years after it was first introduced in Congress (the “Bill”). A third of the party leaders in Congress signed the Motion of Urgency, from parties which hold 66,7% of the seats of both houses combined, including the Brazilian President’s own party. Although congressman Enrico Misasi requested a public hearing to discuss the Bill before the Constitution, Justice and Citizenship Commission on August 1, 2022, the Presiding Officer of the Chamber of Deputies may call on the vote for the Motion of Urgency at any session from this point on.

If the Bill passes, it will create unprecedented requirements for arbitrations, affecting aspects such as appointment of arbitrators, composition of arbitral tribunals, arbitrators’ duty to disclose, and confidentiality. Unlike the 2015 Amendment, which was predominantly praised by the arbitral community (as discussed in a previous post), the Bill has been criticized for being against the cornerstone of arbitration: party autonomy.  In this regard, the Brazilian Institute of Lawyers (IBA)  has called the Bill the “Anti-Arbitration Bill”.

On this post, we first introduce the reasons behind the Bill, as written by the congresswoman who introduced it. Second, we summarize which provisions of the BAA would be changed by the Bill. Third, we address the question posed by the title of this post.

 

Background

According to the Bill’s explanatory notes, congresswoman Margarete Coelho, elected by the state of Piauí, introduced the Bill to further regulate arbitrators’ conduct and, thus, improve the BAA.

To achieve such goals, the Bill proposes new limitations and regulations to five different axes: (1) availability of arbitrators; (2) composition of arbitral tribunals; (3) arbitrator’s duty to disclose; (4) appointment of members of arbitral institutions’ Executive Committees or Secretariats to act as an arbitrator or counsel; and (5) transparency of awards.

First, the Bill’s explanatory notes assert that, even though arbitration is designed to offer a quicker path for resolving disputes, the BAA and the rules of almost all arbitral institutions in Brazil allow (1) members of the arbitral tribunal to conceal the number of arbitrations in which they are acting as an arbitrator, and (2) recurrent appointments made by the parties.

According to the Bill’s explanatory notes, this causes arbitration cases to concentrate in the hands of a few gatekeepers, generating delays in proceedings and opening the doors for an increase of set aside applications before Brazilian courts. To avoid this scenario, the Bill’s first proposed change is to forbid arbitrators from acting in more than ten ongoing arbitrations.

Second, unlike the careful treatment given by the UK Supreme Court in Haliburton v. Chubb, the Bill also proposes to outright forbid identical arbitral tribunals (either fully or partial) to conduct ongoing arbitrations,  regardless of whether they relate to the same subject matter. In Haliburton v. Chubb, the UK Supreme Court ruled that the fact that an arbitrator acted in multiple proceedings arising from the explosion of an offshore drilling unit in the Gulf of Mexico, having similar subject matters and repeating parties, did not, by itself, point to bias. Rather, it would depend on the particular facts of the case. The Bill’s explanatory notes, however, consider that the proposed change would (1) avoid the risk of an arbitral tribunal unduly favoring one of the parties, while it would (2) open the arbitration market for new professionals, thereby increasing legal certainty, diversity, and quality of awards.

Third, the Bill establishes a legal regime on the conflict of interest for arbitrators. It first prevents arbitral institutions’ Executive Committee or Secretariat members from acting as arbitrators in cases administered by the institution they are affiliated with. It also expands their duty to disclose, forcing arbitrators to disclose the number of tribunals of which they are members, as well as any other facts that raise “minimum doubts” as to their impartiality or independence.

Fourth, the Bill imposes a broad scope of transparency in all type of arbitrations, regardless of whether they involve public or private entities, or whether they are domestic or international. The Bill proposes to make publicly available not only the (1) the names of the arbitrators once the tribunal is constituted and (2) information about set aside applications, but also (3) the award itself, noting, however, that parties may request to omit confidential information they may deem necessary.

Regarding the first point, the Bill’s explanatory notes assert that parties will be aware of the availability of arbitrators once the composition of tribunals is publicly available. As to the second point, it states that making set aside applications transparent will discourage parties from frivolously resorting to national courts to annul arbitral awards. It further explains that it will not be attractive for the losing party to have aspects of dispute, such as matters related to the merits of the case and the amount in dispute, made public. Lastly, as to the third point, it asserts that the publication of arbitral awards would create a “precedent system,” thus avoiding contradictory decisions and increasing predictability in arbitration.

 

What are the changes proposed under the Bill? 

 

Article 13, paragraphs 8 and 9

The Bill proposes to add two new paragraphs, paragraphs 8 and 9, to Article 13, which contains rules governing the mission and duties of arbitrators. Paragraph 8 forbids arbitrators from acting in more than ten ongoing arbitrations, and paragraph 9 determines that there must not be completely or partially identical arbitral tribunals in pending arbitrations, regardless of the role of the arbitrators within the tribunal and whether the proceedings relate to the same subject matter.

 

Article 14, paragraphs 1 and 3

The Bill changes Article 14, paragraph 1, which currently provides that an individual appointed to serve as an arbitrator shall disclose any circumstances likely to give rise to justifiable doubts as to his or her impartiality or independence.

The proposed new paragraph 1 states that an individual appointed to serve as an arbitrator shall, throughout the full duration of the proceedings, not only disclose any circumstances likely to give rise to a minimum doubt as to his or her impartiality or independence, but also the number of arbitrations in which he or she acts as single arbitrator, co-arbitrator, or chairman.

The Bill also adds a paragraph to Article 14, paragraph 3, which states that members of an arbitral institution’s Executive Committee or Secretariat members must not act as single arbitrator, co-arbitrator, chairman, or counsel for one of the parties in arbitrations administered by the institution they are affiliated with.

 

Article 33, paragraph 1

Article 33, paragraph 1, currently provides the statute of limitations applicable to setting aside procedures (ninety days). The Bill adds a further requirement, stating that set aside applications will be subject to the principle of publicity.

 

Articles 5-A and 5-B

The Bill inserts two provisions to Article 5, which, together with Articles 6 and 7, set forth rules for the commencement of an arbitration. The proposed articles 5-A and 5-B provide, respectively, that the arbitral institution administering the arbitration will publish on its website (1) the names of the arbitrators and the amount in dispute (once the arbitral tribunal is constituted), and (2) the full content of the award once the arbitration is closed, unless there is a request for some excerpts or information to remain confidential.

 

Conclusion

The Bill would make Brazilian arbitration unattractive as an alternative to litigation, which otherwise thrives since the Brazilian Supreme Court recognized the constitutionality of the BAA in 2001.  First and foremost, the parties’ ability to freely choose their arbitrators–one of the most important benefits of arbitration, as parties tend to select arbitrators who possess technical knowledge and experience–would be undoubtedly suppressed.

Second, confidentiality would be unwittingly breached once awards are published in full without the parties’ consent. Confidentiality is one of the main reasons at least half of professionals seek arbitration, according to the QMUL 2019 survey. In this respect, ICC awards made as of 2019, as well as any dissenting and/or concurring opinions, may be published (see Note to Parties and Arbitral Tribunals on the Conduct of the Arbitration under the ICC Rules of Arbitration). Also, CAM-CCBC’s draft 2022 arbitration rules contain a provision authorizing the publication of excerpts of awards. However, in such cases, unlike the Bill’s proposed reform, if a party objects, the award will not be published.

Third, the creation of a new standard of independence and impartiality (“minimum doubt”) creates unnecessary confusion and uncertainty. Such a harsh standard of independence and impartiality would not only induce unduly long disclosures from arbitrators but also decrease the consistency of decisions on conflict of interest, given the uncertain meaning of the new terms. Expanding the legal ground for challenges will certainly increase the number of set aside proceedings before Brazilian courts, which contradicts the announced intention of the Bill. Moreover, we deem it unnecessary since the standard adopted by the BAA reflects international best practices–the Model Law’s justifiable doubt standard, which is the result of UNCITRAL’s work tracing back to 1985.

Answering the question posed in the title of this post: the Bill is a threat and will certainly close doors for both international and domestic arbitrations in Brazil. Unsurprisingly, institutions like the Chartered Institute of Arbitrators (Brazil Branch), the Brazilian Arbitration Committee, the Brazilian Institute of Civil Procedure, and many others, have opposed the Bill. What remains unclear, however, is how many doors will be closed.

 

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Kluwer Arbitration ITA Arbitration Report, Volume No. XX, Issue No. 11 (August 2022)

Fri, 2022-08-26 01:41

The Institute of Transnational Arbitration (ITA), in collaboration with the ITA Board of Reporters, is happy to inform you that the latest ITA Arbitration Report was published: a free email subscription service available at KluwerArbitration.com delivering timely reports on awards, cases, legislation and current developments from over 60 countries and 12 institutions. To get your free subscription to the ITA Arbitration Report, click here.

 

The ITA Board of Reporters have reported on the following court decisions.

 

OGH – 3 Ob 152/21f, Supreme Court of Justice of Austria, 3 Ob 152/21f, 21 October 2021

Matthias Hofer and Katherine Khan, Freshfields Bruckhaus Deringer LLP, ITA Reporters for Austria

The interpretation of the validity of an arbitration agreement is in principle case-specific and therefore does not raise a substantial question of law. Moreover, the OGH is not responsible for ensuring the uniformity or further development of foreign law. Only under certain requirements may there be a substantial question of law in connection with the application of foreign law.

 

OGH – 18 OCg 5/21s, Supreme Court of Justice of Austria, 18 OCg 5/21s, 15 December 2021

Matthias Hofer and Katherine Khan, Freshfields Bruckhaus Deringer LLP, ITA Reporters for Austria

Partial setting aside of the arbitration award is possible in principle. Setting aside due to a violation of the right to be heard requires a certain arbitrariness, as does setting aside due to a violation of the substantive ordre public. The ordre public is narrower than the range of mandatory norms in Austria.

 

OGH – 3 Ob 190/21v (3 Ob 201/21m), Supreme Court of Justice of Austria, 3 Ob 190/21v (3 Ob 201/21m), 26 January 2022

Matthias Hofer and Katherine Khan, Freshfields Bruckhaus Deringer LLP, ITA Reporters for Austria

Since a discretionary decision under § 273 (1) Austrian Civil Code Procedure is also not revisable under Austrian law, an arbitral award with a “discretionary decision according to equitable criteria in the estimation of damages” cannot contradict the basic values of Austrian (damages and procedural) law from the outset.

 

A v. B & C, Market Court of Finland, Case No. 2018/376, Decision No. 10/2022, 22 March 2022

Ina Rautiainen and Anna-Maria Tamminen, Hannes Snellman Attorneys, ITA Reporters for Finland

The Market Court of Finland evaluated a plea of inadmissibility regarding whether a previous ICC arbitral award creates a res judicata effect and renders the claims presented in the Market Court inadmissible. The arbitral award concerned claims arising out of a contractual relationship between the parties, whereas the process in the Market Court concerned claims based on the Finnish Unfair Business Practices Act (“the Business Practices Act”). The Business Practices Act regulates fair practices in business with an objective to prevent unfair conduct in e.g. marketing efforts and other business relations.

The Market Court dismissed the plea of inadmissibility and decided that the arbitral award did not create a res judicata effect regarding the claims presented in the Market Court. The Market Court reasoned that the arbitral tribunal had not granted and, in fact, could not have granted such penalties (such as a conditional fine) that A was requesting on the basis of the Business Practices Act. The case demonstrates the Market Court’s exclusive jurisdiction in market law related matters regulated under the Business Practices Act.

 

BGH – I ZB 21/21, Federal Court of Justice of Germany, I ZB 21/21, 09 December 2021

Patrick Gerardy and Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

If an arbitral tribunal violated a party’s right to be heard and the court does not set aside the arbitral award despite the party’s complaint, the court thereby perpetuates the violation.  The court’s decision may be attacked on appeal for violating the party’s right to be heard.

While lower minimum requirements apply to the reasoning in an arbitral award compared to a court judgment, respecting a party’s right to be heard follows the same standard.  If the reasoning in the arbitral award does not address the material core of a party’s pleadings concerning a factual or legal issue that is central to the dispute, such omission may indicate that the arbitral tribunal did not duly take note of and consider the party’s pleadings (and thereby violated its right to be heard).

 

BGH – I ZB 31/21, Federal Court of Justice of Germany, I ZB 31/21, 16 December 2021

Patrick Gerardy and Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

A blanket waiver of the right to request a state court to set aside an arbitral award is invalid if it is agreed prior to receipt of the arbitral award.  However, an arbitral award based on an arbitration agreement with such a waiver does not constitute a violation of public policy that would prevent a court from declaring the arbitral award enforceable.

If the claim in dispute is assigned during the pending arbitration proceeding, even an (assumed) error of the arbitral tribunal to nonetheless order payment to the assignor does not amount to a violation of public policy.

 

BVerfG – 1 BvR 2103/16, Federal Constitutional Court of Germany, 1 BvR 2103/16, 03 June 2022

Patrick Gerardy and Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

If an athlete’s participation in professional sports competitions, which are organized by a sports association that holds a dominant position in the respective sports competitions market, is dependent on the agreement to an arbitration agreement, and the athlete is thereby “forced” into arbitration (here: a disciplinary CAS arbitration concerning alleged violations of anti-doping rules), the arbitration agreement is invalid if the applicable arbitration rules (here: the former CAS rules) do not provide for the right to request a public hearing.  The reason is that in case of such a “compulsory disciplinary arbitration” the lack of the right to a public hearing violates the athlete’s constitutional right of access to effective judicial relief.  If an arbitration clause violates this constitutional right, it is invalid and cannot be invoked against an action brought in state court.

 

Claimant A & Claimant B v. Respondent Companies, Eighth District Court of Concurrent Jurisdiction of the District of Nuevo Leon, 77/2021 and 83/2021, 22 April 2022

Cecilia Flores Rueda, Flores Rueda Abogados, ITA Reporter for Mexico

The Eight District Judge in Mexico City set aside an arbitral award for considering that the service of process was defective, and that the composition of the arbitral tribunal was not in accordance with the arbitration agreement.

 

Comision Federal de Electricidad (CFE) v. Transportadora de Gas Natural de la Huasteca, S. de R.L. de C.V., Fifteenth Collegiate Court in Civil Matters of the First Circuit, 4/2021, 18 July 2022

Cecilia Flores Rueda, Flores Rueda Abogados, ITA Reporter for Mexico

The Fifteenth Civil Collegiate Court of the First Circuit in Mexico ruled that interim measures issued by the courts, in assistance to commercial arbitration, cannot be of constitutive nature, but only conservative.

 

Estado Paraguayo – Ministerio de Urbanizacion Vivienda y Habitat (MUVH) v. Ing. Carlos Ughelli s/ Cumplimiento de Contrato ((Application for Annulment of Award), Court of Appeal in Civil and Commercial Affairs of Asunción, 35/2022, 04 July 2022

José A. Moreno Rodríguez, Altra Legal, ITA Reporter for Paraguay

On July 4, 2022, an Asunción Appeals Court rejected an annulment request, as the Applicant did not prove that the alleged annulment grounds found in Art. 40 (a)(2) and (3) were met in the case at hand.

 

Programa Nacional de Saneamiento Rural (PNSR) v. Empresa de Transformación Agraria S.A. Sucursal del Perú (TRAGSA), Superior Court of Justice of Lima, Expediente No. 00182-2021-0-1817-JR-CO-02, 23 March 2022

Fernando Cantuarias Salaverry, Law School of Universidad del Pacìfico, ITA Reporter for Peru

The Commercial Chamber of the Superior Court of Justice of Lima declares inadmissible an action for annulment against a partial award.

 

C-B.V. v. X, Court of Appeal of Lisbon, 2851/19.3YRLSB.L1-2, 28 April 2022

Iñaki Carrera, PLMJ Advogados, and José Miguel Júdice, Independent Arbitrator, ITA Reporters for Portugal

This Decision confirms that, as there is no system of double exequatur in Portugal, the recognition of foreign arbitral awards must be compared with similar procedures, in order to assess whether the recognition is more cumbersome. The court takes as a basis for comparison the procedure for setting aside national arbitral awards. Thus, the Portuguese procedure for recognition of foreign arbitral awards cannot be more onerous or have higher fees or charges than those imposed in the procedure for setting aside national arbitral awards.

Moreover, this Decision was correct in reducing the fees by 90%. As the rules for legal costs in Portuguese proceedings do not contain any cap, in cases where the value at issue is high, the costs can be very onerous. In this case, they were EUR 600,000. If the court did not grant the reduction, there could be grounds for an appeal based on the violation of Article III of the NYC.

 

Re Shanghai Xinan Screenwall Building & Decoration Co, Ltd [2022] SGHC 58, Supreme Court of Singapore, High Court, Originating Summons No. 682 of 2021 (Summons No. 3925 of 2021), 18 March 2022

Michael Hwang, Michael Hwang Chambers LLC, ITA Reporter for Singapore

The Singapore High Court has refused an application to set aside leave to enforce an arbitral award on the basis that, inter alia, the arbitral institution (i.e. the “China International Arbitration Center”) named in the arbitration agreement(s) did not exist.

In this regard, the Singapore High Court held that, if the parties objectively intended to refer to the same arbitral institution, the validity of the arbitration agreement(s) would not be affected. It is only in the case where parties had in mind different institutions, or if it was impossible to tell which institution Parties were referring to, that the misnomer would affect the validity of the arbitration agreement(s). This is in line with the Singaporean Court’s pro-arbitration stance, which generally seeks to adopt the interpretation which enables the pathological clause to be upheld, as opposed to interpretations that lead to contrary or nugatory effects.

This case not only serve as a helpful guide to how the Singapore Courts will interpret arbitration clauses naming non-existent arbitral institutions, it also serves as a cautionary tale to Parties that Arbitration clauses should not be treated as an afterthought, or “midnight clauses”, but must be carefully negotiated between Parties. Otherwise, Parties risk opening themselves up to challenges against the validity (and enforceability) of said clauses.

 

CJA v. CIZ [2022] SGCA 41, Supreme Court of Singapore, Court of Appeal, Civil Appeal No. 35 of 2021, 17 May 2022

Michael Hwang, Michael Hwang Chambers LLC, ITA Reporter for Singapore

Will a tribunal necessarily exceed its jurisdiction if it bases its award on a ground not contained within the Parties’ written pleadings and not ancillary to the pleadings? The Singapore Court of Appeal’s decision in this case suggests that the answer to the foregoing question is ‘no’. The Singapore courts will take a holistic approach and look at the totality of what was placed before the Tribunal in assessing what parties have submitted for arbitration. If a tribunal has put a point to the parties for their consideration, it is likely that it will be entitled to base its decision on reasoning flowing from those points.

This case also serves as a useful reminder that tribunals are entitled to come to conclusions different from the views of the parties (and will not be in breach of natural justice) – even if the parties are agreed – as long as (1) those conclusions are based on evidence that was before the tribunal, and (2) it consults the Parties where the conclusions may involve a dramatic departure from what has been presented to it.

 

National Investment Bank Ltd. v. Eland International (Thailand) Co. Ltd. & Eland International Ghana Limited [2022] EWHC 1168 (Comm), High Court of Justice of England and Wales, Queen’s Bench Division, Commercial Court, CL-2021-000414, 17 May 2022

Nicholas Fletcher, 4 New Square, ITA Reporter for England & Wales

For a court to exercise its s. 18 powers it was not necessary for it to reach a final decision as to whether or not there was an arbitration agreement between the parties or whether the dispute which was sought to be referred fell within the arbitration clause. It was sufficient that a s.18 applicant could show a good arguable case to that effect.

A party will be held to have waived its right to arbitrate if they have acted in such a way as to lead the other party to believe that they have made an election not to pursue the claim by way of arbitration. A party will be held to have made such an election if it acts in a manner consistent only with it having chosen one of two alternative and inconsistent courses of action.

 

Union of India v. Reliance Industries Limited & BG Exploration and Production India Limited [2022] EWHC 1407 (Comm), High Court of Justice of England and Wales, Queen’s Bench Division, Commercial Court, CL-2021-000100, 09 June 2022

Nicholas Fletcher, 4 New Square, ITA Reporter for England & Wales

The principle of res judicata enunciated in Henderson v Henderson is a procedural power and not a matter of substantive law and is governed by the law of the seat. The principle applies in the context of both arbitral and court proceedings. In so far as arbitration is concerned the principles have their basis in the duties of the tribunal set out in s. 33(1)(a) and s.33(10(b) of the Arbitration Act.

The Henderson v Henderson principle could apply to all stages of the same proceedings, to defenses as well as to claims, and in an arbitration as well as to litigation. The scope of a remission in arbitration was not endless. Finality is a goal in both court and arbitral proceedings.

There is a very high threshold for a s.68 challenge based on a tribunal’s failure to deal with an issue. Firstly, it must be shown that there was a relevant issue. Second, it must be shown that the issue was put. Third, it must be shown that the issue was not dealt with.

 

Hoffmann-La Roche Ltd., Roche Molecular Systems, Inc. and Gen-Probe Inc. v. Qiagen Gaithersburg, Inc., United States District Court, Southern District of New York, 09 Civ. 7326 (WHP) / 09 Civ. 7396 (WHP), 11 August 2010

Inigo Kwan-Parsons

With competing petitions regarding the validity of a final arbitral award, the US District Court of Southern District of New York, clarifies the standard of review to be applied to awards rendered from international arbitrations under the New York Convention (as opposed awards rendered from domestic arbitrations), and exemplifies the high threshold required to set aside arbitral awards under New York law.

 

Esso Exploration and Petroleum Nigeria Limited v. Nigeria National Petroleum Corporation, United States Court of Appeals, Second Circuit, No. 19-3159 (L), 19-3361, 08 July 2022

Tasmin Parzen, King & Spalding LLP, ITA Reporter for the United States of America

Plaintiff-Appellants Esso Exploration and Production and Shell Nigeria Exploration and Production Company Limited (collectively, “Esso”) initiated arbitration against Defendant-Appellee Nigerian National Petroleum Corporation (“NNPC”) in 2009. The tribunal ultimately issued a final award in favor of Esso. However, Nigerian courts set aside the award in part. While its appeals in those proceedings were pending, Esso sued to enforce the award in the United States District Court for the Southern District of New York.

While rejecting NNPC’s request to dismiss the case for a lack of personal jurisdiction over NNPC and on the ground of forum non conveniens, the district court ultimately denied Esso’s petition on the merits, finding that the Nigerian courts’ judgments were owed comity. Esso appealed the denial of enforcement, and NNPC cross-appealed the denial of its motion to dismiss.

On appeal, the Second Circuit determined that the district court both appropriately denied NNPC’s motion to dismiss and correctly concluded that comity was owed to the judgments of the Nigerian courts. However, it determined that the district court ought not to have denied Esso’s petition in full but instead ought to have enforced those portions of the Award left intact by the Nigerian Courts.

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A Clearer Roadmap for Arbitration: Uzbekistan Enacts Helpful Legal Reforms

Thu, 2022-08-25 01:00

Uzbekistan has updated certain legislative acts in connection with the recent adoption of the Law “On International Commercial Arbitration” (No. O’RQ-674) in 2021 (as previously covered in this blog).

On May 16, 2022, the President of Uzbekistan signed a new law “On amendments and additions to certain legislative acts of the Republic of Uzbekistan in connection with the adoption of the Law ‘On International Commercial Arbitration’” (No. ЗРУ-769) (“the Law”). On May 17, 2022, the Law was published and entered into force pursuant to Article 4 of the Law.

 

Key Amendments to the Economic Procedure Code

The Law amended and added several provisions to the Economic Procedure Code (No. O’RQ-461) (“EPC”). Most significantly, the EPC was supplemented with a new Chapter 291, which follows the existing Chapter 29 on procedures for the issuance of a writ of execution for the enforcement of an arbitral award. Chapter 291 contains two sections. Section 1 (Articles 2321 to 2324) regulates the general rules for consideration by Economic Courts in cases related to the provision of assistance to arbitration proceedings. Section 2 (Articles 2325 to 2329) establishes the procedure and grounds for the annulment of an arbitral award by an Economic Court.

Aside from Chapter 291, other amendments were made to the EPC to clarify the jurisdiction and procedure of the Economic Courts. Article 32 of the EPC was amended to clarify that cases related to arbitration proceedings are within the jurisdiction of the courts of Uzbekistan, regional courts and the Tashkent city court, specifically the Economic Court. Such cases are considered by the Economic Court, regardless of whether the participants in the dispute are legal or natural persons. The new Article 281 of the EPC specifies that cases related to arbitration proceedings provided for by the Law “On International Commercial Arbitration” are considered by the Economic Court according to the general rules of economic legal proceedings, taking into account the particulars specified in the new Chapter 291 of the EPC.

However, Articles 281 and 37 provide that cases concerning the appointment of an arbitrator, the challenge of an arbitrator, the adoption of a decision on the termination of the powers of an arbitrator, the issue of the jurisdiction of a commercial arbitration court, assistance in obtaining evidence, as well as on the annulment of an arbitral award are considered by Economic Courts only if the place of arbitration is located in Uzbekistan. Otherwise, such cases are submitted to the court at the place of arbitration.

According to Article 20(2), a judge of the Economic Court may not participate in the consideration of a case and shall be subject to challenge if they acted as an arbitrator in the related arbitration. Previously, this was not specified by the legislation.

Article 53 also now provides that arbitrators, experts appointed by a commercial arbitration tribunal and employees of an arbitral institution cannot be summoned as witnesses in relation to circumstances that became known to them during the arbitration proceedings.

 

Interim Measures

The Law also amended the EPC to include procedures for an application for the recognition and enforcement of interim measures or for the adoption of interim measures on a claim being considered by a commercial arbitration court. Article 37 of the EPC now provides that such applications are submitted to the court at the place of arbitration or at the state registration of the debtor or, if the place of registration of the debtor is unknown, at the location of his property.

Article 93 provides that, upon an application of a party to the arbitration proceedings, the Economic Court may take interim measures on a claim being considered before a commercial arbitration court. At the same time, according to Article 99, the Economic Court’s interim measures shall be cancelled if the arbitrator’s award rejects the claims.

 

Reasons for Suspension or Termination of Cases Related to Arbitration Proceedings

The grounds for suspending and terminating a case related to arbitration proceedings by the Economic Court have been supplemented by the new Law and now also consist of the following grounds.

Pursuant to Article 154(3) and (51) of the EPC, the Economic Court can refuse to accept a statement of claim if there is an ongoing arbitration between the same persons, on the same subject matter, and on the same grounds or if there is a ruling issued on a dispute between the same persons, on the same subject and on the same grounds, to terminate the arbitration proceedings, except for a case where the arbitration proceedings are terminated due to the arbitral tribunal’s lack of jurisdiction to consider this dispute.

The Economic Court can also refuse to accept a statement of claim under Article 154(41) or can terminate a case related to arbitration proceedings under Article 110 of the EPC if there is an arbitral award given previously by a commercial arbitration court that has entered into legal force in a dispute between the same persons, on the same subject and on the same grounds, except for cases in which the Economic Court has refused to recognize and enforce the arbitral award.

 

Recognition and Enforcement of Awards

The new Law also clarifies in Article 248 of the EPC that if the place of arbitration is in Uzbekistan, issues of recognition and enforcement of an arbitral award are resolved in the manner already prescribed by the existing Chapter 33 of the EPC, taking into account the specifics provided for by the Law On International Commercial Arbitration”. Decisions of the Economic Court on the recognition and enforcement of a foreign arbitral award shall be subject to immediate execution.

 

Conclusion

In general, the amendments and additions made by the new Law along with the introduction of the Law “On International Commercial Arbitration” in 2021 bring Uzbek arbitration legislation into line with international laws and norms, such as the UNCITRAL Model Law on International Commercial Arbitration 1985, with amendments as adopted in 2006. Arbitration is still a new and rapidly evolving practice in Uzbekistan. As the number of arbitration cases grows, issues that were not considered by earlier legislation are emerging that are addressed by this new Law. There are probably a few more amendments that will surface in near future as arbitration practice is rapidly changing in the COVID world as well. For example, the law could expressly permit online or partially online hearings. In short, these changes are well received by ADR practitioners in the country.

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Interview with our Editors: Shane Spelliscy, Chair of UNCITRAL Working Group III on Investor-State Dispute Settlement Reform

Wed, 2022-08-24 01:29

In 2017, the United Nations Commission on International Trade Law (UNCITRAL) initiated a consultative process to consider procedural reform options for investor-State dispute settlement (ISDS). Kluwer Arbitration Blog ran a series on UNCITRAL’s reform work in 2020, highlighting several subjects under consideration by Working Group III (WGIII).

To get first-hand insights into the current status of this reform process, we have invited Shane Spelliscy, in his capacity as Chair of UNCITRAL’s WGIII, to discuss the Group’s work on ISDS reform. Mr. Spelliscy has extensive experience in ISDS. He has been lead counsel for Canada in a number of ISDS cases, has been Canada’s representative at UNCITRAL since 2008, and since 2017 has acted as Chair of WGIII. Currently, he is also the Director-General and Senior General Counsel of the Canadian Government’s Trade Law Bureau.

Shane, welcome to Kluwer Arbitration Blog! Thank you for accepting our invitation, we look forward to hearing your thoughts on UNCITRAL’s reform process and its impact on international investment arbitration.

 

  1. WGIII has focused on several key topics for reform. In your view, which reform options are likely to prove the most important or innovative for reforming ISDS?

From my point of view as the Chair of the Group, this is not a question that can be answered in the abstract. There is no objectively “most important” or “most innovative” reform. As a group, we decided by consensus to pursue a number of reforms simultaneously in recognition of the fact that governments feel very different about the answer to this very question. What might be the most important type of reform for one government, might be of a lower priority for another given each of their respective experiences, interests and needs. Ultimately, each government will have its own decision to make as to which reforms, if any, it wishes to adopt and implement.  This flexibility for governments is essential, but there is an acknowledgement as well that too much flexibility could lead to further fragmentation. Ultimately, I am hopeful that we can achieve a significant number of reforms that will be deemed important and acceptable by all States, as well as a number of options in other areas that will allow governments to do what they understand to be in the interests of the stakeholders they represent.

 

  1. WGIII’s mandate omits substantive reforms from consideration. What challenges arose during the discussions leading to the decision to focus only on procedural reforms? Do you think that the procedural reforms being considered have the capacity to impact or complement further (procedural or substantive) reforms in the future?

I think that it is important to understand as a starting point that the mandate of the Working Group was determined by the Commission, not the Working Group itself. When the project was initiated, the Commission mandated the Working Group to develop reforms to investor-State dispute settlement. As a result, our scope of work does not include consideration of whether to reform all aspects of international investment agreements. Rather, the focus is on dispute settlement. Of course, a significant number of States continue to call for work on reform of substantive standards in international investment agreements as well. While such reforms are outside of the current mandate of WGIII, I have always been clear that the focus of the Working Group on the procedural aspects of investor-State dispute settlement does not diminish in any way the importance of States considering whether the substantive balance achieved in their own investment agreements is the right one. This is an extremely important question, and I have consistently encouraged governments to ask it of themselves.

 

  1. The Draft Code of Conduct for Arbitrators is an important development emerging from WGIII’s work. What challenges were associated with developing such an instrument, and how has the international arbitration community reacted to it so far?

The development of a new Code of Conduct is a reform initiative that has a significant amount of support. I think all delegations see it as an important and necessary part of the reform effort. However, views do differ on how much change it will bring about in and of itself. Some delegations seem to view the Code as not only necessary, but also as a tool that will bring about much of the needed change in the system. Others recognize its importance, but believe that real change and improvement will come with only more structural changes to how these disputes are resolved between investors and States.

In addition to these differences, we have also seen very different views from delegations on some of the text of the Code. One area where such different views exist is on what has been called “double-“or “multiple” hatting”, that is, where in addition to acting as an arbitrator, an individual also acts as a counsel or expert witness in other disputes. Initially, views here were very divergent, but I am hopeful that as we are driving towards the end-game on the Code, a consensus is emerging on how and in what way to regulate this practice.

Another challenge has been enforcement – and here it is interesting because generally there is agreement on the value of an enforceable Code. However, there are a number of questions on how to actually bring that about – particularly in the context of arbitration. As a Working Group, we are still brainstorming ideas on how the obligations in the Code could be enforced – meaning how they could be made legally binding such that violation would bring some sort of sanction.

Now, in terms of the reaction of the community, we make significant efforts to ensure that the voices of all stakeholders are heard at UNCITRAL, including the voices of the arbitration community. Ultimately, this is a process led by States who must consider diverse interests, but we are certainly open to hearing the views of stakeholders on these issues. In this regard, I think that a number of organizations involved in the existing arbitration community have been very heavily and constructively engaged in our work.

 

  1. WGIII has been considering alternative forms of ISDS, including investment mediation. How do you think investment mediation will interact with investment arbitration proceedings in the future?

Pursuant to our work plan, the goal is to bring the work on dispute prevention and mediation to the Commission next year, in 2023. There has been a significant focus on mediation – as the Working Group understands that one of the ways to mitigate the costs and time taken in arbitration is to avoid arbitration altogether. Mediation presents an attractive alternative as a result and a number of delegations have really supported work in this area. My hope is that any reforms that we develop here can contribute to the resolution of disputes before they get to the arbitration stage. In fact, one of the benefits that many delegations have highlighted is that mediation does not destroy the relationship between an investor and a State in the same way as the adversarial process of arbitration. Ultimately, if a not insignificant number of ISDS cases are eventually resolved through mediation, I think that would be an important achievement for the Working Group.

 

  1. How have the different legal cultures of UNCITRAL representatives influenced the reform process? What challenges have arisen due to the multilateral nature of the process?

A multilateral process like UNCITRAL, where we have delegates from over 100 States representing differing legal interests, backgrounds and approaches, offers a number of challenges. Sometimes you see the differences between, for example, common law and civil law lawyers, with the former often more willing to leave things to the discretion of a tribunal. However, for the most part, UNCITRAL offers a forum where we can accept and celebrate such differences rather than letting them derail the process. In seeking to come to consensus, we are not trying to eliminate or mitigate the diversity of perspectives that the delegations bring, but rather to build on them so that the reforms that we develop can be both broadly accepted and widely understood. And here, I would note that the Working Group holds a lot of informal sessions with the goal of explaining and building capacity so as to facilitate the work of the Working Group in coming to a consensus.

 

  1. Given that the UNCITRAL reform process is largely State-led, what role has WGIII given to the views of ISDS experts, private stakeholders, and civil society in the process? Has the COVID-19 pandemic impacted the capacity of WGIII to consult with observers and other stakeholders?

I would note first that the State delegations that we have in WGIII are often composed of ISDS experts – either the State counsel who litigate these cases or the negotiators of ISDS provisions. In each session, it is clear that there is an enormous amount of expertise in the room.

In addition, in WGIII we have always attempted to be open and transparent, and our work is supported by an Academic Forum, consisting of Professors and others who extensively study the field of ISDS, as well as a Practitioners Group who represent a number of counsel practicing in the area. In addition, we have active participation in the Working Group III by representatives of civil society, industry, other IGOs and NGOs, bar associations, arbitration centres and arbitration institutions. When we have a session, in all but rare instances – like when we are pressed for time – I will call on delegations in the order in which the “flags” go up, and irrespective of whom the delegation represents. In this way, the Working Group is able to hear and consider a diverse range of views before coming to consensus amongst States on a way forward. The pandemic has, of course, affected the way all of us have had to interact and it has certainly presented challenges, but the overall approach to participation and transparency has not changed. I am looking forward, though, to a return to in-person negotiations once again starting this September.

 

  1. Given that the UNCITRAL reform process remains ongoing, what are your hopes for the future of the process? Has the Group identified any additional matters that could be considered or put forward for reform in either this or separate future processes?

My ultimate hope for the process remains as it was when we started this work: to find reforms that can be accepted by as many States as possible while preserving some flexibility for States to make their own sovereign choices about what types of reforms will best suit their needs. In terms of any additional matters to be considered, the Group will remain open to the identification of new concerns with ISDS until the end of our work. However, if the question is what comes next beyond this project, then I would stay that with as much as we have on our agenda to complete in the next 4 years, I am focused on the present efforts and not yet thinking about any future processes!

 

Thank you for your time and insights, Mr. Spelliscy. We look forward to following UNCITRAL’s work as it progresses this important reform process!

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

The views expressed by the interviewee do not represent the position of the Government of Canada. The interviewee undertook this interview in his capacity as Chair of UNCITRAL’s WGIII.

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Interpreting Away Treaty Conflicts? Green Power, ISDS and the Primacy of EU Law

Tue, 2022-08-23 01:25

News of the award in Green Power and Obton v Spain is sinking in. Initial responses indicate that this is no ordinary decision – but rather a ‘major earthquake’, a ‘landmark decision’ and ‘one for the history books’. It may well be: on 16 June 2022, an SCC arbitral tribunal seated in Stockholm declined jurisdiction over claims brought by Danish investors under the Energy Charter Treaty (ECT) because of the intra-EU character of the dispute, following the approach developed by the Court of Justice of the EU (CJEU) in its Achmea and Komstroy judgments. In our view, this marks an overdue recognition that investment tribunals addressing disputes between EU nationals and EU member States cannot ignore the primacy of EU law. But the award’s reasoning is unlikely to persuade critics: the Tribunal reaches what we think is the correct outcome via a long and winding reasoning that overstretches the principles of treaty interpretation.

In this post, we situate the Green Power award, explain why its reasoning is problematic, and indicate how future tribunals might engage with the so-called ‘clash of Grundnormen’ between EU law and investment law.

 

  1. Clashing Grundnormen: Before Green Power

Like so much else, the story of Green Power goes back to Achmea. The CJEU’s judgment of March 2018 had suggested that proceedings based on intra-EU BITs (which are common) could not go ahead, as ISDS clauses included in intra-EU investment treaties violated the EU principles of autonomy and mutual trust. The judgment sent shockwaves through the EU and investment communities, generating very different reactions.

The EU’s response was robust. The Commission’s Communication to the European Parliament and the Council, asserting that EU law must have primacy, urged an end to intra-EU investment arbitration. Member States’ Declarations of 15 and 16 January 2019 also considered ISDS clauses in intra-EU bilateral investment treaties ‘contrary to Union law and thus inapplicable’, affirmed the primacy principle and noted that ‘[t]he same result follows… under general public international law’. Following this, Member States adopted the Treaty for the Termination of Intra-EU BITs (now with 20 parties) while the CJEU, in Komstroy, extended the Achmea logic to the ECT arbitration clause.

Investment tribunals, by contrast, resolutely rejected the ‘Achmea objection’, holding States to the commitments made in the jurisdictional clauses of the applicable BITs or Article 26(3) ECT (eg RREEF v Spain), whose meaning they considered plain. Moreover, while many tribunals addressed the principles governing incompatible successive treaties (Articles 59 and 30(3) of the Vienna Convention on the Law of Treaties (VCLT)), they held that neither of these could accommodate the primacy claimed by EU law. (Professor Kohen’s dissent in Adamakopoulos so far seemed a ‘lone dissent’).  So the cases continued, notwithstanding Achmea, and the ‘clash of Grundnormen’ resurfaced in follow-up proceedings (State aid, recognition and enforcement, etc).

 

  1. Overcoming ‘Binary Logics‘ through Interpretation: The Green Power Approach

Given these entrenched positions, the Green Power Tribunal’s desire to overcome the ‘binary logic of an either “insider” or “outsider” perspective with respect to EU law’ (§332) is commendable. The Tribunal sought a way out via an interpretation of Article 26(3)(a) ECT, which contains States‘ ‘unconditional consent to the submission of a dispute to international arbitration’. The Tribunal considered this provision to be ‘[o]n its wording …  unqualified’ and ‘unconditional’ (§341), but felt that to ‘stop … there‘ would ‘ignore the complexities of this case’ (§343).

What followed was a detailed explanation of why this ‘unqualified’ and unconditional‘ wording could not be given effect. In 140 paragraphs of interpretation based on VCLT Article 31, the Tribunal concluded that ECT Article 26(3)(a) could not be interpreted without reference to EU law, and that the application of EU law entailed the invalidity of Spain’s offer to arbitrate. In support, it relied on the  ‘evidence’ informing the EU’s approach to investment arbitration sketched out above, notably Achmea, Komstroy, and the Declarations of 15 and 16 January 2019, which the Tribunal considered to have authentically interpreted Article 26(3)(a).

The Tribunal also added summary remarks on the question of priority in the application of EU law and the ECT, noting ‘that the primacy of EU law … is not a matter of lex specialis or of lex posterior, but one of lex superior’ (§469). This superiority meant that Spain was precluded from making a unilateral offer to arbitrate in Article 26 ECT: there was, in short, ‘no unilateral offer by the Respondent which the claimants could accept’ (§§476-477).

 

  1. An Alternative Approach: Recognising and Resolving the Treaty Conflict

There is much to commend in the award. The Tribunal was right to avoid the ‘binary logic’ that had, so far, only succeeded in entrenching the positions summarised above. We submit it was also right in rejecting jurisdiction under Article 26(3)(a). But the Tribunal’s way out – to resolve the conflict through treaty interpretation – is problematic. Two difficulties are obvious. First, the Tribunal’s ‘evidence‘ hardly supports its conclusion (see also here). For instance, the Declarations of January 2019 were not made by all treaty parties to the ECT – so how could they amount to an authentic interpretations of Article 26? Second, the Tribunal ends up holding that Article 26(3)(a) does not mean what it ‘unconditionally‘ says – a plain meaning the Tribunal had itself acknowledged (§341).

At the source of this fundamental problem is the Tribunal’s preferred way out: treaty interpretation. Interpretation can assist where conflicts are merely apparent – where the two apparently conflicting rules can be reconciled (Pauwelyn, at 272). This was not the situation in Green Power, however, where two rules plainly clashed: Article 26(3)(a) required Spain to submit to arbitration; EU law required it not to do so. As much as the Tribunal tried, these two rules were genuinely incompatible – as the Tribunal’s brief comments on lex superior seemed to acknowledge (§469). The plain interpretation of Article 26(3)(a) (unconditional consent to arbitration) may not have reflected the ‘complexities’ of the case, but the point of interpretation is definitional: to elucidate the meaning of treaty clauses. The Tribunal was right that interpretation must not be an abstract process (§344), and that the normative environment of the provision to be interpreted must not be overlooked or ignored. But a systemically integrated interpretation, like the one advanced by the Tribunal, was a way to find, rather than resolve, the complexities of the case: a way to reveal the genuine conflict between ECT Article 26(3)(a) and EU law.

A number of earlier tribunals pronouncing on the ‘Achmea objection’ had correctly acknowledged such genuine conflict – and then sought to resolve it. To do so, they notably relied on the lex posterior rule of VCLT Article 30(3), which stipulated that between successive treaties relating to the same subject matter, ‘the earlier treaty applies only to the extent that its provisions are compatible with those of the later treaty’. But inevitably, tribunals before Green Power thought that Article 30(3) VCLT could not accommodate the primacy of EU law over the investment treaty. And perhaps this is plausible: Article 30(3) is not about primacy, but about posteriority; and for that reason, may not fit the Achmea logic, which is, as noted in Green Power, ‘a matter … of lex superior’ (§469).

But this is not the only way to resolve the (acknowledged) conflict between ISDS clauses and EU law. It seems to us that there would have been a better approach — one that takes arguments about lex superior seriously, but that, puzzlingly, has not been pursued by tribunals yet. This approach proceeds from the assumption that States can determine which of their incompatible treaty commitments enjoys priority. They can do so because, outside cases of peremptory rules, they are free to qualify particular treaty rules as superior or inferior. To us, the existence of such a prerogative seems not in doubt, even though the VCLT does not formulate it as a general principle. Even in the absence of a general ‘priority clause’, the idea that superior rules should be given effect is not alien to Article 30, whose para. (1) spells out one priority clause expressly when referring to Article 103 of the UN Charter (which has primacy over both prior and later incompatible treaty commitments). Article 30(2) also addresses priorities, though its approach is selective:

When a treaty specifies that it is subject to, or that it is not to be considered as incompatible with, an earlier or later treaty, the provisions of that other treaty prevail.

As is clear from its wording, Article 30(2) only covers subordination clauses, not claims to priority – but the possibility of such clauses is implicit therein (see eg here). The ILC’s 1966 Commentary notes that States can regulate the relation between their treaty commitments through clauses in an earlier or later treaty. ‘Whatever the nature of the provision’, it continues, ’the clause has necessarily to be taken into account in appreciating the priority of successive treaties relating to the same subject matter’ (Article 26 Commentary , §2). This includes primacy clauses. That States could choose which treaty commitments ought to prevail over others, was so obvious that the ILC did not think it necessary to expressly mention them in Article 30 (ibid, §8). The specific cases of priority mentioned in Article 30 were included because of their peculiar characteristics: Charter Article 103 was included because of the importance of the Charter in modern international law (ibid, §3); subordination clauses because they could influence the operation of the general rules concerning the effects of conflict clauses and in particular the fact that they may affect the position of third States (ibid, §4). But these were just illustrations of a more general principle.

 

  1. Giving Effect to the Intentions of EU Member States

In our assessment, this general priority principle provides a more convincing path to resolving the conflict between intra-EU ISDS clauses and EU law. It can apply because the parties are clear that, between those two incompatible rules, EU law clearly enjoys priority. It does so as a matter of EU law (because of the primacy principle), but also as a matter of general international law. Member States in fact said so expressly in the Declaration of 15 January 2019 where they declared ‘all investor-State arbitration clauses contained in bilateral investment treaties concluded between Member States [to be]… inapplicable’, relying on the primacy principle, but also on ‘the relevant provisions of the Vienna Convention on the Law of the Treaties.’

The Declaration, in our assessment, reflects three clear positions taken by EU member States: (i) There is a conflict between EU law and arbitration clauses. (ii) EU law enjoys priority. And (iii) this priority is recognised (also) as a matter of international law. So far, investment tribunals have failed to give effect to these clearly expressed positions. Tribunals before Green Power felt they could not reach the outcome clearly desired by EU member States. The Green Power Tribunal reached the desired outcome, but felt it could only do so by interpreting away the conflict. It thereby managed (unlike the earlier tribunals) to give effect to the parties’ intentions, but did so via an unconvincing argumentative avenue.

This blog post is an attempt to encourage further thinking about the interaction between EU law and ISDS jurisdictional clauses. The solution sketched out above, based on a general priority principle implicit in Article 30 VCLT, will need to be further developed. But the preceding considerations do suggest, in our view, that there is a way of reflecting EU law primacy within the general law of treaties. Only by exploring this, we submit, will investment tribunals be able to overcome the ‘binary logic of an either “insider” or “outsider” perspective with respect to EU law’ (cf. Green Power, §332).

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How Far Goes the Deadline for Vacating an Arbitral Award? A Brazilian Perspective

Mon, 2022-08-22 01:22

As most arbitration laws, the Brazilian Arbitration Act (Law n. 9307/1996; “BAL”) establishes a short deadline for any interested party to seek annulment of an arbitral award in court. The interested party has a 90-day period as from (i) notice of the partial or final arbitral award or (ii) the decision on a motion for clarification to file an annulment request before Brazilian courts (BAL, Article 33, 1st Paragraph).  In 2015, Federal Law No. 13,129 amended certain provisions of the BAL, which included adding the second trigging event (i.e., a decision on a motion for clarification) to its original text.  Said rule begs the question: if the losing party wishes to submit successive motions for clarification to the arbitral award, does that mean that the 90-days deadline is indefinitely extended? The answer is intuitively negative, but what is the legal limit applicable in this case? And how can said guerilla tactic be restrained?

A recent decision rendered by the São Paulo Court of Appeals in Brazil dealt with these issues (see, Appeal n. 1048961-82.2019.8.26.0100, March 10, 2021, LRM Serviços et al. v. Vyttra Diagnósticos Importação e Exportação Ltda. et al.; “Vyttra Case”).

In this post, we discuss the position taken by Brazilian courts in the Vyttra Case and others that involved the issue of multiple motions for clarification against arbitral awards. As we will see, there have been different views on whether motions for clarification that were deemed inadmissible by arbitral tribunals could still extend the 90-day legal limitations period for seeking annulment. We hope this post steers the debate into the right direction.

 

Background

In the arbitral proceedings that led to the Vyttra Case, the tribunal rendered an award against respondents (plaintiffs in the set aside proceedings) in April 2018. In May 2018, respondents filed their first motion for clarification, which was unanimously rejected in June 2018 (“First Decision”). Subsequently, respondents filed a second motion for clarification – which appeared to be but a replication of the first – and raised accusations against the arbitrators’ impartiality and independence. Soon thereafter, all three arbitrators withdrew and a new tribunal was constituted.

Later, in May 2019, the new tribunal rendered a majority decision dismissing the second motion for clarification and imposing a fine against respondents for deliberately postponing the proceedings’ closure. Because the first motion was rejected in full and no amendments to the award were needed, the majority understood that respondents were not entitled to file a second motion for clarification in the first place (“Second Decision”). The minority arbitrator, however, issued a dissenting opinion, which not only admitted but also granted respondents’ motion.

 

The set aside proceedings

Almost a year elapsed from the First Decision (June 2018) to the Second Decision (May 2019). Nevertheless, in May 2019, respondents filed a motion to vacate the arbitral award, alleging in sum that the award (i) violated due process by dealing with matters beyond the scope of the submission to arbitration; (ii) was rendered by partial arbitrators, who allegedly had dubious relationships with claimants’ counsel; and (iii) violated public policy by failing to apply the restitutio in integrum principle provided for under Article 944 of the Brazilian Civil Code. Among other defenses, claimants argued that the claim was time-barred under Brazilian law.

On August 11, 2020, a Brazilian lower court issued a decision refusing to set aside the award. According to the lower court: (i) the arbitral award did not decide on matters falling outside the arbitrators’ jurisdiction; (ii) respondents failed to produce evidence of the alleged partiality of the arbitrators; and (iii) the application of a certain legal rule pertains to the merits of the award, which cannot be reviewed by the Judiciary. As to claimants’ statute of limitations defense, the lower court considered however that the claim was not time-barred under Brazilian law, since the second motion for clarification filed in the arbitration extended the 90-day limitation period. Although this motion was dismissed by the majority of the arbitral tribunal, the Brazilian lower court understood that the merits of the application were analyzed and, as a result, the Second Decision – and not the First – should be the one considered as initial term for the 90-days limitation period. Respondents then appealed to the São Paulo Court of Appeals.

The São Paulo Court of Appeals also denied claimants’ time-bar argument but overturned the lower court’s judgment, annulling the award based on lack of legal reasoning and breach of due process in the arbitrators’ ruling on quantum. In what concerns claimants’ time-bar defense, the São Paulo Court of Appeals considered irrelevant whether a long period of time had elapsed between the First Decision and Second Decision. According to the Court, the delay was due to the need to constitute a new tribunal, which could not be attributed to any of the parties. The Court also reasoned that, as respondents could not be sure whether their second motion would be granted by the newly-formed tribunal, the 90-day period should be counted from the Second Decision. The Court also pointed out that neither the BAL nor the applicable arbitration rules disallowed multiple motions for clarification. Lastly, the Court noted that the Second Decision was not unanimous and thus there was reasonable doubt as to whether the second motion for clarification should have been admitted. Claimants then appealed to the Superior Court of Justice, which has not rendered a decision on the case yet.

 

Analysis

The São Paulo Court of Appeals’ decision in the Vyttra Case may have set a concerning precedent. Based on its reasoning, an opportunistic losing party may file multiples motions for clarification aiming at simply postponing the 90-day deadline to initiate set aside proceedings. But, what is the limit for such tactic? How many motions for clarification may an opportunistic losing party file before arbitral tribunals to widen the limitation period fixed by the BAL?

The Vyttra Case seems, however, to be an isolated position. For instance, the São Paulo Court of Appeals took a different approach on this same issue not so long ago. In 2012, the Court had to deal with the same peremption argument and reached an opposite conclusion (see, Appeal n. 0177130-22.2010.8.26.0100, December 3, 2012, Companhia do Metropolitano de São Paulo v. Consórcio Via Amarela; “Metro Case”).

In the Metro Case, the São Paulo Court of Appeals recognized that the 90-day limitation period could be extended by filing a motion for clarification as long as such motion complied with the admissibility requirements set forth in the BAL and in the applicable arbitration rules – in that case, the ICC Arbitration Rules. However, the Court concluded that the second motion for clarification filed in the arbitration was not able to extend the 90-day term, as it had been dismissed by the arbitral tribunal (because in the arbitrators’ eyes the request failed to demonstrate any need for correction or interpretation and was filed after the ICC Arbitration Rules deadline). Thus, the Court dismissed the set aside proceedings.

The same reasoning appeared in obiter dictum in a more recent decision rendered by another Brazilian State Court of Appeals (see, Minas Gerais Court of Appeals, Interlocutory Appeal n. 1.0024.09.516036-2/003, March 12, 2015, Kelsey Daivis de Oliveira v. Ricardo Arlindo Nunes).

 

Conclusion

The São Paulo Court of Appeals’ opinion in the Metro Case seems more reasonable than the one taken in the Vyttra Case.

If a party did not meet the deadline established by the applicable arbitration rules to file a motion for clarification, should said motion extend the term for vacating the award? The answer is – or should be – a resounding no. The same reasoning should apply to any motion that fails to meet the admissibility threshold and is dismissed by the arbitral tribunal (either unanimously or by the majority vote). As a matter of principle, if a party fails to comply with the admissibility requirements when filing its motion for clarification – specially a second motion that is a mere replica of the first –, such party should not benefit from the extension of the deadline to seek the annulment of the award.

By deciding to file a motion for clarification, a party accepts to run the risk of said motion being considered inadmissible. It is true that in most instances the arbitral tribunal decides the motion in advance of the deadline for setting aside the award, in which case this issue becomes moot. However, whenever the tribunal takes longer than that to decide (especially when said delay is caused by the moving party itself – e.g. by raising allegations against the arbitrators’ impartiality) and the moving party decides to wait on the arbitrators’ ruling, there should be little such party could do if the motion is deemed inadmissible, except for accepting the arbitral award and complying with the arbitrators’ orders.

 

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KluwerArbitration ITA Arbitration Report, Volume No. XX, Issue No. 10 (July 2022)

Sat, 2022-08-20 01:30

The Institute of Transnational Arbitration (ITA), in collaboration with the ITA Board of Reporters, is happy to inform you that the latest ITA Arbitration Report was published: a free email subscription service available at KluwerArbitration.com delivering timely reports on awards, cases, legislation and current developments from over 60 countries and 12 institutions. To get your free subscription to the ITA Arbitration Report, click here.

 

The ITA Board of Reporters have reported on the following awards.

 

Parties Not Indicated (Award), CCIR Arbitral Award No. 52 of 19 March 2021, 19 March 2021

Cosmin Vasile, Zamfirescu Racoti Vasile & Partners

Failure to undergo the DAB procedure due to the fact that an adjudicator could not be jointly nominated by the parties does not prevent the parties from going to arbitration under Sub-clause 20.4.

 

Parties Not Indicated (Award), CCIR Arbitral Award No. 120 of 9 December 2021, 09 December 2021

Cosmin Vasile, Zamfirescu Racoti Vasile & Partners

The Arbitral Tribunal decided that, by agreeing on the application of the Rules of Arbitration of the Court of International Commercial Arbitration attached to the Chamber of Commerce and Industry of Romania, the parties have decided that the Arbitral Tribunal shall have jurisdiction to hear both contractual and extra-contractual disputes.

 

Parties Not Indicated (Award), CCIR Arbitral Award No. 121 of 15 December 2021, 15 December 2021

Cosmin Vasile, Zamfirescu Racoti Vasile & Partners

The 28 days’ deadline for giving notice under Sub-clause 20.1 is fixed and mandatory for the party requesting additional costs/an extension of time, and not a flexible deadline, regardless of the fact that the respondent knew of the existence of the event giving rise to the claim.

 

A v. B. & Anor (HKIAC’s Prima Facie Power to Proceed), HKIAC Case ID CD2021/12/04, 01 February 2021

Sarah Grimmer, Hong Kong International Arbitration Centre (HKIAC)

In this case, HKIAC decided on a prima facie basis to proceed with the arbitration under the 2018 HKIAC Administered Arbitration Rules (“2018 Rules”) in circumstances where (1) the arbitration clause contained express references to HKIAC and its “rules and practice”; (2) the Claimant commenced the arbitration under the 2018 Rules; and (3) the Respondents had not made a final choice of institution or rules where it was empowered to do so under the arbitration clause. HKIAC concluded that there was a possibility that an arbitration agreement under the 2018 Rules might exist.

 

A v. B. & Anor (Applicability of Expedited Procedure), HKIAC Case ID CD2021/12/08, 01 October 2018

Sarah Grimmer, Hong Kong International Arbitration Centre (HKIAC)

In this case, the Claimant requested to apply the expedited procedure under the 2013 HKIAC Administered Arbitration Rules (“2013 Rules”) on the ground of exceptional urgency, citing its urgent need for capital and potentially imminent insolvency. HKIAC rejected the request on the basis that, among other things, the Claimant did not make out a case of exceptional urgency and the expedited procedure could not provide the protection sought by the Claimant to avoid the alleged harm caused by the Respondents. HKIAC also considered the complexity of the dispute and found that the prejudice caused to the Respondents of being forced into the expedited procedure of a complex and high-value dispute outweighed the benefits that could be obtained by the Claimant.

 

A & Anor v. B. (Consolidation of Arbitrations), HKIAC Case ID CD2021/12/10, 01 August 2018

Sarah Grimmer, Hong Kong International Arbitration Centre (HKIAC)

In this case, the Claimants requested the consolidation of two arbitrations against the same Respondent arising under separate but materially identical contracts, arbitration clauses, and claims relating to the same multicurrency note programme, pursuant to Article 28.1(c) of the 2013 HKIAC Administered Arbitration Rules (the “2013 Rules”). HKIAC decided to consolidate the arbitrations having considered the conditions under Article 28.1(c) and several other factors.

 

TVL International, LLC v. Zhejiang Shenghui Lighting Co., Ltd. and SengLED USA, Inc. (Partial Final Award and Final Award), ICDR Case No. 01-17-0004-7802, 09 August 2019

Michele Sonen

This dispute arose out of alleged trade secrets infringement stemming from a prospective OEM arrangement between a US consumer electronics company and a Chinese manufacturer to market a new type of lightbulb. Shortly after negotiations broke down between the parties, the prospective manufacturer began selling a product that the Claimant alleged was identical to its bulb and used stolen technology, in violation of a NDA and US state and federal law protecting trade secrets. The Tribunal agreed and awarded the Claimant damages totaling nearly USD 1.8 million, including punitive damages.

 

Advanced Aerofoil Technologies, AG. & Ors v Todaro & Ors (Partial Final Award), ICDR Case No. 50 152 T 0013112, 06 March 2013

Inigo Kwan-Parsons

New York’s unforgiving laws regarding contracting out of fraudulent misrepresentations have been applied in this arbitral proceeding, reminding parties to be cautious when drafting aa agreement.  In this case, the arbitrator rejected the claimant’s claims alleging they had been induced by fraudulent misrepresentation into entering a settlement agreement by referring to a contractual provision within the settlement agreement which barred any claims for misrepresentations ‘both known and unknown’ to the parties.

 

Vantage Deepwater Company and Vantage Deepwater Drilling, Inc. v. Petrobras America Inc., Petrobras Venezuela Investments & Services, BV, and Petroleo Brasileiro S.A. (Petrobras Brazil) (Final Award), ICDR Case No. 01-15-0004-8503, 29 June 2018

Michele Sonen

In this arbitration, a majority of the Tribunal awarded Vantage Deepwater USD 615 million in damages for wrongful termination by Petrobras of a long-term lease of an oil drilling rig. Petrobras had leased the rig from Vantage Deepwater for a term of 8 years, but terminated the agreement only 2 years and 9 months into the term.

 

Premium Petroleum Services Corp. v. Superior Energy Services Colombia S.A.S. & Superior Energy Services Inc. (Final Award), ICC Case No. 21574/RD/MK, 19 July 2018

Inigo Kwan-Parsons

In this heavily litigated saga, an arbitral tribunal navigated numerous preliminary issues (as to evidence and jurisdiction), before addressing claims brought by Premium Petroleum Services Corp. (Premium) against Superior Energy Services Colombia S.A.S. and Superior Energy Services Inc. (collectively, Superior), and Superior’s counterclaims against Premium, in accordance with Columbian law, arising from a sale purchase agreement between the parties (SPA) and associated employment agreements.  In addressing the parties’ issues, the arbitral tribunal interpreted the provisions of the SPA in light of the principle of ‘good faith’, finding substantively for Superior.

 

Constellation Overseas Ltd. v. Alperton Capital Ltd., Capinvest Fund Ltd., Universal Investment Fund Ltd., Commercial Perfuradora Delba Baiana Ltda. & Interoil Representacao Ltda. (Interim Award), ICC Case No. 23856/MK, 26 April 2019

Sarada Nateshan

In this arbitration governed by the Rules of the International Chamber of Commerce (ICC), the Arbitral Tribunal issued an Interim Award, which barred the Claimant from “pledging, transferring or otherwise encumbering the disputed shares,” and from selling off the assets of the drillship companies that were formed as part of the joint venture between the Parties.

 

Global Gaming Philippines LLC (as assignor) and GGAM Netherlands B.V. (as assignee) v. Bloomberry Resorts and Hotels Inc. and Sureste Properties, Inc. (Partial Award on Liability), SIAC Case No. [xxx], 20 September 2016

Michele Sonen

The owners of a casino and resort in Manila terminated its service agreement with its management and services operator. The Tribunal concluded that the termination was wrongful. It also rejected the owners’ attempt to require the operator to return its shares in the resort’s parent company or enjoin sale of the shares to a third party.

 

Global Gaming Philippines LLC (as assignor) and GGAM Netherlands B.V. (as assignee) v. Bloomberry Resorts and Hotels Inc. and Sureste Properties, Inc. (Final Award), SIAC Case No. [xxx], 27 September 2019

Michele Sonen

The owners of a casino and resort in Manila wrongfully terminated its service agreement with its management and services operator. As compensation, the Tribunal awarded the owners over USD 85 million in damages. The Tribunal also concluded that the owners had improperly impeded the operators’ sale of its shares in the resort’s parent company and awarded the owners approximately USD 190 million in damages for the value of the shares

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Towards Greater Efficiency in Document Production

Fri, 2022-08-19 01:32

International arbitration has been regarded as a flexible and efficient dispute resolution mechanism. While this may hold true for most phases of the arbitration, document production (i.e., the phase where a party requests the other party to produce documents that are in the other party’s possession and are relevant to the dispute and material to its outcome) has often led to inefficiencies. Not infrequently, clients and counsel alike complain about the way the document production phase is carried out and the adverse impact that it has on the costs of the arbitration. Likewise, the desire to leave no stone unturned in an effort to win the case pushes parties to ever greater levels of production. This post outlines possible causes of the inefficiencies impacting this phase and offers suggestions to pre-empt these inefficiencies.

 

Is Document Production Desired at All?

Document production (or any type of exchange of documents during a dispute) is the exception rather than the norm in most legal systems. Civil law countries generally do not have such a phase in their domestic civil procedure rules.

By contrast, common law jurisdictions view the exchange of documents as a necessary process to ensure that the parties can assess the strengths and weaknesses of their case and marshal evidence in support of their case. Exchange of documents is viewed as a fundamental guarantee of the parties’ procedural rights. Failure to conduct the exchange of documents in accordance with the relevant laws will typically constitute a breach of ethical standards and attract liability. Civil law jurisdictions, instead, focus on the parties meeting their burden of proof by presenting their factual account based on the documentary evidence already available to them. If these are insufficient, the court will rule against the party that has failed to discharge its burden of proof. Only in rare, exceptional cases, the court may order a party to disclose documents against its will and only for the other party to prove its case, but never to buttress its factual account or legal arguments.

Establishing a procedure that is acceptable to these diverging legal traditions is one of the challenges in international arbitration with the potential of unforeseen conflicts and inefficiencies. Twenty years ago, document production was an exception rather than a norm. Now it is a default assumption in most cases, with the IBA having now published multiple editions of the IBA Rules on the Taking of Evidence (2020) in international arbitration (the “IBA Rules”). The IBA Rules were designed to bridge the gap between different legal systems and traditions by offering only limited tools to obtain evidence from other parties to the dispute. For instance, the document production process is circumscribed to the exchange of narrow and specific categories of documents relevant to the dispute and material to its outcome. Despite the clear language of the IBA Rules, the legal traditions of the tribunal and counsel have often influenced its interpretation, which can vary the scope of the document production phase.

To mitigate inconsistent interpretations as to the scope and to align expectations, the parties should ideally address document production at an early stage. If both parties come from legal traditions where exchange of documents does not exist or arbitration is chosen as an alternative to litigation because of expediency, procedural flexibility, and not because document exchange is available, then the parties could specify that the evidentiary issues of the arbitration should adhere to the Rules on the Efficient Conduct of Proceedings in International Arbitration (the “Prague Rules”). The Prague Rules offer an alternative to the IBA Rules and were designed to provide a civil law-focused approach to evidentiary issues in international arbitration. They expressly discourage document production.

 

Choosing the Arbitrators: Discovery or Disclosure Creep?

Practitioners will be familiar with the concept that selecting different rules for the taking of evidence (i.e., the IBA Rules or the Prague Rules) will lead to different results in terms of document production. However, that is often not the end of the story, and in practice, the document production can creep and expand beyond the parameters envisaged by the IBA Rules.

The starting point for scope creep is with legal counsel for the parties (often at the suggestion of their clients). If a request is very wide-ranging, it risks that the tribunal may make a correspondingly wide-ranging order. In the authors’ view, lawyers from common law backgrounds are more likely to draft wide-ranging requests, given their familiarity and experience in jurisdictions where disclosure obligations can be wide-ranging.

However, the background of the tribunal will also dictate the style of document production and the extent to which there is scope creep. For example, a tribunal comprised of three English barristers is more likely to order document production in a similar style to English court litigation, given that is the style with which they are familiar. Tribunals such as this may be more prone to scope creep beyond the parameters envisaged by the IBA Rules. By contrast, tribunals comprised of lawyers from civil law jurisdictions may be more restrictive in their approach to document production. In the authors’ view, parties should take these factors into account when appointing arbitrators.

This all leads to the question of how the parties and the tribunal can manage the process to prevent scope creep.

 

Setting Boundaries

The adverse consequences of discovery and disclosure creep in the document production phase can be significant. Overly broad document production obligations will require counsel and their clients to devote more time and resources to locating and reviewing documents to ascertain whether they are responsive. Expansive document production requests can be very disruptive to the day-to-day operations of clients.

Additionally, a document request with a broader scope will very likely yield a larger volume of responsive documents. This means that counsel will spend more time reviewing the documents, which will increase legal costs.

Despite the adverse consequences that discovery and disclosure creep can have on the parties and the arbitration, the arbitration community has not adopted a uniform strategy to ensure that the production of documents in international arbitration strictly adheres to the parameters of the IBA Rules. There are, however, several topics which could be addressed in a procedural order to mitigate discovery and disclosure creep and the inefficiencies resulting therefrom. These suggestions assume that the parties have agreed that the IBA Rules will provide guidance as to the rules of evidence that govern the arbitration.

  • Removing fishing expeditions from the scope of document production: these are requests which seek documents that may exist and their content may support an argument from the requesting party. They are typically used to either validate an argument for which no evidence exists or shift the burden of proof to another party. It is evident that fishing expeditions fall foul of Article 3.3(a)(ii) of the IBA Rules. To avoid any possibility of fishing expeditions being made, parties could expressly set out that the tribunal should reject this type of request outright.
  • Reducing the number of requests that may be submitted: procedural orders could include the number of production requests that the parties would find acceptable. They could also include a mechanism that allows the parties to inform the tribunal if they foresee exceeding the number of production requests. This approach has the benefit of ensuring that parties submit truly indispensable production requests while also helping the parties assess the costs of the document production phase.
  • Defining the relevant criteria of Article 3.3 of the IBA Rules: a powerful way to prevent discovery or disclosure creep is to define how the tribunal should interpret the relevant criteria of Article 3.3 of the IBA Rules. The parties could set out examples of the type of requests that describe the requested documents in sufficient detail, what constitutes a narrow and specific category of documents, and how the phrase “relevant to the case and material to its outcome” should be assessed. Such a provision will encourage parties to be particularly mindful of the wording and justification supporting their production requests, lest they will be rejected.

Of course, if parties want to minimise disputes and inefficiencies around document production, they should also specify in advance the approach to thorny (and larger) issues such as cross-border privilege. Parties may also wish to provide a template privilege log and specify the amount of detail in which privileged documents should be described.

 

Conclusion

Document production, more than any other phase of the arbitration, is particularly vulnerable to inefficiencies. The dynamics where one party devotes significant efforts to withhold certain documents and the other makes reciprocal efforts to convince the tribunal that the documents must be produced are well-known to most arbitration practitioners. Most practitioners will also be familiar with situations where the parties have significantly different interpretations of the criteria of the IBA Rules and how to approach the document production phase. All these factors will likely result in inefficiencies, which will impact, among other issues, the costs of the arbitration. Parties, and particularly their counsel, should be aware of the factors creating these inefficiencies, and proactively take steps to ensure that the document production phase is carried out with maximum efficiency. If the system is to work better, it is incumbent on users to take the necessary steps to maximise the efficiency of the procedure.

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The English Approach to the Law Governing Confidentiality in International Arbitration

Thu, 2022-08-18 01:23

In November 2021, the Law Commission of the United Kingdom announced its review of the English Arbitration Act 1996. Among the critical issues of the reform is the debate on whether to codify the existing principle of implied confidentiality of arbitration proceedings under English law. While the principle of implied confidentiality is largely settled in England, the question of which law governs confidentiality issues is not.

 

Confidentiality in Arbitration: Definition and Delimitation

Despite privacy and confidentiality regarded as universally recognized “essential ingredient[s] of arbitration” (see Hassneh Insurance Co of Israel v Mew), confidentiality in arbitration lacks a universal definition and description of the duties associated with it. In common law jurisdictions, the legal bases for confidentiality duties have been developed over the course of various court decisions of binding nature, whereas civil law has developed this concept by means of (a few) isolated statutory provisions (e.g., Spanish Arbitration Act, art. 24.2, Peruvian Arbitration Law, art. 51.). Nonetheless, both common and civil legal traditions agree that confidentiality encompasses “a duty of an individual to refrain from sharing confidential information with others”, except when there is the legal authority, justification, or express consent to do so (see Legal Dictionary).

Generally speaking, confidentiality and privacy are conceptually different: “[p]rivacy means that no ‘outsider’ is allowed to participate in arbitral proceedings, whereas confidentiality refers to an obligation not to disclose information acquired during arbitration.” While some authorities have drawn a sharp distinction between the two (see Dolling-Baker v Merrett; Ali Shipping), others have treated privacy and confidentiality as one and the same (see London and Leeds Estates Ltd v Paribas Ltd; Hassneh Insurance Co of Israel v. Mew). Nonetheless, the two concepts are intertwined, and are often assessed together.

 

Implied Obligation to Maintain Confidentiality of Arbitral Proceedings Under English Law

The English Arbitration Act 1996 does not expressly provide for confidential arbitral proceedings, since the drafters in 1996 regarded privacy and confidentiality to be “better left to the common law to evolve” given the myriad of exceptions to confidentiality, while acknowledging that “none doubt at English law the existence of the general principles of confidentiality and privacy” (Emmott, citing Departmental Advisory Committee on Arbitration Law, Report on the Arbitration Bill, 1996, reprinted). Thus, English common law has long recognized the duty of confidentiality as an implied obligation arising out of the parties’ agreement to arbitrate (see ex multis Ali Shipping; Dolling Baker). In fact, the parties’ choice to arbitrate instead of litigating in court is (partly) due to their expectation of the hearings being private (see Emmott, at 62; Hassneh Insurance Co of Israel v. Mew, at 246-7; City of Moscow, at 2 and 30).

 

Which Law Governs Confidentiality Issues?

Despite frequently applying the concept of an implied duty of confidentiality, English legislators and courts have yet to answer the question of which law governs confidentiality duties. Today, case law is far from uniform and rarely touches specifically upon the governing law aspect. Yet, in cases where different laws govern the arbitration agreement, the law of the seat and/or the underlying contract, the question of the applicable law to determine confidentiality will have to be tackled. Below, three approaches to the applicable law are presented.

(i) The Law Governing the Arbitration Agreement: Confidentiality as an Implied Duty of the Arbitration Agreement?

Given that English law recognizes an implied duty of confidentiality arising out of the agreement of the parties to arbitrate, the logical consequence is that the law governing the arbitration agreement also governs all matters related to confidentiality. Even more so, if parties expressly provide for a duty of confidentiality within their arbitration agreement, the law governing the arbitration agreement will determine confidentiality stipulated therein.

Recalling the English decisions Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors and Kabab-Ji SAL v Kout Food Group, even if the law governing the agreement governs confidentiality, whenever there is a lack of an explicit choice thereof, English courts will likely apply the law of the main contract to the arbitration agreement and its implied duty of confidentiality.

(ii) Lex contractus: Confidentiality as a Substantive Matter?

Parties might insert a confidentiality clause in the main contract that primarily dictates the confidential execution of the contract. Haas and Oberhammer, for instance, argue that this contractual confidentiality should also extend to ancillary arbitration proceedings. In those cases, confidentiality arises as an express obligation of the main contract, which is why the law of the main contract will govern confidentiality.

Even absent a contractual confidentiality provision, confidentiality may be regarded as a substantive rather than a procedural matter, which is why the lex contractus would apply. In England, especially in line with the business efficacy test, contracts will frequently be impliedly confidential if confidentiality is necessary for business efficacy or essential “to make the contract work” (see Ali Shipping, considering Hassneh Insurance Co of Israel v. Mew, though later stating that “the implied term ought properly to be regarded as attaching as a matter of law” and not to the efficacy of a contract). For instance, licencing contracts of intellectual property rights may inherently require confidentiality to protect the parties’ rights. Hence, confidentiality is imminent in the contract, which extends also to subsequent proceedings arising thereout.

(iii) Law of the Seat: Confidentiality as a Corollary of Hearing Privacy?

The law of the seat represents the procedural law of the arbitration and typically governs matters like the conduct of the hearings as well as the relationship of the arbitration to national state courts. In fact, the law of the seat may also serve as the legal basis for confidentiality duties. This notion is primarily based on considering confidentiality as a logical extension of privacy. In Hassneh Insurance Co of Israel v. Mew, Colman J acknowledged that “[i]f it be correct that there is at least an implied term in every agreement to arbitrate that the hearing shall be held in private, the requirement of privacy must in principle extend to documents which are created for the purpose of that hearing.” Similarly, in Ali Shipping, Potter LJ mentioned that “the obligation of confidentiality [] arises as an essential corollary of the privacy of arbitration proceedings.” If one, thus, regards confidentiality as an extension of the privacy of arbitration, the law governing privacy, namely the law of the seat, will also govern confidentiality issues.

Similar to England, Singapore has adopted a view that considers confidentiality to be an implied duty. However, the Singaporean High Court in AAY v. AAZ [2011] 1 SLR 1093 took a clear stance on when this notion of confidentiality applies: “[W]here Singapore is to be the seat of the arbitration [] confidentiality will apply as a substantive rule of arbitration law, not through [Singapore’s arbitration legislation], but from the common law.”

In light of the review of the Arbitration Act 1996, it should be noted that the attractiveness of a seat to arbitrate may be tied to the notion of confidentiality provided for by that law. In 1995, the Australian High Court sent shock waves throughout the arbitration community when it stated in Esso that arbitration is a public process unless a contrary agreement explicitly provides for confidentiality. As reflected in case studies finding that 83% of in-house counsel regarding confidentiality as an “important” or “quite important” characteristic of arbitration, New Zealand in 2007 saw the need to react to Esso by explicitly providing for confidential arbitration proceedings whenever New Zealand is the seat of an arbitration. In 2010, Australia decided to return to confidential arbitrations to increase its attractiveness as a seat for international commercial arbitrations and incorporated an almost verbatim provision as that of New Zealand’s. Likewise, English courts have acknowledged the importance of confidentiality in the choice of England as a seat: “Among features long assumed to be implicit in parties’ choice to arbitrate in England are privacy and confidentiality” (see City of Moscow).

A similar view was taken in the recent Halliburton v Chubb case in England, where the court obiter held that for an English-seated arbitration with New York being the law governing the underlying contract, “it is necessary to consider the obligation in English law on an arbitrator to uphold the privacy and confidentiality of an arbitration which has an English seat and the boundaries of that obligation.” At the same time, the court left open when English law would be applicable: “English-seated arbitrations are both private and confidential, if the law governing the confidentiality of the arbitration is English law” (emphasis added).

 

Concluding Remarks

The question of which law determines the arbitration agreement’s implied duty of confidentiality is yet to be answered by English lawmakers or courts. Ultimately, the law governing confidentiality issues will depend on whether confidentiality is understood (i) as arising from the arbitration agreement itself, (ii) as an extension of a confidential contract between commercial parties, or (iii) as being a corollary to the privacy of arbitral proceedings. Thus, it is yet to be seen if and how the review of the English 1996 Arbitration Act addresses this debate and tackles what is said to be “one of arbitration’s principal attractions” (Lord Neuberger of Abbotsbury).

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Alejandro Díaz Gaspar v. Costa Rica: FET in the Spotlight

Wed, 2022-08-17 01:27

On 29 June 2022, an ICSID Tribunal composed of Alexis Mourre, Luis González García and Adolfo Jiménez issued its Final Award in the case brought by Alejandro Diego Díaz Gaspar, a Spanish national, against Costa Rica. The majority of the Tribunal ultimately found minor breaches of the underlying Costa Rica-Spain Bilateral Investment Treaty (the “Treaty”) but declined to award any damages to Claimant.

This is the most recent ICSID award rendered against Costa Rica.  In the author’s view, this decision confirms its place as a country respectful of international law and the obligations acquired with respect to foreign investors. In total, Costa Rica has been Respondent in thirteen ICSID cases, only two of which are currently pending.  Most of these cases stem from specific, individual situations that relate to different types of investments, industries and measures.  The country’s experience with ISDS has been overwhelmingly positive, including two cases (David Aven and Cervin Investissements) in which the tribunals ruled in favor of the state and even awarded Costa Rica its costs.

This post will address the origins of the dispute between Alejandro Diego Díaz Gaspar and Costa Rica, the applicable legal framework, the questioned governmental measures, the Tribunal’s approach to the fair and equitable treatment standard (“FET”) standard and finally the Tribunal’s decision.

 

Background to the dispute

This particular case arose out of a growing conflict between Ibérico (the company incorporated by Mr. Díaz Gaspar in Costa Rica through which he purchased a poultry processing plant), and the neighbors of the area where the plant was located, due to supposed bad odors and other health concerns.

When Ibérico took over the plant, it increased the facility’s production capacity without obtaining the pertinent authorizations (such as the environmental assessment). The repeated complaints from the neighbors triggered several inspections from the Costa Rican sanitary authorities.

On 27 January 2016, the health authorities issued a sanitary order noting that Ibérico had not obtained the required authorization to expand the capacity of the plant’s wastewater treatment system (“STAR”). The order gave the company a two-month cure period. However, two days later, this order was replaced by another one, which instead allowed for a one-day compliance period.

On 12 February 2016, the health authorities ordered the technical closure of the STAR, to be complied with by 19 February 2016. Additionally, another resolution dated 15 February 2016 suspended the veterinary operation certificate (“CVO”) and all plant activities effective 19 February 2016.

On 19 February 2016, an administrative court issued an interim measure in favor of Ibérico, halting the closure of the STAR and the CVO suspension. Despite this, the plant still suspended its activities between 19 February and 23 February 2016. The plant later reopened, but eventually ceased its operations.  The cause of the shutdown of the plant was a disputed fact in the arbitration.

Claimant filed its claim in 2019 before ICSID alleging:

  • Expropriation of Claimant’s investment.
  • Breach of the obligation to promote and create favorable conditions for Claimant’s investment.
  • Breach of the obligation to grant a fair and equitable treatment.
  • Obstruction of the investment through arbitrary and discriminatory measures.
  • Breach of the national treatment obligation.

Claimant sought at least US$ 81 million in damages, plus US$ 1 million in moral damages.

 

The Applicable Legal Framework to the Investment and Governmental Measures

The Tribunal first determined that Respondent’s legal framework offered the Government certain leeway in the exercise of its supervisory duties.

Claimant questioned the following governmental measures:

  • Irregular inspections in January 2016.
  • Sanitary orders, reports and decisions detecting nonexistent disconformities and granting impossible deadlines to comply, which lead to disproportionate administrative acts.
  • The resolution that suspended the CVO.
  • The technical closure of the STAR and the plant.

The Tribunal found that the inspections were normal, especially for this type of industry.  Regarding the sanitary orders, the Tribunal extensively analyzed and concluded that Respondent had not offered a compelling reason for why it had replaced the two-month cure period. As for the suspension of the CVO, the Tribunal found one irregularity; however, it was deemed irrelevant because the resolutions in question were suspended through the decision of the administrative court.

In view of the Tribunal’s finding regarding the sanitary order that granted the one-day period, it also concluded that the decision to close the STAR was premature and irregular. The order in question was deemed to be excessive and lacking legal reasoning.

 

The Protection and Admission Standard

The Tribunal determined that the Treaty should be interpreted as having two parts: one related to obligations applicable to the admission phase of the investment (which are regulated in Article II), and the other concerning the treatment obligations owed to admitted investments. This led the Tribunal to conclude that the State acts at issue, which took place after the investment was admitted, could not constitute a breach of Article II-1.

 

Fair and Equitable Treatment

The core of this case revolved around the FET standard. The Tribunal first analyzed the Treaty’s FET provision and noted that Article III-1’s wording clearly provided that the Parties did not agree to an FET obligation beyond that provided in international law. Thus, Article III-1 reflected the minimum standard of treatment under customary international law.

On that basis, the Tribunal determined that a state act that is arbitrary, notoriously unjust, unlawful, idiosyncratic or discriminatory, as well as lacking in transparency or a serious breach of administrative due process, is contrary to the minimum standard of treatment under customary international law, and must be examined on a case – by – case basis.

For the Tribunal, two circumstances must be considered: that the dispute was based on a treaty that promotes and protects investments, and that the disputed measures referred to the Government’s exercise of regulatory powers.

When analyzing Claimant’s argument related to the violation of legitimate expectations, the Tribunal emphasized that the legitimate expectations that are relevant to an FET breach are those generated at the moment when the investment is made, not in the course of its operation.

The Tribunal determined that since Claimant did not prove that it had carried out a proper due diligence on the regulatory framework at the moment of making the investment, and it had not received specific commitments on the part of the State, it could not have had any legitimate expectations relating to the evolution of the legal framework. Based on this, the Tribunal concluded that Claimant did not prove that it had legitimate expectations that could be relevant towards a breach of the FET standard.

Further, in analyzing the FET standard, the Tribunal explained that the breach must be considered with respect to the State’s legal system as a whole, meaning that if there is an error and the State promptly corrects it, the measure cannot give rise to State responsibility under international law.

The Tribunal considered that the unexplained modification of the two-month cure period constituted a breach of Costa Rica’s duties to hold a reasonable and transparent administrative process.  The Tribunal also suggested that the two-month period would have been reasonable, considering that the authorities knew of the plant’s irregularities since 2015, and that it would have allowed Ibérico to regularize its situation.

In response to these measures, Ibérico obtained a favorable interim measure that suspended the sanitary orders and received notification on 19 February 2015. However, the plant remained closed for the three following days. In consequence, the Tribunal considered that this closure was not attributable to the State, since the sanitary orders had been effectively suspended.

In addition, the Tribunal concluded that Ibérico’s financial distress could not be attributed to the Government’s acts and had begun since at least in November 2015.

Claimant also argued that public officials had created a defamation campaign against Ibérico; however, the Tribunal concluded that there was no proof that the statements made interfered with Claimant’s rights.

Finally, the Tribunal also dismissed Claimant’s request for moral damages based on its finding that the decisions ordering the closure of the Plant do not constitute treaty breaches because they were promptly corrected by the administrative court.

 

No Violation of Other Standards

The Tribunal noted that the prohibition of arbitrary measures contained in Article III-2 also forms part of the FET standard under Article III-1.  The Tribunal decided that the sanitary closure, the CVO suspension orders, as well as few of the Health Minister’s statements to the press were arbitrary; however, these were promptly corrected by Costa Rica’s Judiciary. These conclusions also applied to breaches of Article II-1 as well as Article III-2.

As for the expropriation claims, the Tribunal ultimately rejected them, citing that for an indirect expropriation to exist, one of the necessary elements is that the deprivation of the use and enjoyment of the investment must be caused by acts attributable to the State.  In this case, the Claimant voluntarily closed the plant (since the irregular sanitary orders were promptly remedied by the local courts); therefore, the closure could not be attributed to the State.

 

Decision

In sum, the majority of the Tribunal concluded that:

  • By substituting the sanitary orders, closing the STAR, suspending the CVO and closing the plant for three days, the Government of Costa Rica acted arbitrarily and inconsistently with its FET obligations.
  • However, these breaches were promptly corrected by the the administrative court.
  • The fact that Ibérico later went on to shut down its plant for three additional days could not be attributable to the State.
  • Since Costa Rica corrected the arbitrary measures, these could not constitute a breach of the State’s international obligations under the Treaty.
  • The Minister of Health’s statements to the press constituted a breach of the FET standard, but Claimant did not prove that these statements caused any damages.

In his partial dissenting opinion, Mr. González agreed with the majority’s finding that the case should be dismissed in its entirety; however, he disagreed with the majority’s reasoning on the assessment of FET and submitted that the Tribunal majority had applied a much lower standard when identifying two instances of arbitrariness.

 

Conclusion

Even though the Tribunal did not award damages to Claimant, the Tribunal’s FET analysis merits attention because of the standard applied, especially regarding the Minister of Health’s statements to the press. The decision also serves as a strong reminder of the importance of having sound public policies that are backed by a system of checks and balances. The Tribunal eventually sided with Costa Rica because it was able to prove that the Judiciary corrected the “arbitrary measures” carried out by the Executive Branch that resulted in a breach of the Treaty’s FET standard. This speaks to the State’s ability to correct certain conducts to avoid being in breach of international law.

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The EU’s Clarification on Access to Arbitration in its Seventh Package of Sanctions Against Russia: Trivial or Consequential?

Tue, 2022-08-16 01:02

On 21 July 2022, the European Council adopted Decision (CFSP) 2022/1271 amending Decision 2014/512/CFSP and Council Regulation (EU) 2022/1269 amending Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine. One of the amendments introduced by the European Council appears to have assuaged the concerns of arbitral institutions and arbitration practitioners alike.

As the Council explains in its Regulation (EU) 2022/1269, “[i]n order to ensure access to justice, Decision (CFSP) 2022/1271 […] allows an exemption from the prohibition to enter into any transactions with Russian public entities necessary to ensure access to judicial, administrative or arbitral proceedings.”

The said “prohibition to enter into any transactions with Russian public entities” is laid down in Article 5aa(1) of Regulation (EU) No 833/2014 (“Regulation 833/2014”). This provision sets out that “[i]t shall be prohibited to directly or indirectly engage in any transaction with: (a) a legal person, entity or body established in Russia, which is publically controlled or with over 50 % public ownership or in which Russia, its Government or Central Bank has the right to participate in profits or with which Russia, its Government or Central Bank has other substantial economic relationship, as listed in Annex XIX; (b) a legal person, entity or body established outside the Union whose proprietary rights are directly or indirectly owned for more than 50 % by an entity listed in Annex XIX; or (c) a legal person, entity or body acting on behalf or at the direction of an entity referred to in point (a) or (b) of this paragraph” (hereafter jointly referred to as “Listed Entities”). At the time of publication of this post, twelve entities appear in Annex XIX, including Rosneft and Gazprom Neft.

In June 2022, that is, before the adoption of Decision (CFSP) 2022/1271 and Council Regulation (EU) 2022/1269, the European Commission had already clarified that “[w]ith regards to the provision of […] legal services, Article 5aa should be interpreted in light of the fundamental rights protected under the Charter, in particular the right of defence. This provision does not affect the provision of services that are strictly necessary for the exercise of the right of defence in judicial proceedings and the right to an effective legal remedy as referred in Article 47 of the EU Charter of Fundamental Rights and Article 6 of the European Convention on Human Rights.”1)Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014, p. 211, question no. 5. jQuery('#footnote_plugin_tooltip_42447_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42447_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Further to Council Regulation 2022/1269, Article 5aa(3) of Regulation 833/2014, which lists transactions that are exempt from the prohibition set out in Article 5aa(1), now expressly stipulates that such prohibition shall not apply to “transactions which are strictly necessary to ensure access to judicial, administrative or arbitral proceedings in a Member State, as well as for the recognition or enforcement of a judgment or an arbitration award rendered in a Member State and if such transactions are consistent with the objectives of this Regulation and Regulation (EU) No 269/2014” (Article 5aa(3)(g) of Regulation 833/2014, hereafter referred to as “New Article 5aa(3)(g)”).

New Article 5aa(3)(g) Does Not Vitiate Other Restrictions of the EU Sanctions Program that May Affect Arbitration Proceedings and Arbitral Awards

The concerns that led to the amendment were undoubtedly valid.

Indeed, by prohibiting “any transaction” with publicly-owned or -controlled entities listed in Annex XIX to Regulation 833/2014 and other Listed Entities, Article 5aa(1) justifiably raised doubts as to whether attorneys, arbitrators and arbitral institutions were authorised to provide any of the services required to ensure these entities access to justice inter alia through arbitration proceedings, and whether attorneys, arbitrators and arbitral institutions were authorised to receive any kind of payment in relation to such services. Today, New Article 5aa(3)(g) makes it plain that transactions that are strictly necessary to ensure access to justice or for the recognition or enforcement of a judgment or an arbitral award, are exempt from the general prohibition laid down in Article 5aa(1).

New Article 5aa(3)(g) should however not be read in isolation from the rest of the EU sanctions program against Russia. The new provision itself stipulates that transactions that are strictly necessary to ensure access to justice are authorized only to the extent that they are “consistent with the objectives of [Regulation 833/2014] and Regulation (EU) No 269/2014 [(“Regulation 269/2014”)],” both of which contain provisions that continue to affect not only the administration of arbitration proceedings but also the ruling by arbitrators on substantive claims and the enforcement of arbitral awards.

Legal and practical difficulties related to transfers of funds (including payments of registration fees and advances on costs) remain a staunch reality in all cases involving an entity that is both a Listed Entity under Article 5aa(1) of Regulation 833/2014 and an entity listed in Annex 1 to Regulation 269/2014, hence an entity whose assets are frozen as per Article 2 of the latter Regulation. This is, for instance, currently the case of United Aircraft Corporation and United Shipbuilding Corporation. In respect of such entities, no transfer of frozen assets may take place absent a license from the competent authority and the agreement of the banks involved.

Merits-wise, Article 11 of Regulation 833/2014 continues, of course, to prohibit the satisfaction of claims made inter alia by Listed Entities if such claims relate to transactions whose performance has been affected by measures imposed under the EU sanctions program against Russia.2)Article 11(3) only reserves the right inter alia of Listed Entities to judicial review of the legality of the non-performance of contractual obligations in accordance with Regulations 833/2014 and 269/2014. jQuery('#footnote_plugin_tooltip_42447_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_42447_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Finally, at the enforcement stage, Article 5(1) of Regulation 269/2014 continues to provide that frozen funds of an entity included in Annex I (which might also happen to be a Listed Entity under Article 5aa(1) of Regulation 833/2014) may be released for purposes of satisfying an arbitral award only in situations in which the award was rendered before the entity in question was included in Annex I.

Surely, the introduction of New Article 5aa(3)(g) “clarifies the intention of the legislator […] to isolate the target commercially and financially, not to deny publicly-owned or-controlled entities access to justice. But [the above shows that] the mere involvement of a sanctioned entity in arbitration proceedings […] is […] no shield against the restrictions imposed by the EU sanctions programme.3)Jack Ballantyne, EU confirms arbitration carve-out in sanctions regimes, GAR News, 26 July 2022, quoting Mercédeh Azeredo da Silveira. jQuery('#footnote_plugin_tooltip_42447_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_42447_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

New Article 5aa(3)(g) Might However be Helpful to Interpret Some of the Other Restrictions Found in the EU Sanctions Program

While New Article 5aa(3)(g) does not vitiate restrictions, other than the general one set out in Article 5aa(1) of Regulation 833/2014, that may affect arbitration proceedings and arbitral awards, the new provision might be helpful to interpret some of these other restrictions.

For instance, New Article 5aa(3)(g) is arguably relevant when it comes to interpreting situations in which frozen assets may be released under Article 4 or under Article 5 of Regulation 269/2014.

Pursuant to Article 4(1)(b) of Regulation 269/2014, “[b]y way of derogation from Article 2, the competent authorities of the Member States may authorise the release of certain frozen funds or economic resources, […] after having determined that the funds or economic resources concerned are […] intended exclusively for payment of reasonable professional fees or reimbursement of incurred expenses associated with the provision of legal services.”

New Article 5aa(3)(g) – which, in accordance with the guidance provided by the European Council, is intended to safeguard “the right of defence […] in judicial proceedings and the right to an effective legal remedy4)Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014, p. 211, question no. 5. jQuery('#footnote_plugin_tooltip_42447_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_42447_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); – gives further legitimacy to the view that Article 4(1)(b) covers not only payments of attorneys’ fees and payments to arbitrators (which squarely fit into “professional fees […] associated with the provision of legal services”) but also transfers of funds to arbitral institutions. All of these payments are, after all, necessary to truly guarantee access to justice.

At the post-award stage, Article 5 of Regulation 269/2014 sets out two slightly different regimes as regards the release of frozen funds to satisfy arbitral awards and court decisions. It allows the release of frozen funds to satisfy an award only if the latter was rendered before the unsuccessful respondent was included in Annex I, whereas it allows the release of frozen funds to satisfy a judicial decision irrespective of whether the respondent was included in Annex I before or after the decision in question was rendered.

Some authors have read this provision to imply that unlike local courts, arbitral tribunals should not hear or rule on claims in disputes involving entities listed in Annex I to Regulation 269/2014.

It is beyond the scope of the present entry to explain in detail why such position does not hold. Suffice it to note here that by placing judicial, administrative and arbitral proceedings on an equal footing as dispute resolution avenues even for cases involving sanctioned entities, New Article 5aa(3)(g) reinforces the view that Article 5 of Regulation 269/2014 – which relates strictly to enforcement issues – is not intended to reduce the scope of disputes that may be heard by arbitrators as compared to the scope of matters that may be heard by local courts.

References[+]

References ↑1, ↑4 Consolidated FAQs on the implementation of Council Regulation No 833/2014 and Council Regulation No 269/2014, p. 211, question no. 5. ↑2 Article 11(3) only reserves the right inter alia of Listed Entities to judicial review of the legality of the non-performance of contractual obligations in accordance with Regulations 833/2014 and 269/2014. ↑3 Jack Ballantyne, EU confirms arbitration carve-out in sanctions regimes, GAR News, 26 July 2022, quoting Mercédeh Azeredo da Silveira. function footnote_expand_reference_container_42447_30() { jQuery('#footnote_references_container_42447_30').show(); jQuery('#footnote_reference_container_collapse_button_42447_30').text('−'); } function footnote_collapse_reference_container_42447_30() { jQuery('#footnote_references_container_42447_30').hide(); jQuery('#footnote_reference_container_collapse_button_42447_30').text('+'); } function footnote_expand_collapse_reference_container_42447_30() { if (jQuery('#footnote_references_container_42447_30').is(':hidden')) { footnote_expand_reference_container_42447_30(); } else { footnote_collapse_reference_container_42447_30(); } } function footnote_moveToReference_42447_30(p_str_TargetID) { footnote_expand_reference_container_42447_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_42447_30(p_str_TargetID) { footnote_expand_reference_container_42447_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 Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Anti-suit Injunctions Against Sovereign States: The English High Court Weighs In

Mon, 2022-08-15 01:24

Can a court restrain a State from pursuing civil proceedings in a foreign jurisdiction? This was the question before the English High Court in UK P&I Club N.V. and United Kingdom Mutual Steam Ship Assurance Association Ltd v República Bolivariana de Venezuela RCGS “Resolute” [2022] EWHC 1655 (Comm). UK P&I Club N.V. (the “English Club”) and its parent company (the “Dutch Club”) (together “Claimants”) sought a final anti-suit injunction against the Defendant, Venezuela, restraining it from pursuing proceedings in Dutch Curaçao and Venezuela.

While anti-suit injunctions are common in English courts, this injunction, had it been granted, would have been the first time the Courts took such action directly against a State (without the State having somehow provided its consent).

This is a relevant case for the doctrine of State immunity in England & Wales that provides important insight on the extent to which courts are willing to deal with States as they would with any other private party. Separately, the judgment provides an illustrative example of how parties that have not entered into an arbitration agreement can find themselves bound by one.

 

Background

In early 2020, the VL Naiguatá GC-23 (“Naiguatá”), a Venezuelan navy patrol vessel, was sent to intercept the RCGS Resolute (“Resolute”), an ice-classed cruise liner which engaged in tourism to Antarctica. An altercation between the vessels broke out and the Naiguatá sank.

Following the loss of its vessel, Venezuela brought civil claims in the courts of Dutch Curaçao and in Venezuela itself. These claims were worth around €125M and €300M respectively. The defendants to these claims were the Resolute, its owners and head managers, and the Claimants as the vessel’s P&I insurer.

The Claimants’ view was that, in substance, these claims sought to enforce the terms of the contract of insurance between the Dutch Club (as insurer) and its members, especially the owners (as assureds). This would mean that Venezuela was bound by the contract of insurance, including the London arbitration and English law clauses.

In February 2021, the Claimants commenced proceedings in England seeking an anti-suit injunction restraining Venezuela from pursuing its foreign claims on this basis. The following month an interim anti-suit injunction was granted against Venezuela in ex parte proceedings.

Venezuela objected to this and on 4-5 May 2022 there was a hearing before Sir Ross Cranston to consider Venezuela’s objections and whether the interim anti-suit injunction should be made final. Sir Ross Cranston’s judgment is dated 28 June 2022.

 

Are Venezuela’s claims within the scope of the arbitration agreement?

Unlike a ‘standard’ anti-suit injunction case, the arbitration clause that the Claimants were seeking to enforce was contained in an insurance contract to which Venezuela was not a party.

Sir Ross Cranston  explained that, while normally considered a contractual remedy, anti-suit injunctions can also be granted on a “quasi-contractual” basis. For example, Venezuela was not a party to the insurance contract between the Claimants and the assureds, but if it wanted to rely on this contract in foreign proceedings, it would be bound by its terms (including the arbitration clause). The Claimants could therefore seek an anti-suit injunction against Venezuela on what is called a “derived rights basis”. The key question was whether Venezuela was in fact relying on the contract in the foreign proceedings. Put another way, were Venezuela’s claims in substance contractual?

There was no dispute on Curaçaon law: Venezuela accepted the evidence of Claimants’ expert that these claims were subject to the terms of the insurance policy.

Competing experts from both parties debated this point in the context of Venezuelan law. However, the Court concluded that it had to focus on the nature of the right, not its source, and that, under Venezuelan law, a direct action by a third party against a liability insurer would be subject to the terms of the insurance contract.

This meant that all of Venezuela’s foreign claims fell within by the arbitration clause, and its only remaining prospect of avoiding the effects of this clause was to claim sovereign immunity.

 

Can anti-suit injunctions be granted against States?

Venezuela made two arguments. First, it claimed immunity from the Court’s jurisdiction under section 1 of the State Immunity Act 1978 (the “SIA”). Second, even if the Court had jurisdiction, it claimed to be immune from injunctive relief under section 13(2)(a) of the SIA.

 

Venezuela’s first argument: State immunity

State immunity under the SIA is subject to a number of exceptions, including an exception applicable to cases where proceedings relate to a commercial transaction entered into by the State (section 3 of the SIA). The scope of this exception should be interpreted against the restrictive approach to State immunity generally, where there is an important distinction between claims arising out of a State’s sovereign and non-sovereign acts.

Venezuela argued that its foreign litigation was a sovereign act. The proceedings related to a naval patrol vessel, and included claims for lost military equipment and environmental damage to sovereign territory. The Court disagreed and considered these were commonplace private law claims, and therefore, the commercial transactions exception applied.

So did the arbitration exception, which covers cases where a State agrees in writing to submit a dispute to arbitration (section 9 of the SIA). Given that Venezuela was not a party to the underlying insurance contract, practitioners may question how the “in writing” criteria is fulfilled here. Nevertheless, the Court was prepared to treat it as if it had been satisfied.

 

Venezuela’s second argument: immunity from injunctive relief

So far, so difficult for Venezuela. At this point in the judgment, the Court had decided that Venezuela’s foreign claims fell within scope of the arbitration agreement, and fell within the commercial transactions and the arbitration exceptions to the principle of State immunity.

Nevertheless, Venezuela succeeded in avoiding an anti-suit injunction by relying on the protection in section 13(2)(a) of the SIA. This provides that, subject to certain exceptions:

“relief shall not be given against a State by way of injunction or order for specific performance …”

The Claimants countered this by arguing that section 13(2)(a) of the SIA was incompatible with their right to a fair trial under article 6(1) of the European Convention on Human Rights (“ECHR”). Article 6(1) of the ECHR provides (as relevant):

“In the determination of his civil rights and obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law.”

Legislation, so far as possible, needs to be read and given effect in a way that is compatible with ECHR rights (section 3 of the Human Rights Act 1998 (“HRA”)). The Claimants argued that, as section 13(2)(a) was incompatible with their article 6(1) rights, it should be read as being limited to a State’s sovereign activities.

As the Court considered article 6(1) to be engaged, the key question was whether the interference with that right caused by section 13(2)(a) of the SIA was justified.

The Claimants argued it could not be justified as it went beyond the requirements of customary international law in protecting States from anti-suit injunctions in respect of their non-sovereign as well as their sovereign acts. They argued that Venezuela could only show the interference was justified if (1) there was a binding rule of customary international law conferring immunity from anti-suit injunctive relief, or (2) a tenable view that customary international law mandates immunity from such relief.

The judge did not agree with this approach. He distilled five principles from the jurisprudence:

  1. restrictions on article 6(1) are only justified if they pursue a legitimate objective by proportionate means and do not impair the essence of the claimant’s right;
  2. both customary international law and domestic policy may offer justification;
  3. in the absence of a recognised rule of customary international law, the domestic rule is compatible with article 6(1) if it is within the range of possible rules consistent with current international practices;
  4. the restrictive doctrine of customary international law is based historically on the idea that governmental acts of one state are not matters upon which the courts of other states will adjudicate;
  5. there is an international consensus as to the scope of state immunity in favour of the restrictive doctrine.

As to the state of customary international law, the court considered that there was no clear and settled view regarding orders for injunctions against States. However, there was substantial uniformity in the view that criminal or financial penalties attached to coercive measures are of no effect against States. Section 13(2)(a) was therefore not an outlier, and the interference was justified as it fell within the range of possible rules consistent with current international standards.

In any event, the Court considered that section 13(2)(a) could be justified by domestic policy. In particular, section 13(2)(a) made sense as States cannot be held in contempt (the ultimate sanction for breaching an injunction), this was an area of international sensitivity touching on comity and procedural propriety, and even if the Claimants could not obtain an anti-suit injunction, they still had a remedy in damages for breach of the arbitration clause.

Finally, the Court concluded that even if article 6(1) had been breached, this was not an appropriate case for interpreting the underlying statute pursuant to section 3 of the HRA. In the Court’s view, the changes suggested by the Claimants involved an exercise more akin to legislating than interpreting, and this was not the Court’s place.

 

Conclusion

This case will be a stark warning for States seeking to rely on State immunity in the context of their commercial transactions. It is also a timely reminder that States (and other actors) may find themselves bound by arbitration clauses they did not expressly agree to. As to the anti-suit injunction, even in commercial dealings, States remain immune from this particular form of relief.

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KluwerArbitration ITA Arbitration Report, Volume No. XX, Issue No. 9 (July 2022)

Fri, 2022-08-12 01:28

The Institute of Transnational Arbitration (ITA), in collaboration with the ITA Board of Reporters, is happy to inform you that the latest ITA Arbitration Report was published: a free email subscription service available at KluwerArbitration.com delivering timely reports on awards, cases, legislation and current developments from over 60 countries and 12 institutions. To get your free subscription to the ITA Arbitration Report, click here.

 

The ITA Board of Reporters have reported on the following court decisions.

 

Angle World LLC v. Jiangsu Beier Decoration Materials Co., Ltd., Intermediate People’s Court of Beijing, , 21 April 2022

Arthur X. Dong, JunHe LLP, ITA Reporter for China

An often-seen requirement to a valid and binding arbitration agreement is that the contract containing the arbitration clause must bind upon the parties. However in this case, in a separate proceeding the PRC court found that the arbitration clause in an contract, which provides CIETAC arbitration in Shanghai, was binding although it was only signed by one party. When the respondent applied to set aside the award by arguing the arbitration agreement was not binding, the PRC court dismissed the application by holding that the same issue had been determined in the previous proceeding. Nonetheless, it is noteworthy that when the claimant applied for recognition and enforcement of the award before the U.S. court, the U.S. court dismissed the application by holding that there is no binding arbitration agreement.

 

RoinvestCo UK Ltd v. The Russian Federation, Supreme Court of Sweden, Ö 2301-09, Case Date 12 November 2010

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

After a tribunal had found itself having jurisdiction to try a dispute the Defendant-Appellee (Russia) had filed a negative declaratory action with a District Court seeking a declaration that the tribunal lacked jurisdiction to try the dispute. The case was appealed to the Svea Court of Appeals which found it has jurisdiction and that the arbitral tribunal lacked jurisdiction. The case was then appealed by the Claimant-Appellant (RosInvestCo) and the to the Supreme Court.

The Claimant-Appellant argued that the suit should be dismissed as the dispute had insufficient connection the Swedish legal system (lack of Swedish judicial interest). The Supreme Court confirming the principle of party autonomy, explained that the parties may freely agree on applicable law, which is normally done by agreeing on the place of arbitration. According to the Supreme Court, Swedish law is applicable to an arbitration if the arbitration agreement states Sweden as the place of arbitration, even if the dispute is international. If Sweden is the agreed place of arbitration it is of no consequence if the parties or the arbitrator convene elsewhere, if the arbitrators are not Swedes, do their work in another country or if the disputed agreement has no connection to Sweden. Because the parties had agreed on Sweden as the place of arbitration, Swedish law was applicable to the arbitration.

The declaratory action was, in the Supreme Court’s opinion, permissible as the only legal limitations preventing such an action are the ones given by Chapter 13, Section 2 of the Swedish Code of Judicial Procedure. With those limitations in mind, the Supreme Court discussed whether such an action is appropriate if it cannot be expected to be settled before the arbitral award is given. The Supreme Court noted that the legislative history assumes that such an action is allowed, concluding that the action should be allowed at least when the arbitral award is not imminent. As the action had been brought forth shortly after the tribunal’s decision, with no arbitral award imminent, the Supreme Court allowed the action.

 

NeuroVive Pharmaceutical AB v. CicloMulsion AG, Supreme Court of Sweden, T 796-18, 30 April 2019

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

Issue of procedural irregularity and in particular the relevance of the requirement that the irregularity must have likely affected the outcome of the case. The tribunal set out its position in regard to an issue in a procedural order (PO) which it stated it would not change without the parties being given opportunity to comment. The tribunal changed its position in an award without having given the parties a possibility to comment. Whether alleged procedural irregularity regarding the changed position of the tribunal and not allowing the parties to comment.

 

Joint Stock Company Belgorkhimprom v. Koca Insaat Sanayi Ihracat Anonim Sirketi, Supreme Court of Sweden, T 5437-17, 20 March 2019

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

Belgor’s request to set an award aside was denied in its entirety. Claims to set aside the final award. General Swedish principles of contract law  interpretation apply to arbitration agreements. Tribunal best placed to determine its jurisdiction and evaluate evidence which is the starting point for the review. Issues of scope of the arbitration agreement, alleged failure by tribunal to review disputed circumstance, right and opportunity to present one’s case and whether award not based on evidence adduced.

 

Kingdom of Spain v. Athena Investments A/S (ex Greentech Energy Systems A/S), Foresight Luxembourg Solar 1 Sarl, Foresight Luxembourg Solar 2 Sarl, GWM Renewable Energy II Srl, RM , GWB Renewable Energy SpA RM, Svea Court of Appeal of Stockholm, T 1626-19, 09 October 2020

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

The Court of Appeal received a letter from the EU Commission of its intention to submit a written observation to the Court on its own initiative as well as to present observations at the oral hearing.

 

JSC Gazprom transgaz Belarus v. Energoprojekt Oprema a.d. Beograd, Svea Court of Appeal of Stockholm, T 8181-19, 17 April 2020

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

Dismissal of new grounds for challenge raised after the expiration of the three month time limit for challenge and following which new grounds may not be invoked.

 

Städexia AB v. Oskar Berger Pension AB, Svea Court of Appeal of Stockholm, T 1151-19, 26 May 2020

John Kadelburger, Advokat John Kadelburger AB, ITA Reporter for Sweden

Jurisdiction of arbitral tribunal. Scope of arbitration clause in share purchase agreement (SAP) and issue of extension to claims under separate (loan) agreement between same parties specifically providing for court proceedings. Interpretation of arbitration agreement. Procedural irregularity for failure to consider motion for dismissal invoked by a party in the event of a certain conclusion of invalidity of an agreement. Time limit for challenge and invoking new grounds. Importance of party’s failure to object in the challenge proceedings.

 

Lifestyle Equities CV & Anor v Hornby Street (MCR) Ltd & Ors [2022] EWCA Civ 51, Court of Appeal of England and Wales, Civil Division, Case No. CA-2021-000460 (formerly A3/2021/0355), 28 January 2022

Nicholas Fletcher, 4 New Square, ITA Reporter for England & Wales

The question of who is a party to an arbitration agreement is a substantive question which depends upon the concept of contractual consensus. Under English conflicts of laws principles, it is to be determined in accordance with the governing law of the putative agreement. As a matter of English law, absent some provision for accession in an agreement, a person can only become a party to an existing arbitration agreement with the consent of all of the other parties – either by novation of the making of a new agreement.

There is a distinction between the law governing an arbitration clause and the law governing the substantive dispute. The choice of law applicable to the arbitration agreement is relevant to the question who decides the substantive dispute. The law applicable to the substantive dispute applies to the resolution of that dispute. As a general proposition, the law governing the validity of the arbitration agreement also governs the question who becomes a party to it. The same principle must apply to the question of who is bound by the arbitration clause. The applicable law for determining whether a party was bound by an arbitration agreement was not restricted to the law chosen by the parties to govern their agreement. In the present case, the parties had chosen California law to govern their contract, including the arbitration clause. That law is therefore the starting point.

 

Industrial Steel Construction, Inc. v. Lunda Construction Company, United States Court of Appeals, Eighth Circuit, No. 0:21-cv-2242, 13 May 2022

Julian Ranetunge, King & Spalding LLP, ITA Reporter for the United States

Defendant Lunda Construction Company (“Lunda”), as the general contractor for a bridge construction project, engaged Plaintiff Industrial Steel Construction, Inc. (“ISC”) to fabricate structural steel for the bridge.  In their contract, they agreed to submit any disputes to arbitration under the AAA Construction Industry Rules, and stipulated that those Rules would “govern all procedural matters not specified” in the contract.  In the contract itself, they also agreed that ISC “shall be liable for incidental and consequential damages (including attorneys fees and liquidated damages) resulting from delays,” i.e., they struck out the words permitting the recovery of attorneys’ fees from ISC.

A dispute arose, which was referred to arbitration.  The arbitrator issued a final award that ordered ISC to pay Lunda’s attorney’s fees.  After Lunda sought to confirm the award, ISC moved to vacate it on the basis that the arbitrator did not have authority to award Lunda attorney’s fees and expert costs.  The district court agreed, finding that the parties’ agreement addressed the availability of attorneys’ fees when they struck out the relevant wording permitting the recovery of those fees, and so there was no basis for “gap filling” by the AAA Rules.

On appeal, the Eighth Circuit stated that for a court to vacate an award under Section 10(a)(4) of the Federal Arbitration Act, the arbitrator would have to have clearly disregarded the terms of the contract, rather than erred in his application of it.  Here, the arbitrator at least arguably construed the agreement not to address Lunda’s fees; determined liability for fees to be a “procedural matter not specified” in the agreement; and then applied the AAA Construction Industry Rules to fill in the gap, as provided by the contract.  As there was a basis to infer that the arbitrator had reached his decision on attorney and expert fees by construing the agreement, the Court was bound to affirm the final award.

 

Cheim and Read LLC et al. v. Faurschou Project ApS, United States District Court, Southern District of New York, 21-CV-6540 (RA), 18 May 2022

Renzo Seminario Cordova, King & Spalding LLP, ITA Reporter for the United States

The United States District Court for the Southern District of New York confirmed current case law establishing that the burden of proof necessary to avoid confirmation of an arbitration award is very high and the award should be enforced as long as there is a barely colorable justification for the outcome reached. The standard is met when the parties are given a full and fair opportunity to present arguments and defenses and the arbitral award thoroughly details the factual and legal findings.

An unanswered petition to confirm an arbitration award is treated as an unopposed motion for summary judgment.

 

AlixPartners, LLP v. Fund for Protection of Investors’ Rights in Foreign States, Supreme Court of the United States, No. 21-401 and No. 21-518, 13 June 2022

Charles B. Rosenberg, King & Spalding LLP, ITA Reporter for the United States

On June 13, 2022, in a unanimous opinion delivered by Justice Amy Coney Barrett, the U.S. Supreme Court ruled that 28 U.S.C § 1782(a) (Section 1782) does not extend to proceedings before “private adjudicatory bodies.”  Section 1782 authorizes U.S. district courts to order discovery “for use in a proceeding in a foreign or international tribunal.”  The Court held that Section 1782 applies only to “governmental or intergovernmental” adjudicatory bodies and private adjudicatory bodies like private commercial arbitral tribunals and certain ad hoc investor-state arbitration panels do not qualify as “foreign or international” tribunals under Section 1782.

Previously, the only U.S. Supreme Court decision interpreting Section 1782 was Intel v. Advanced Micro Devices, which found that the statute conferred broad discretion to U.S. district courts and provided a list of factors to consider when determining whether to grant Section 1782 requests.  The opinion included dicta indicting that Section 1782 may include arbitral tribunals. However, since then, a Circuit split has developed, with the Second, Fifth, and Seventh Circuits holding that Section 1782 may not be used for discovery in aid of foreign private arbitrations and the Fourth and Sixth Circuits finding the opposite.  In 2021, the Court granted certiorari in two consolidated cases (ZF Automotive v. Luxshare and AlixPartners v. Fund for Protection of Investors’ Rights in Foreign States) to resolve the split.

 

William Attix v. Carrington Mortgage Services LLC, United States Court of Appeals, Eleventh Circuit, No. 20-13575, 26 May 2022

Emma Iannini, King & Spalding LLP, ITA Reporter for the United States

Plaintiff-Appellee William Attix brought suit in federal district court against mortgage servicer Carrington Mortgage Services LLC in May 2020 under the Fair Debt Collection Practices Act (FDCPA) and Florida law. Attix’s claims related to a mortgage payment he had made to Carrington using an automated pay-by-phone service operated by Speedpay, a third-party provider.

Before making his payment to Carrington, Attix had agreed to be bound by Speedpay’s terms of service; those terms of service—to which Attix, Speedpay, and Carrington were all parties—provided that “any dispute arising from” Attix’s use of Speedpay’s service “shall be” arbitrated by a sole arbitrator appointed under the American Arbitration Association (AAA) Rules. Speedpay’s terms of service also stated that the “arbitrator shall also decide what is subject to arbitration unless prohibited by law,” and that “[t]he arbitrator shall have the power to rule on his or her own jurisdiction.”

Faced with Attix’s suit in the district court, Carrington moved to compel arbitration pursuant to Speedpay’s terms of service. dispute must be arbitrated according to the conditions to which Attix had agreed. Carrington argued that, by agreeing that the AAA arbitrator would decide “what is subject to arbitration” and would “rule on his or her own jurisdiction,” Attix and Carrington had consented to allow the arbitrator to decide whether Attix’s claims under Speedpay’s terms of service were arbitrable. Attix conceded that he had agreed to the arbitration clause included in Speedpay’s terms of service and that the claims he brought against Carrington were covered by those terms of service; however, he countered that a provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act prohibited enforcement of the parties’ arbitration agreement.

The district court denied Carrington’s motion to compel arbitration, accepting Attix’s assertion that the Dodd-Frank Act prohibited the court from ordering the parties to commence AAA arbitration. On appeal, the 11th Circuit overturned the district court’s holding, ruling that Attix and Carrington “clearly and unmistakably agreed that an arbitrator would decide all threshold claims about [] arbitrability, including whether the[] arbitration agreement is enforceable [despite the existence of allegedly contrary provisions in the Dodd-Frank Act].” Thus, explained the 11th Circuit, the “arbitrability dispute” between Attix and Carrington— i.e., whether the Dodd-Frank Act prohibited enforcement of the arbitration agreement—was solely for the AAA arbitrator to decide. The 11th Circuit reversed and remanded the case to the district court with instructions to compel arbitration and stay the district court proceedings.

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Arbitration Framework in Andorra: A Recent Law and a New Arbitration Institution

Thu, 2022-08-11 01:34

The history of arbitration in the Principality of Andorra began with two arbitration procedures in the years 1278 and 1288 which led to the signing, between the Bishop of Urgell and the Earl of Foix, of the Paréages which created the Principality. Despite this historical background and the fact that arbitration has been conducted in Andorra on an ad hoc basis ever since, it was only recently – on 18 December 2014 – that the Arbitration Law 47/2014 (the “Law”) was enacted, providing for state-of-the-art rules governing domestic and international arbitration.

This post provides for a succinct overview of the new Andorran legal framework on arbitration and of the recently created arbitration institution, the Arbitral Tribunal of the Principality of Andorra (the “ATPA”).

 

Features of the New Andorran Law on Arbitration

The Law governs all commercial arbitration proceedings conducted in the Principality of Andorra but can also be applied to supplement any provisions found in specialized types of arbitration. The Law applies to both arbitration in law and arbitration ex aequo et bono and provides for a choice between ad hoc arbitration and institutional arbitration. As is usually the case around the world, the parties can choose to adopt specific rules, directly or by reference to an arbitration institution, which shall prevail over the non-imperative provisions of the Law.

Following the dualist model of the French legal system, the Law draws a distinction between domestic and international arbitration, although most rules, if not all, are common to both. Under Article 4.2, an arbitration is “international” when:

  • At the time of conclusion of the arbitration agreement, the parties have their domiciles in different states;
  • The seat of arbitration is located outside the state of the parties’ domiciles;
  • The place of “fulfillment of a substantial part” of the obligations is located outside the State of the parties’ domiciles;
  • The legal relationship from which the dispute arises affect the interests of international trade;
  • The parties have expressly agreed that the subject matter of the arbitration agreement is related to more than one.

The legislators have decided not to lay down a comprehensive list of which matters can be referred to arbitration and have instead chosen to use a general formula which provides that can be submitted to arbitration any matters within the capacity of the parties to freely dispose of. However, according to Article 3.2, the Law does not apply to special types of arbitration such as employment and consumer arbitration, which are governed by specific legal provisions.

Among the provisions applicable to both domestic and international arbitrations, the following are worth mentioning, as being a little unusual:

  • appointment of arbitrator by the Andorran court (Batllia), if and when required, by draw from a list of three names (Articles 17 and 18);
  • specific powers granted to the Batllia for the recognition and enforcement of arbitral tribunal interim measures (Articles 36 to 38);
  • right to submit documentation in Spanish, French or English without translation (Article 43.2);
  • possibility for the Andorran court (Tribunal Superior), upon a request for annulment, to invite the arbitral tribunal to resume the proceedings and seek to remove the ground for annulment (Article 56.4).

Concerning international arbitration, defined under Article 4.2 following a classic mixed and comprehensive criterion, grounds for annulment of awards made in Andorra and for refusal to recognize and enforce awards made abroad (Articles 70 to 73) are very much in line with those found in the 1958 New York Convention. Also, it is worth noting that, pursuant to Article 67, if the parties wish the arbitration to be confidential, they must provide so expressly.

Finally, to promote the use of arbitration in Andorra, Article 15 of the Law provides for the creation of an institution that will encourage the use of arbitration, as an out-of-court alternative dispute resolution method and administer both domestic and international arbitration in the Principality.

 

Creation of the Arbitral Tribunal of the Principality of Andorra

In accordance with the Arbitration Law, the Arbitral Tribunal of the Principality of Andorra was created by the Law No. 13/2018, adopted on 31 May 2018. Completely independent from the public authority, this unique institution whose founding members are the Andorra Chamber of Commerce, Industry and Services and the Andorra Bar Association administers the arbitration cases entrusted to it.  These entities are responsible for the composition and functioning of the institution’s governing bodies. Furthermore, they are responsible for drafting the Arbitration Rules that will apply to the proceedings administered by the ATPA and for laying down its financial and accounting rules in accordance with the Law.

The ATPA’s governing bodies are the Assembly (“Ple”) and the General Secretariat.

The Assembly must be composed by at least seven members with the right to vote. Three of them are appointed by the Andorra Chamber of Commerce, Industry and Services and three by the Andorra Bar Association. The six members of the Assembly must appoint a seventh member, to act as President.

The General Secretary monitors the arbitration proceedings entrusted to the ATPA. Appointed by the Assembly, he attends and acts as the secretary of the Assembly´s meetings, without voting rights. Furthermore, the General Secretary is responsible for the ATPA’s financial accounts and for the control and safekeeping of its financial resources.

The Law No 13/2018 ends with a chapter devoted to the financial and accounting rules and provides that the ATPA’s By-laws must address its financial regime.

The By-laws, found in Annex I of the ATPA’s Arbitration Rules, recall in their first chapter the institution’s legal nature, highlighting that it is subject to private law, benefits from legal personality and financial autonomy, and has full power to own and dispose of assets in pursuance of its aims.

The By-laws provide for a specific body, the Arbitral Board, to assist the Assembly and the General Secretary. This body is composed of five members: one appointed by each of the ATPA’s founding members; one member appointed by the Assembly who must have a renowned experience in arbitration matters and is independent of the founding members; the President and the General Secretary. The Arbitral Board has exclusive competence to administer the arbitration cases and, by delegation from the Assembly, to appoint or confirm the arbitrators as provided for in the Arbitration Rules.

In addition to provisions relating to the running of the ATPA by the Assembly or ad hoc committees, the By-laws provide an express clause precluding ATPA members to be involved, either as arbitrator or counsel to one of the parties, in any cases administered by the ATPA, unless expressly agreed by the parties and if it is not considered improper by the Arbitral Board, in view of the circumstances of the case.

The By-Laws end with provisions relating to the appointment and requirements for being a member of ATPA and dealing with the independence and lack of conflict of interest of arbitrator. These provisions ensure that the ATPA operates in total neutrality as an institution and as an administrative body in the monitoring the arbitration proceedings entrusted to it.

 

The ATPA Arbitration Rules

The ATPA Arbitration Rules have been adopted by the Assembly and are in force since January 2021. Short and modern with only 27 provisions, they regulate the entire arbitral process.

The first title deals with the application of the Rules, notifications of disputes, and the calculation of time periods. The second title covers the start of the proceedings, i.e. the request for arbitration and the answer thereto, the effect of arbitration agreements, and third-party involvement in arbitration procedures. Article 6 makes it possible, at the Arbitral Board’s discretion, to consolidate proceedings conducted at the ATPA, even if they do not involve the same parties, and to have third parties joined in the proceedings.

Title four deals with the rules applicable to the procedure and to the merits, to the terms of reference, new claims, issues of proof, conservatory measures and the conduct of hearings. Article 10.4 entitles the arbitral tribunal to convene a meeting, after the first exchange of submission on the merits, to address issues which it considers in need of clarification.

The language provision found in Article 12 is another attractive characteristic of the Rules, as it allows the parties to submit documents or evidence in the four most spoken languages in the Principality – Catalan, French, Spanish and English – without having to provide a translation, unless otherwise decided by the arbitral tribunal or the parties. This results in time and money savings for the parties.

The fifth title lays down the form and effects of the award as well at the time limit for its issue which is 6 months as from the date of the signing of the terms of reference unless extension is granted by the Arbitral Board. A draft award must be submitted by the arbitral tribunal to the Arbitral Board which can require modification as to the form, not substance, but can also make any observations it deems necessary for the award’s effectiveness. It is worth mentioning that the late issue of an award will not affect its validity but that the arbitrators may be held liable for the delay.

Then, the parties have 30 days from the date of receipt of the award to ask the arbitral tribunal to correct or clarify one or more specific points of the award, to complete the award in respect of claims which have not been dealt with, or to rectify any ultra petita finding of the award. Finally, the last two titles lay down the rules on the costs of the arbitration and the waiver of the right to challenge the award.

As the ATPA was inaugurated, on September 30, 2021, and arbitration clauses referring to it have found their way in contracts recently, it should not be long before cases are brought before this new arbitration institution.

In conclusion, it can be said with confidence that with its modern arbitration law and arbitration rules, the Principality of Andorra, a country of multicultural and neutral background, offers an appropriate seat for arbitral tribunals and an appropriate institution, the ATPA, for the Andorran and international business community to resolve its disputes.

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GSI v. Canada: Old Problems and New Take-Aways concerning Counsel Conflicts

Wed, 2022-08-10 01:35

Not so long ago, as a lawyer you started your career at the same firm from which you would later retire. Today, the opposite is true. Ambitious young lawyers and sometimes even entire practice groups move to new firms. Counsel switch between in-house and law firm positions, between public and private employers, and occasionally between firms and third-party funders (TPFs).

By now, we are all accustomed to arbitrator challenges based on these kinds of interconnections. But the increased mobility and connectivity among counsel is leading to a new breed of potential conflicts of interest—those between counsel and parties in international arbitration. Like arbitrator conflicts, counsel conflicts can directly hinder the integrity of the arbitral proceedings. However, unlike arbitrator conflicts, challenges based on alleged counsel conflicts of interest have not received the attention they deserve, even if they can be equally disruptive.

As alleged counsel conflicts become more frequent and more complex, tribunals must engage with these issues more substantively and more formally. There are, however, several fundamental questions with no clear answer. Are tribunals being asked to decide a procedural issue or one of professional ethics? Which rules or standards apply, or do multiple sources apply to the same conduct? What remedies are within the tribunal’s competence? All three of these issues are addressed in the recent decision issued in GSI v. Canada, an investment arbitration under UNCITRAL Rules and administered by ICSID. The case also raises interesting new questions about whether conflicts can exist as between third party funders (TPFs) and counsel, and how parties should manage allegations of conflicts, even as they contest them.

 

The Case and the Challenge

After filing their claim, but before the tribunal was constituted, GSI (Claimant) wrote to the Canadian Government (Respondent) alleging that an individual member of Respondent’s legal team (Counsel) had a conflict of interest with the Claimant. The allegation was that, during her prior employment with the Claimant’s TPF, Counsel obtained confidential information relevant to the arbitration. Based on (disputed) details about Counsel’s access, Claimant argued that Counsel had a conflict of interest that created a serious risk of prejudice to Claimant. In light of this risk, Claimant argued, the tribunal should disqualify Counsel and another member of the Respondent’s team with whom Counsel allegedly shared the confidential information.

Respondent refuted Claimant’s arguments that Counsel had received confidential information. Respondent also argued that, while employed by the TPF, Counsel was not acting as a lawyer and did not have an attorney-client relationship with Claimant. Consequently, according to Respondent, Counsel did not have any duty of loyalty to Claimant and could not have a conflict of interest with Claimant. Despite these arguments, upon notice of Claimant’s concerns, Respondent voluntarily cordoned Counsel off from the case with a so-called ethics wall until the disqualification issue could be formally resolved.

After this exchange, but still before the tribunal had been constituted, Claimants petitioned the Federal Court of Canada to provide relief by disqualifying Counsel. As discussed in a previous blog, the Court rejected the petition on both of the arguments raised.

First, the Court determined that the composition of the Trade Law Bureau’s (TLB) legal team was not a public issue and, as such, was not amenable to judicial review under the Federal Courts Act.

Second, the Court declined to intervene in an ongoing arbitration because Claimants had not demonstrated the arbitral tribunal’s lack of jurisdiction to deal with the conflict of interests issue. In the Court’s view, the tribunal was “the proper forum to deal with the issue.”

Claimant’s subsequent appeal was stayed pending the decision of the arbitral tribunal, before which Claimant had raised the challenge in the meantime.

 

The Tribunal’s Decision

Ultimately, the tribunal disqualified the Counsel. In reaching this decision, the tribunal first sought to distinguish between “(1) regulating the conduct of counsel in terms of their professional duties and applicable ethical rules or (2) ensuring the integrity of the arbitration process itself, including fundamental principles of fairness, natural justice and equality as between the parties.” (para. 91)

In the tribunal’s view, any request falling under the former category of issues would be beyond its powers. However, the tribunal interpreted GSI’s request, as falling within the second category—a request addressed to the tribunal’s obligation to maintain integrity of the proceedings and ensure fundamental fairness.

Having framed the key issues as ones of procedural fairness and integrity, the tribunal then looked to international investment jurisprudence and scholarship, as well as the provisions of NAFTA (the applicable treaty) and the UNCITRAL Rules, to determine that it had jurisdiction to decide the request for disqualification.  Both NAFTA and the UNCITRAL Rules grant arbitral tribunals broad discretion to conduct the proceedings in a manner that will ensure the equal treatment of both parties and their right to fully present their case. In declining to exercise its jurisdiction, the Federal Court of Canada also affirmed that arbitral tribunals have “wide latitude” in conducting the proceedings, without regard to national law.

The tribunal also looked to various cases cited by the parties, most notably Fraport, Khudyan, Hrvatska and Rompetrol. In all four of these cases, one party requested the removal of counsel representing the opposing party. In Hrvatska and Rompetrol, the alleged counsel conflicts related to members of the arbitral tribunal and not the broader notions of procedural fairness. The GSI tribunal took note of the distinction and primarily relied on Fraport due to the similar nature of the challenge and factual background. The tribunal did not consider itself bound by prior investment awards, but nevertheless applied them as a matter of due process (as both parties relied on the same cases in their submissions) and jurisprudence constante.

Emphasizing that disputing parties have a fundamental right to be represented by counsel of their choice, the tribunal reasoned that Fraport and Khudyan established a high standard for the removal of counsel in international arbitration. Under this standard, mere speculations do not suffice and there must be a real risk of prejudice to justify the removal of counsel.

In light of these standards the tribunal formulated the test warranting disqualification only if:

[T]here is clear evidence of a material risk that [the Counsel] and [the team member] have received confidential information from Claimants about the dispute that could be of significance in the present proceedings such that there would be prejudice to the fair disposition of the dispute in this arbitration if Respondent were allowed to continue being represented by them. (para. 143)

This test requires a tribunal to balance the risk posed by the presence of the allegedly conflicted attorney against the likelihood of prejudice to the other party. Applying this standard, the tribunal ultimately removed Counsel (but not her colleague with whom she may have allegedly shared confidential information).

The tribunal’s decision rested on a finding that a real risk existed that Counsel had been exposed to confidential information and that exposure could be prejudicial to Claimant. The tribunal also expressed concern about the risk that “latent memories” may be triggered by future events, making further information available to the Respondent’s team. The tribunal found no similar risk for Counsel’s colleague and dismissed the challenge against him.

 

Take-Aways from the Decision

Arbitral tribunals will continue to face challenges to counsel based on alleged conflicts of interest, and courts will also be called on to weigh in, either on an interim basis or as part of award review. Just recently, a US appellate court was presented with a public policy challenge to a Peruvian award based on allegations of attorney side-switching (Tecnicas Reunidas De Talara S.A.C. v. Ssk Ingenieria y Construccion S.A.C.)

Despite the increasingly obvious need for clearer guidance about applicable standards, tribunal competences, and the inter-relationship between national rules and international standards, little has been done to formally address these issues. Not even the IBA Guidelines on Party Representation in International Arbitration address the issue. As the complexity of these issues cannot be fully resolved in a blog post, we instead provide comments on some wholly original issues raised in GSI.

First, GSI appears to be the first case to identify the potential for counsel conflicts of interest with a TPF or a person employed by a TPF. Canada sought to side-step the issue by arguing Counsel was not serving as a lawyer while at the TPF and, as such, did not owe any duty of loyalty that would be the basis for a conflict once she joined the TLB.

Not so long ago, some TPFs raised a similar argument that they could not have conflicts of interest with arbitrators because funders were simply providing financing for the case. That argument has been summarily rejected as States, institutional rules, arbitral tribunals, and the IBA Guidelines on Conflicts of Interest have established clearer guidance for when a TPF’s participation must be disclosed and when that participation may give rise to a potential conflict. Similar clarifications will be needed with respect to counsel and TPFs.

Second, the Canadian court confirmed that arbitral tribunals are “the proper forum to deal with the issue” (para. 62, emphasis in the original) and characterizing any judicial disqualification is an  unnecessary interference.

This Canadian decision adds weight to one side of conflicting cases that considered whether arbitrators have the power to disqualify counsel. For example, in Malik v. Ruttenberg, the court reasoned that attorney disqualification “falls directly within the adjudicative functions of the arbitrator.” Meanwhile, in Wurttembergisch Fire Ins. Co. v. Republic Ins. Co., the court concluded any disqualification decision by a judge “would have only advisory effect upon the arbitrators” and interfere with the arbitrators’ ability “to control their internal procedures.”

A third take-away relates to Canada’s voluntary establishment of an ethics wall, even as it contested the existence of any conflict. An ethics wall is a series of protocols within an organization, designed to create a barrier to the exchange of information between a potentially conflicted individual and others in the organization. An ethics wall is more than just an informal agreement to avoid discussing a particular case or certain topics; rather, it is a precise set of formally acknowledged procedures to prophylactically cordon off the flow of information that otherwise naturally occurs among colleagues. This can be a difficult process, especially if a change in employment that may give rise to a conflict is contemplated but is still confidential.

TLB’s willingness to respond quickly and effectively to GSI’s challenge, despite its obvious disagreement, undoubtedly aided the tribunal in deciding that Counsel’s colleague had not received any confidential information. Indeed, it was the lack of this responsiveness in Hrvatska that influenced the tribunal’s decision to disqualify. The tribunal in that case had specifically noted that the party’s late revelation of and “subsequent insistent refusal to disclose the scope of [the allegedly conflicted lawyer’s] involvement” were “errors of judgment” that “created an atmosphere of apprehension and mistrust which it is important to dispel” (para. 31).

The GSI case demonstrates that even with uncomfortable and disputed allegations of counsel conflicts of interest, parties can minimize the harm by adopting a common sense approach as they seek formal resolution. Those solutions, however, should not be left entirely to the discretion of the person who is allegedly conflicted or later to a tribunal or court to sort out. As the 10th anniversary of the 2013 IBA Guidelines of Party Representation in International Arbitration approaches, perhaps it is time to consider formally clarifying these issues.

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KluwerArbitration ITA Arbitration Report, Volume No. XX, Issue No. 8 (May 2022)

Tue, 2022-08-09 01:25

The Institute of Transnational Arbitration (ITA), in collaboration with the ITA Board of Reporters, is happy to inform you that the latest ITA Arbitration Report was published: a free email subscription service available at KluwerArbitration.com delivering timely reports on awards, cases, legislation and current developments from over 60 countries and 12 institutions. To get your free subscription to the ITA Arbitration Report, click here.

 

The ITA Board of Reporters have reported on the following court decisions.

 

Al Alameya Company S.A.E. v. Party Not Indicated, Court of Cassation of Egypt, Case No. 13892 of JY 81, 22 February 2022

Noha Khaled Abdel Rahim & Mohamed S. Abdel Wahab, Zulficar & Partners, ITA Reporters for Egypt

The Commercial and Economic Circuit of the Court of Cassation rejected a challenge made against the Cairo Court of Appeal judgment, which rejected a nullity action brought against a CRCICA arbitral award. In its decision, the Court of Cassation explicitly referred for the first time to the IBA Guidelines on Conflicts of Interest in International Arbitration (2014) and quoted Clause 3.3.5 of the Orange list, to serve as guidance in determining the duty of disclosure and its impact on the independence and impartiality of an arbitrator. Furthermore, the Court reaffirmed well-established principles in international arbitration and beyond, which include the arbitrators’ duty of independence and impartiality, the capacity to conclude arbitration agreements, the prohibition of de novo review of the merits by nullity courts, and the award of interest with respect to Egyptian public policy and the principles of Islamic Shari’a.

 

Parties Not Indicated, Court of Appeal of Cairo, Case No. 43 of JY 138, 26 April 2022

Noha Khaled Abdel Rahim & Mohamed S. Abdel Wahab, Zulficar & Partners, ITA Reporters for Egypt

The 4th Commercial Circuit of the Cairo Court of Appeal has rejected a nullity action filed against an arbitral award. On this occasion, the Court has recognised WhatsApp as a valid means of communication in arbitral proceedings, so long that the fundamental principles of arbitration are guaranteed, such as confidentiality, due process, fair and equitable treatment of parties and the right of defence, etc. The arbitral tribunal informed the parties that it extended the time limit for issuing the final award because two members of the arbitral tribunal caught COVID-19 pandemic. The Court of Appeal has considered the illness of the two arbitrators as a force majeure event that automatically interrupts the period of the arbitration proceedings. Furthermore, the Court has also referred to the wide spread of virtual hearings in international arbitration and the increase in use of new means of communication to facilitate the conduct of arbitral proceedings and to minimise the costs. The Court also referred to the principle of estoppel stating that the plaintiff cannot object before the Court of Appeal on a procedural issue that took place during the arbitration proceedings, which the plaintiff accepted back at the time without objecting.

 

BGH – I ZB 13/21 (“Schiedsfähigkeit IV”), Federal Court of Justice of Germany, I ZB 13/21, 23 September 2021

Patrick Gerardy & Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

The minimum requirements for the validity of arbitration clauses covering disputes over defects in shareholders’ resolutions, which the German Federal Court of Justice (“BGH”) developed for limited liability companies (GmbH), also apply to partnerships if the articles of partnership provide that such disputes shall not be litigated among the partners but with the partnership.  In case of doubt, an arbitration clause that covers “all” disputes arising from the partnership relationship indicates the partners’ intention not to completely abandon the clause in the event of its partial invalidity, but to maintain its validity to the extent legally permissible.

 

BGH – I ZB 16/21, Federal Court of Justice of Germany, I ZB 16/21, 17 November 2021

Patrick Gerardy & Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

A provision in an intra-EU bilateral investment treaty (“intra-EU BIT”) that offers an investor to settle investment disputes through arbitration generally violates EU law and is invalid, with the effect that there is no arbitration agreement.  Accordingly, a German court not only will set aside, or refuse enforcement of, an arbitral award based on an intra-EU BIT arbitration clause, but also, when seized of a related jurisdictional dispute, declare arbitration proceedings inadmissible.  An exception to the invalidity of such an intra-EU BIT clause may apply where the (strict) requirements developed in the Achmea, PL Holdings, and Komstroy judgments by the Court of Justice of the European Union (the “CJEU”) are met.

 

BayObLG – 101 Sch 60/21, Highest Regional Court of Bavaria, 101 Sch 60/21, 18 January 2022

Patrick Gerardy & Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

Neither the mere possibility of future set-aside proceedings against the arbitral award at the seat of arbitration, nor a set-aside proceeding already pending – in this case pursuant to Sec. 68 of the English Arbitration Act 1996 before the High Court of Justice  – establish grounds for refusal of enforcement under Art. V(1)(e) of the New York Convention (“NYC”).  Rather, in a proceeding to declare a foreign award enforceable in Germany, the court may exercise its discretion pursuant to Art. VI of the NYC and declare the award enforceable despite set-aside proceedings pending at the seat of the arbitration.

 

OLG Frankfurt am Main – 26 Sch 12/20, Higher Regional Court of Düsseldorf, 26 Sch 12/20, 21 April 2021

Patrick Gerardy & Harry Nettlau, Cleary Gottlieb Steen & Hamilton LLP, ITA Reporters for Germany

Applications before German courts to set aside or declare enforceable an arbitral award under Sec. 1059–1061 of the Code of Civil Procedure (Zivilprozessordnung, or “ZPO”) do not fall within the jurisdiction of specialized cartel senates, even if the invoked grounds for setting aside or refusing enforceability are grounded in antitrust law.  Rather, senates for arbitration matters remain competent.

The fact that mandatory provisions of antitrust law form part of public policy justifies neither an unlimited review of the arbitral award for conformity with antitrust law nor a summary or “plausibility” review in this regard.  Rather, a state court deciding on a public policy objection against an award may review only whether the award disregards fundamental notions of the legislator, as enshrined in the applicable antitrust law provisions (“minimalist approach”).

 

UAB Corolla Ventures v. Panevėžio statybos trestas, Supreme Court of Lithuania, 3K-3-228-823/2021, 15 September 2021

Denis Parchajev, Motieka & Audzevičius, ITA Reporter for Lithuania

In September 2021, the Supreme Court of Lithuania annulled the ruling of the Court of Appeal of Lithuania and ruled that a pathological arbitration clause, which refers a dispute to an arbitral institution that has been dissolved, is inoperable or incapable of being performed, and the parties‘ dispute must be brought before Lithuanian courts. This marks a departure from the previous liberal interpretation inspired, among others, by the likes of the Lucky Goldstar case.

 

Republic of Lithuania v. Veolia Energie International S.A. et al., Supreme Court of Lithuania, e3K-3-121-916/2022, 18 January 2022

Denis Parchajev, Motieka & Audzevičius, ITA Reporter for Lithuania

In January 2022, the Supreme Court of Lithuania ruled that the Ruling of the Court of Appeal of Lithuania shall remain unchanged, thus establishing that a perfected ICSID arbitration clause set out in the France-Lithuania BIT became invalid based on the CJEU Achmea judgment.

 

Kaunas Free Economic Zone and Management JSC, Knightsbridge Property Management Limited and Antwerpse Ontwikkelings- en Investeringsmaatschappij v. Channel Hotels and Properties Limited, Supreme Court of Lithuania, e3K-3-68-611/2021, 07 April 2021

Denis Parchajev, Motieka & Audzevičius, ITA Reporter for Lithuania

In April 2021, the Supreme Court of Lithuania reversed the ruling of the Court of Appeal of Lithuania and ruled that the avoidance of parallel arbitration and count proceedings constitutes part of international public policy, as the former undermines the principles of civil process and leads to conflicting and incompatible decisions.

 

Clube v. SAD, Court of Appeal of Lisbon, 22927/20.3T8LSB-B.L1-2, 27 January 2022

Iñaki Carrera, PLMJ Advogados & José Miguel Júdice, Independent Arbitrator, ITA Reporters for Portugal

The Lisbon Court of Appeal issued a decision that bluntly confirms the powers of the state court to assist the Arbitral Tribunal to order the party in breach of the obligation to produce evidence to submit such elements. This decision confirms the favourable arbitration trend of the Portuguese state courts and opens a relevant avenue to reinforce the conditions for compliance with the Arbitral Tribunal’s orders.

 

Advanced Aerofoil Technologies, AG. & Ors v. Todaro & Ors, United States District Court, Southern District of New York, 13 Civ 7181 (RWS), 15 April 2014

Inigo Kwan-Parsons

New York’s Southern District Court has affirmed its pro-arbitration stance in refusing to set aside an arbitral award which dismissed claims as to fraudulent representations regarding a termination agreement which had sought to settle ‘any and all claims, liabilities and obligations, both known and unknown’ between the parties, and applying principles enunciated by the New York Court of Appeals in Centro Empresarial Cempresa SA v. America Movil SAB, 17 NY 3rd 269 (2011).

 

Superior Energy Services Colombia S.A.S. & Superior Energy Services Inc. v, Premium Petroleum Services Corp., United States District Court, Southern District of New York, 18-CV-7704 (ALC), 08 July 2019

Inigo Kwan-Parsons

After receiving a favourable arbitral award, Superior Energy Services Colombia S.A.S. and Superior Energy Services Inc. (collectively, Superior), petitioned before the Southern District Court of New York, to enforce the arbitral award, which was opposed by the unsuccessful party to the arbitration, Premium Petroleum Services Corp. (Premium), who filed a petition seeking to vacate the arbitral award. In upholding the award, the Court reaffirmed its jurisdiction’s reluctance, and high threshold, to interfere with an arbitral award.

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Admissibility of Third-Party Funding in Arbitration Proceedings in Serbia: A Search for a Definitive Answer

Mon, 2022-08-08 01:30

Third-party funding is not directly addressed in Serbian legislation. Consequently, there is widespread debate as to whether third-party funding is allowed under Serbian law.

This post analyses whether third-party funding of arbitration costs and associated legal fees is admissible in Serbia. It further addresses the conditions that have to be met in order for such third-party funding arrangements to be carried out in accordance with Serbian law.

To this end, the post focusses on the following aspects of the topic: (i) whether the relevant domestic sources of law prohibit third-party funding contracts, (ii) the nature of the contractual relationship between the funder and the party’s counsel; and (iii) the relationship between the funder and the arbitration process.

Do the Relevant Sources of Law in Serbia Allow for Third-Party Funding Arrangements?

UNCITRAL defines third-party funding as:

“an agreement by an entity (the “third-party funder”) that is not a party to a dispute to provide funds or other material support to a disputing party (usually the claimant or a law firm representing the claimant), in return for a remuneration, which is dependent on the outcome of the dispute”.

Third-party funding may cover part or all of the costs associated with an arbitration proceeding, such as the cost of proceedings and legal fees.

As noted above, Serbian law does not directly address the permissibility of contractual arrangements being concluded by parties to arbitration proceedings to secure third-party funding arrangements in support of those proceedings.

In accordance with Art. 10 of the Law of Contract and Torts (“ZOO”), contracting parties may regulate their contractual relationship as they wish within the limits of mandatory rules, public policy, and good faith. As such, there are general conditions that contracts must comply with in order to be valid under Serbian law.

Art. 10 of the ZOO should be interpreted together with the relevant case-law of the Supreme Court of Cassation, especially for present purposes Decision No. 223/2010(2) dated 04 March 2010. In this decision, the Court concluded that uniform rules represent codified customs, meaning that the parties can incorporate them into their contract via Art. 10 of the ZOO.

Templates and good practices concerning third-party funding are being increasingly standardized by stakeholders, including by bodies such as UNCITRAL. However, it is questionable whether the current standardization efforts in this area would constitute “codified customs” in the sense understood by this decision of the Supreme Court of Cassation.

Nevertheless, even if they do not amount to “codified customs”, such standards may become relevant under Art. 10 of the ZOO via its references to public order and good faith. These represent subjective criteria that are prone to constant change, and which may negatively impact the validity of unnamed contracts (those not listed in or regulated by the relevant legislation), insofar as such contracts must be in line with the relevant mandatory rules at the time of their signing.

Therefore, one must analyze the relevant mandatory rules concerning legal fees and costs of arbitration proceedings through the lens of the contractual relationships between, on the one hand, the funder and the party’s counsel and, on the other, the relationship between the funder and the arbitration process.

The Contractual Relationship Between the Funder and the Counsel of the Litigant

Art. 30.2 of the Ethical Code for Lawyers allows the counsel of the client to seek and receive payments for their fees and costs or arrange acceptance of payments by contractual means from a third-party funder, but only if the client approves of this and provided also that the client is represented by counsel in the proceedings. Art. 30.2 in its current form would allow a funder to pay the legal fees of the parties’ counsel under the condition that the counsel receives confirmation from their client to do so.

In addition to the question of admissibility of such a payment, there is also the lingering question of the disclosure of attorney-privileged information. More precisely, is the counsel allowed to disclose attorney-privileged information in the event that the funder asks for case-sensitive information prior to or at the moment of signing the third-party funding agreement?

The Ethical Code for Lawyers possibly provides guidance on this matter. It stipulates that counsel may disclose attorney-privileged information if the client provides an unequivocal confirmation to this end through a power of attorney.

Thus, a party seeking to have its arbitration funded by an external entity would be well advised to define within the relevant power of attorney the scope and the content of information that would be disclosed to the latter. For the sake of comparison, the Code of Conduct for Litigation of Funders of the Association of Litigation Funders of England and Wales dictates that, before requesting or receiving any documents from the litigant or their counsel, the funder is required to sign either a confidentiality or non-disclosure agreement with the litigant.

Relationship Between the Funder and Arbitration Process

The Serbian Arbitration Act is only applicable if the seat of arbitration is in Serbia, and it provides strict rules for costs of arbitration. Art. 18 of this Act states that arbitration costs fall on the disputing parties. Given that the question of third-party funding is not directly or indirectly addressed or even prohibited by this Act, we must direct our attention to the arbitration rules of the major arbitral institutions in Serbia. Presently, both the Rules of the Belgrade Arbitration Center and the Rules of the Permanent Arbitration Court of the Chamber of Commerce and Industry of Serbia contain no references to third-party funding. Thus, it is questionable if these arbitral institutions would even accept such funding arrangements. Theoretically, if they end up accepting them, two questions will arise.

The first question is: Does the party who has obtained external funding have the duty to disclose the third-party funding arrangement to the arbitral tribunal, and consequently, to the opposing party as well? In tackling this question, the optimal solution for Serbian arbitral institutions would be to follow the ICC Note to Parties and tribunals on the conduct of arbitration under the ICC Rules of Arbitration. The ICC approach imposes an obligation on the funded party to provide evidence of such an agreement to the ICC, and further requires that the legal document in question must be deemed satisfactory by the ICC’s bank. Moreover, the litigant must report it to the relevant regulatory authorities. By implementing this note, the Serbian arbitral institutions would ensure that all of the parties’ interests will be protected and that there would be a high level of legal certainty and transparency. The most relevant regulatory authorities for these matters in the Republic of Serbia would be the tax administration and the National Bank of Serbia.

The second question will most certainly be whether the arbitrators would be under an obligation to disclose possible conflict of interests in connection to the funder? One way for the Serbian arbitral institutions to approach this issue would be to heed the ICC Rules of Arbitration, and thus to introduce an obligation to arbitrators whereby they are obligated to determine if the disclosed third-party funding agreement presents a potential conflict of interest for them. This approach would most certainly reassure all the parties of the transparency of the disclosing procedure, and these additional steps would also ensure that the chosen arbitrator is neutral and free of conflicts of interests.

Conclusion

The relevant sources of law in Serbia at first glance may not give definitive answers as regards the admissibility of third-party funding. However, having in mind the above-mentioned definition of third-party funding agreements as well as the relevant provisions of the Ethical Code for Lawyers, these kinds of funding arrangements could theoretically be accommodated within the existing legal framework. The question of a separate third-party funding agreement that would cover the costs of arbitration proceedings solely depends on the will of the arbitral institutions in Serbia. If the said institutions were to accept such a contractual arrangement, the parties and the arbitral institution would be well advised to apply the best arbitration practices and the necessary screening tests concerning third-party funding due to them not regulating this matter in their respective rules.

To further deepen your knowledge on third-party funding, including a summary introduction, important considerations, practical guidance, suggested reading and more, please consult the Wolters Kluwer Practical Insights page, available here

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What The Functus? Setting Aside Awards for Lack of Jurisdiction in Chevron Australia Pty Ltd v CBI Constructors Pty Ltd

Fri, 2022-08-05 01:53

Winston Churchill said in 1942 that the war was not at the end, adding: “It is not even the beginning of the end. But it is, perhaps, the end of the beginning”. When it comes to international arbitration, the beginning is easy enough to discern from the notice of arbitration. Divining the end can be more difficult, especially if issues are split or the case is bifurcated.

The Supreme Court of Western Australia is grappling with a challenge to an arbitral award on grounds that the tribunal inadvertently rendered itself functus officio by a decision to bifurcate issues of liability and quantum. The case provides a cautionary tale for parties and tribunals about the need for care in formulating applications and orders for bifurcation; and lessons for reviewing courts called upon to second-guess the procedural course charted by arbitral tribunals.

Chevron Australia Pty Ltd v CBI Constructors Pty Ltd [2021] WASC 323 involved a dispute between Chevron and a joint-venture contractor engaged to perform certain work on Chevron’s Gorgon offshore gas project in northern Western Australia. In essence, the contractor was paid on a reimbursable basis, and the parties fell into dispute over the scope of the reimbursement entitlement and the sum owed.

The tribunal, comprised of Mr Phillip Greenham, the Hon Christopher Pullin QC, and Sir Robert Akenhead, made orders bifurcating liability and quantum. That seemed like a sensible idea. But the tribunal’s orders provided that “all issues of liability” would be the subject of a first hearing, followed by a second phase to address “all matters outstanding in issue between the parties including quantum and quantification issues”. The ambiguity in the orders prefigured the dilemma that later emerged: was the second phase limited strictly to quantum, or did it include quantum and any other residual issues, including residual liability issues?

The parties proceeded to exchange submissions and complete the first phase, leading to a partial award styled somewhat confusingly an “interim award”. The central liability issue in the first phase was, in simplified terms, whether the contractor was entitled to reimbursement on the basis of rates (the contractor’s position) or actual costs (Chevron’s position). The tribunal found broadly in Chevron’s favour.

The matter then proceeded to the second phase. Here the problem with the bifurcation orders reared its head. The contractor sought to raise an issue about the meaning and scope of “actual costs” under the terms of the contract. Chevron objected on the basis that this was a liability issue that should have been addressed in the first phase. Chevron asserted that the tribunal was therefore estopped or alternatively functus officio on the issue.

The debate spilled over to the tribunal. The tribunal had to ask itself: what did we do when we bifurcated liability and quantum? The tribunal rendered a second partial award, again styled an interim award. But the tribunal was split 2:1. The majority held that the tribunal was only ever concerned with liability in the sense of the binary choice between rates and actual costs: the tribunal was not charting the metes and bounds of “actual costs”, and the contractor’s interpretation point remained live in phase two. The dissenting arbitrator took a different view. He concluded that the tribunal had resolved to decide “all issues of liability”. In the dissentient’s mind, those iron-clad words had the consequence, consciously or not, of excluding the contractor’s argument about actual costs from phase two.

Chevron applied to the Supreme Court of Western Australia, at the seat of the arbitration, to set aside the second partial award. The question was, really, who had it right about the effect of the tribunal’s orders: the majority arbitrators or the dissenting arbitrator?

The approach of the judge at first instance was to be “respectful” to the arbitrators, but to conduct a de novo review to decide the question for himself. There was no submissive deference to the tribunal, in the manner of the faithful at the altar of authority. This yielded a lengthy decision, exceeding 130 pages, analysing the procedural record of the arbitration. The judge’s ultimate conclusion was to agree with the dissenting arbitrator and to disagree with the majority: he found that the tribunal was functus officio on all questions of liability following the first partial award, including the issue about the scope of actual costs.

The consequence is that the contractor’s argument about the meaning of actual costs disappeared into the ether. It was not raised in the first phase and was not decided there, and it could not be raised and determined in the second phase. So much for the wisdom of bifurcation from the perspective of the contractor.

The judge’s decision has since been taken on appeal. The decision of the appellate court remains pending at the time of writing.

Taking stock, this case contains lessons for all quarters.

  • For courts, there is the question of who knows best about procedural decisions taken by arbitral tribunals: the tribunal itself, or a reviewing court? Like most construction cases, this particular case involved a massive procedural record spanning over 30 procedural orders, hundreds of pages of submissions and documents, and fractured interlocutory disputation. In the context of that quagmire, one wonders whether the tribunal is best placed to say what it meant to do, and did, when making orders for bifurcation in the interests of procedural economy and the management of the proceedings before it. It is a hard task for a reviewing court to wade in. Deference seems like an attractive position in most cases.
  • For tribunals, arbitrators must be especially attentive to the consequences of bifurcation and the formulation of orders for bifurcation, or else they may accidentally make themselves functus. This was an example of loose language deployed in a procedural order for bifurcation, creating a later controversy about what had been achieved in fact. And, ultimately, the position here was that the tribunal’s procedural order had an effect contrary to what the majority of tribunal members had themselves understood.
  • For parties and their representatives, the case is a reminder of the need for care when identifying and presenting all pertinent arguments at all stages, whether those arguments be primary, alternative, or contingent, and to make appropriate reservations to avoid an inadvertent waiver. Otherwise, the outcome may well be as here, where a potentially viable alternative argument is lost.

In the end, the starting point for any orders for bifurcation or the splitting of issues must be absolute clarity. Where such clarity seems unattainable, the best course may be just to start the hearing on all issues and finish at the end.

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Beyond the Old Rule: Should Cavendish Come to India?

Thu, 2022-08-04 01:00

Arbitral tribunals are often faced with questions concerning the interpretation and enforcement of liquidated damages clauses; in such cases, the law governing the contract can significantly affect what damages can be claimed, the standard for proving such damages, and consequently the outcome of the dispute. This blog post examines the differences between English law and Indian law on liquidated damages to assist parties in determining which of the two may be most appropriate to govern their contracts. These differences may impact not only the choice of governing law in their agreement but perhaps even the seat of arbitration they choose.

In 1915, the House of Lords in Dunlop Pneumatic Tyre v. New Garage & Motor Co. Ltd. (“Dunlop”), found that for a liquidated damages clause to be enforceable, it must be a genuine pre-estimate of damages. In contrast, Indian law provides that where a contract contains a liquidated damages clause, a party suffering a breach of contract may receive “reasonable compensation” but acknowledges that if the clause stipulates an amount that is a genuine pre-estimate of damages, then this may be considered to be reasonable compensation.

However, in the recent case of Cavendish Square Holdings BV v. Talal El Makdessi and ParkingEye Ltd. v. Beavis (“Cavendish”), the United Kingdom Supreme Court (“UKSC”) found that Dunlop’s distinction between “genuine pre-estimate” and “penalty” was artificial and unsatisfactory. It found that merely because a provision was not a pre-estimate of loss, did not necessarily mean that it is penal. Rather, the true test was if the impugned provision was out of all proportion to the party’s legitimate interest in the enforcement of the relevant obligation. Thus, one may argue that arbitral tribunals examining contracts governed by English law are more likely to enforce liquidated damages clauses than in contracts governed by Indian law, as the former’s “disproportionality” standard is more liberal than the latter’s “reasonableness” standard.

 

The Old Rule: Genuine Pre-Estimates and Reasonable Compensation

In Dunlop, the House of Lords examined if a clause requiring payment of £5 “by way of liquidated damages and not as a penalty” for each unit sold below the agreed-upon resale price was enforceable. It found that:

The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.

It examined a number of criteria that may assist in evaluating if the damages were penal or not and accordingly found that the damages agreed upon were reasonable and thus were not a penalty.

Decades later, in Fateh Chand v. Balkishan Das, the Supreme Court of India (“SCI”) examined a sale deed which provided that if the vendee failed to have the sale deed registered by a stipulated date, then the INR 1,000 of “earnest money” and INR 24,000 towards the sale price paid by the vendee, would be forfeited. The SCI noted the common law standard of “genuine pre-estimate of damages” and found that the INR 24,000 stipulation was “manifestly a stipulation by way of penalty”. It found that under Section 74 of the Indian Contract Act if a liquidated damages clause is penal, the Court could provide reasonable compensation not exceeding the amount stipulated. It thus found that in addition to the earnest money, the vendor was entitled to retain compensation of INR 140 per month at a monthly interest of 6 percent till the date the breach was cured.

Subsequently, in Maula Bux v. Union of India, the SCI further added that if it is not able to ascertain reasonable compensation, the sum agreed upon by the parties – if it is a genuine pre-estimate of damages – can be considered as reasonable compensation, so long as it is not a penalty. Finally, in Kailash Nath v. Delhi Development Authority, the SCI found that a liquidated damages clause may be enforced as “reasonable compensation” only if it is a genuine pre-estimate of damages; in other cases, only reasonable compensation not exceeding the stipulated amount may be paid.

Thus, it may be argued that initially, a tribunal governed by Indian law and a tribunal governed by English law could reach similar conclusions on liquidated damages, due to the prevalence of the “genuine pre-estimate” condition in both, albeit with the caveat that if the clause did not stipulate a genuine pre-estimate, then an Indian law governed tribunal could award reasonable compensation. However, with Cavendish, this somewhat narrow divergence expanded substantially, as explained below.

 

Widening the Gap: The Effects of Cavendish

Cavendish was comprised of two appeals: Cavendish Square Holding BV v. Talal El Makdessi, and ParkingEye Limited v. Beavis. In Cavendish v. Makdessi, Makdessi had agreed to sell to Cavendish a controlling stake in a company. The agreement provided that on breach of certain restrictive covenants, Makdessi would not be entitled to receive the final two instalments of the price payable by Cavendish, and could be required to sell his remaining shares to Cavendish at a price which excluded the value of goodwill of the business. Makdessi breached these covenants but subsequently claimed that the clauses Cavendish sought to enforce were penalty clauses.

In ParkingEye v. Beavis, ParkingEye had been engaged to run a car park and had displayed signs in that park indicating that failure to comply with a two-hour time limit would result in a charge of £85. Beavis exceeded the time limit by nearly an hour, but upon ParkingEye’s demand of the fine, argued that the £85 charge was an unenforceable penalty.

The UKSC called the penalty rule an “ancient, haphazardly constructed edifice which has not weathered well”, and noted that “penalty” and “genuine pre-estimate of loss” are not natural opposites or mutually exclusive; a clause that is not a pre-estimate is not necessarily penal, nor is a deterrent clause necessarily penal. The Court said:

The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.

In Cavendish v. Makdessi, the UKSC found that both impugned clauses were primary obligations not subject to the penalty rule. In contrast, in ParkingEye v. Beavis, the penalty rule was engaged, but the £85 charge was not a penalty, as ParkingEye had a legitimate interest in efficiently managing the parking spaces. The charge was also not extravagant or unconscionable. Accordingly, it did not violate the penalty rule.

 

Cavendish and Indian Law: Dunlop Stands Strong

Several recent Indian decisions have referred to Cavendish. In Dishnet Wireless v. Union of India1) (2016) 1 TLR 10 jQuery('#footnote_plugin_tooltip_42307_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42307_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, the Tripura High Court referred to Cavendish as establishing the “true principle” in respect of such clauses, but found that the “dominant test” in India was that of “[genuine] pre-estimate of reasonable compensation.” In Electronics Corporation of Tamil Nadu v. ICMC Limited, the Madras High Court (“HC”) had to adjudicate upon the imposition of liquidated damages due to a supplier’s failure to adhere to a delivery schedule. The Madras HC, referring to Indian law, Dunlop and Cavendish found that there was “proportionality as between the extent of delay and the amount of liquidated damages”, and thus it could be concluded that the liquidated damages clause reflected a genuine pre-estimate of loss. To a degree, this may indicate reliance on Cavendish’s “proportionality” standard, though this may also be attributable to the Courts’ freedom to determine reasonable compensation. Finally, in LIC Housing Finance Ltd. v. Commissioner of ST, the Custom, Excise and Service Tax Appellate Tribunal found that Cavendish clearly laid down the law on penalty clauses, but it did not substantively discuss how this affected Indian law on the subject. Accordingly, though Cavendish has been acknowledged in several Indian legal decisions, the Indian and English positions remain substantially different.

The Indian legal position essentially provides the arbitral tribunal with the power to award lower damages than those stipulated in the contract, if the liquidated damages clause are construed as penal. This may arguably diminish party autonomy and is likely to foment and prolong unnecessary disputes, as breaching parties may seek to diminish their liability from that stipulated in the liquidated damages clause to what the arbitral tribunal thinks is reasonable. In contrast, the Cavendish test strengthens party autonomy by narrowing the scope of intervention in liquidated damages clauses, and by ensuring that such clauses are more likely to be enforced (due to disproportionality being a more liberal standard than reasonableness or genuine pre-estimates) may diminish unnecessary disputes.

The importance of this choice of law is well demonstrated by investor-promoter disputes, in which investors often seek sweeping rights in the underlying agreements, to protect against breach and act as a safety net for the value of the investment. To that extent as Cavendish correctly identifies, every clause that may not be a genuine pre-estimate may also not be a penalty. Whether something is a penalty or a commercially negotiated position to protect the interest of a party that has more monetary exposure, will have to be carefully examined on a case by case basis. It must also be noted that often, identifying what is a genuine pre-estimate of damages is very difficult, especially if there are multiple factors that contribute to such calculation. In such a case this standard does not apply. Cavendish provides a more commercially relevant standard for today’s contracts, which Indian law ought to move towards.

Once attribution has been determined, it is often left to the arbitral tribunal to make the difficult decision on damages and quantification. Indian law provides a framework but may not always neatly assist when determining where a particular amount sits between a pre-estimate and a penalty. In that gap, it will do well for arbitral tribunals governed by Indian law to apply the Cavendish standard and move towards enforcing bargains. Such an evolution would also improve the perception of the Indian legal landscape as being reasonable and practical, as opposed to overly tied to the letter of old (and somewhat outdated) precedent.

 

The views expressed in this blog post are personal to the authors. 

References[+]

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