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First-Ever Live Kluwer Arbitration Blog Quiz Audio Release

Tue, 2022-12-20 01:10

According to arbitration historian Derek Roebuck, what practice was widely used during the reign of her majesty Queen Elizabeth I to avoid the involvement of the Crown in disputes?

 

  1. “Arbitrage”, a practice in many ways similar to modern arbitration, and which had its roots in the Norman conquest.
  2. “Dunking”, a means of encouraging litigants to settle their disputes while being lifted in and out of water, often a lake or stream.
  3. “Loveday,” in which “love” was a form of resolution and “day” meant the beginning of the process.

This was one of the questions asked at the first ever live Kluwer Arbitration Blog Quiz. And if you are scratching your head for the answer, fear not, the Arbitration Station captured the event and all the answers.

Here is a teaser:

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2022/12/Kluwer-Pub-Quiz-Snippet.mp3

 

 

You can download the complete episode on your podcast app or listen to it on the Arbitration Station website.

Wolters Kluwer hosted the public event, where a new interface for Kluwer Arbitration was launched to enable easy navigation and empower legal professionals to maximize their productivity and supercharge their search.

The quiz participants pitted Saadia Bhatty, Annette Magnusson, and Baiju Vasani against each other and members of the audience, guided by hosts Crina Baltag and Michael McIlwrath, and with the indefatigable Abhinav Bhushan as judge and scorekeeper. Audience members competed for prizes, and the winning panelist, Baiju Vasani, had books donated by Kluwer in his name to the VIS Moot Alumni Association for the promotion of equal access to the study of international trade law and arbitration.

The Kluwer Arbitration Quiz Live will return soon to an arbitration venue near you!

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Arbitration Tech Toolbox: Can the New York Convention Stand the Test of Technology Posed by Metaverse Awards?

Tue, 2022-12-20 00:10

While the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) has been one of the driving factors behind the success of international arbitration, its provisions have not evolved in parity with technological advancements, leading to concerns that the Convention may not survive the test of technology.

One cause for concern involves arbitrating in the metaverse based on the arbitration clauses found in a new generation of instruments: smart contracts or blockchain-based contracts. Smart contracts are self-executing instruments, drafted in code form on a distributed ledger that often provide for arbitration in the metaverse. This involves certain automated functions such as invocation of the clause and rendering an award, possibly in the form of code. However, it is not certain that the award will be automatically executed – parties may have to approach state courts for recognition and enforcement. It is against this backdrop that this post aims to address whether the New York Convention is equipped to enforce awards rendered in relation to arbitration disputes that take place in the metaverse and, if not, whether resort to the UNCITRAL Model Law on Electronic Commerce (“Model Law on Electronic Commerce”) or the United Nations Convention on the Use of Electronic Communications in International Contracts (“Electronic Communications Convention”), which could be enabled by the New York Convention’s “more favorable rule” provision, could resolve doubts as to the recognition and enforcement of such awards.

 

Metaverse Awards and Form Requirements

The reliance on blockchain-based contracts with self-executing arbitration agreements involves the automatic invocation of the arbitration agreement if a dispute arises. While such contracts are secure and safe from cybersecurity threats (as discussed in a previous post by Ibrahim Shehata), they do not conform to the form requirements of Article II(2) of the New York Convention, as they are code-based. Second, and more importantly, blockchain-based arbitration agreements are digital, and standards to determine consent in case of traditional instruments may not be the right tools for them. Consent is a crucial aspect of arbitration that cannot be ignored and should be determined in a manner that serves the dual purposes of not jeopardising the award and facilitating technological advancements in arbitration.

Article II(2) requires contracting states to recognise an arbitration “agreement in writing” by which parties agree to resolve their disputes. Article II(2) defines “agreement in writing” to include instruments that have been “signed by the parties or contained in an exchange of letters or telegrams”. Metaverse arbitration agreements and awards are based on blockchain technology. That is, once a dispute arises, the proceedings use blockchain technology and automate steps such as invocation of the clause, conduct of arbitration proceedings, and rendering of an award.  However, the award will not be signed in the traditional sense, as a blockchain-based arbitration agreement and the eventual award that will be rendered constitute a self-executing instrument based entirely on code (discussed in a previous post by Derric Yeoh), which may not be readable.

While arbitration that takes place in the metaverse is based on a self-executing agreement, parties still need to enforce arbitral awards through the courts of New York Convention States, where the situation may not be favourable. In this regard, the form requirement of the award is not the only challenge at the enforcement stage. When an award is filed for recognition and enforcement, the party is required to submit an authenticated and original award, along with the original arbitration agreement or a duly certified copy of the same, per Article IV of the New York Convention. Considering the code-based arbitration agreement, it will be difficult for enforcement courts to affirm its form, even when a code may be provided to them, as there is a possibility that it may not be in a readable format.

 

Determining Consent in Online Arbitration

Traditionally, a written arbitration agreement is viewed as an instrument that entails consent to arbitrate between the parties concerned. Since the New York Convention is silent on contemporary means of expressing consent, it has generally come to mean that consent should necessarily be in writing. This aspect can be remedied by referring to Article 9(3)(a), Electronic Communications Convention, which provides that form can be satisfied by using a method to identify the parties and their intention contained in the event of electronic communication.   However, this in itself will not be sufficient to determine consent due to the aspect of anonymity in blockchain arbitration.1)Gauthier Vannieuwenhuyse, Arbitration and New Technologies: Mutual Benefits, Journal of International Arbitration, Kluwer Law International 2018, Volume 35 Issue 1 pp. 119-130. jQuery('#footnote_plugin_tooltip_43794_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43794_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); As a result, enforcement courts lacking technological means to authenticate codes and determine the parties’ consent to the same, may not find sufficient consent in the first place.

 

How Does the “More Favourable Rule” Fit Here?

While a series of enforcement difficulties exist for blockchain-based arbitration agreements and awards rendered in the metaverse, the solution may well lie within the New York Convention itself. Article VII(1) allows a party to avail itself of the benefits of a more favourable treaty or regime that is applicable at the place where the award has been filed for recognition and enforcement. The drafting history of this provision suggests that the drafters wanted the parties to an international arbitration to avail themselves of the benefits contained in any international conventions and national laws if they provide for lesser requirements for the recognition and enforcement of their awards.2)Marike R.P. Paulsson, The Trump Card: Article VII (1), The 1958 New York Convention in Action, Kluwer Law International 2016 pp. 233-238. jQuery('#footnote_plugin_tooltip_43794_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43794_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This leads to discussion of the possible use of the Model law on Electronic Commerce or the Electronic Communications Convention under the “more favourable rule” provision of the New York Convention.

The Model Law on Electronic Commerce provides under Article 5 that an instrument should not be invalidated if it is in the form of a data message. Additionally, Article 7(1)(a) provides that the requirement for a signature can be satisfied if a method is used to identify a person and their approval of the information contained in a data message. The Electronic Communications Convention, which applies to formation and performance of contracts between parties from different states, has similar provisions. Article 9(1) provides that a contract or any communication need not be evidenced in a particular form. Additionally, when national laws may require the contract to be evidenced in writing, Article 9(2) provides that such a writing requirement is satisfied if the information contained in the contract is accessible in a manner which makes it “usable for subsequent reference.” In this regard, it can be argued that blockchain-based arbitration agreements, including details of the parties and the content, can be seamlessly verified by the courts without risk of tampering, owing to its decentralised nature. Blockchain-based technology allows parties to authenticate any claims by way of decentralized trust services, such as CertCoin, Blockstack and MyData. These platforms can issue certificates of authentication for user identification as well as data verification, which can aid an enforcement court once it has decided to apply the relevant provisions contained in the two more favourable regimes discussed above. With requirements of form and consent satisfied, courts should not encounter difficulties in recognising and enforcing metaverse awards.

 

Conclusion

Blockchain technology and the metaverse are poised to influence transactions over the next couple of decades, and arbitral process cannot lag behind and be deprived of the benefits of a decentralised and largely secure ecosystem. However, the proposed use of the more favourable rule under the New York Convention may come with its own hurdles, primarily because courts in different legal systems may have a different approach towards the rule. While one set of courts may extend the benefits of the Electronic Communications Convention or a similar rule in their domestic law to the parties, other courts may not be open to adopting such an interpretation. The pro-enforcement spirit of the New York Convention should allow the courts to determine form as well as consent of blockchain-based agreements and awards, which is why enforcement courts should try to address this issue through the mechanism of the more favourable rule. Ultimately, this would contribute towards enhancing the technological efficiency of the New York Convention.

 

Further posts on our Arbitration Tech Toolbox series can be found here.

The content of this post is intended for educational and general information. It is not intended for any promotional purposes. Kluwer Arbitration Blog, the Editorial Board, and this post’s authors make no representation or warranty of any kind, express or implied, regarding the accuracy or completeness of any information in this post.

References[+]

References ↑1 Gauthier Vannieuwenhuyse, Arbitration and New Technologies: Mutual Benefits, Journal of International Arbitration, Kluwer Law International 2018, Volume 35 Issue 1 pp. 119-130. ↑2 Marike R.P. Paulsson, The Trump Card: Article VII (1), The 1958 New York Convention in Action, Kluwer Law International 2016 pp. 233-238. function footnote_expand_reference_container_43794_30() { jQuery('#footnote_references_container_43794_30').show(); jQuery('#footnote_reference_container_collapse_button_43794_30').text('−'); } function footnote_collapse_reference_container_43794_30() { jQuery('#footnote_references_container_43794_30').hide(); jQuery('#footnote_reference_container_collapse_button_43794_30').text('+'); } function footnote_expand_collapse_reference_container_43794_30() { if (jQuery('#footnote_references_container_43794_30').is(':hidden')) { footnote_expand_reference_container_43794_30(); } else { footnote_collapse_reference_container_43794_30(); } } function footnote_moveToReference_43794_30(p_str_TargetID) { footnote_expand_reference_container_43794_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_43794_30(p_str_TargetID) { footnote_expand_reference_container_43794_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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Avoiding Res Judicata – Collateral Estoppel Pitfalls in Multi-Fora Disputes

Mon, 2022-12-19 00:08

A slate of recent cases reminded us how important are the doctrines of res judicata and/or collateral estoppel. Put simply, res judicata is known as claim preclusion because a judicial judgment or arbitral award deciding a particular “claim” will be binding on the parties who participated in that proceeding, whereas collateral estoppel is known as issue preclusion because a party is prevented from re-litigating with another party an issue of fact or law that was previously addressed and dealt with in a prior litigation. Both doctrines, as we will see in this post, are instrumental in multi-fora disputes: that is when parties or related parties engage in separate proceedings (either in parallel or in sequence) on related issues and claims.

 

Anticipate Multiple Battlegrounds

More often than not, multilateral transactions do not have the benefit of a multi-party arbitration clause that can encapsulate all the ways in which parties or related parties will litigate issues of fact and law in one or more settings. In this scenario, any lawyer dealing with a multilateral transaction and/or multiple parties should anticipate that a party (or a related party to a transaction) will at some point either attempt to initiate a new litigation to relitigate the parties’ previous dispute and/or attempt to litigate new claims relying on similar or identical issues of fact and law as the ones addressed in a prior litigation.

Faced with the likelihood of multiple proceedings, and provided there are no jurisdictional issues at play, one should consider first some pre-emptive ways to avoid any potential pitfalls of res judicata and/or collateral estoppel. This can be done with mechanisms that can provide for (i) a consolidated forum to litigate disputes or (ii) some sort of protection that would allow for issues and claims to be dealt with in different fora. To this end, one should consider:

  1. drafting a post-hoc arbitration agreement that will allow for all issues and claims to be dealt with in a single forum. This of course will require all of the parties’ (and related parties) consent, which could be tricky if non-signatories are involved.
  2. using institutional rules’ mechanisms for consolidation of arbitrations or joinder of multiple parties.
  3. appointing the same arbitrators if separate arbitrations are unavoidable.
  4. raising lis pendens arguments, such as forum non conveniens, abuse of process, or requesting an anti-suit injunction to avoid parallel proceedings. While each have different goals, the overall purpose of lis pendens arguments or anti-suit injunction is to convince a court or arbitral tribunal to either stay the proceedings, decline their jurisdiction, or restrain the parties from seizing other courts.

There are other mechanisms as well, but these are particularly relevant in the context of parallel litigations before national courts (such as third party notices and intervention) or in the context of parallel litigations before national courts and arbitral tribunals (such as arbitration laws in treaties and/or national laws that deal with these specific instances). For the sake of brevity, these are not addressed here.

 

Be Aware of Your Surroundings

Res judicata and collateral estoppel really come into focus when multi-fora disputes are inevitable. In these circumstances, the quintessential issue is whether the multi-fora disputes entail the application of the doctrines of res judicata and/or collateral estoppel from a civil law or a common law perspective (sometimes even transnational law). Likewise, one should be particular cognizant of which law will ultimately be applicable to the res judicata and collateral estoppel issues, as this will greatly influence your legal strategy if the multi-fora disputes are running in parallel or if one can reasonably anticipate which forum will be the last to hear the related issues or claims subject of the multi-fora disputes.

For example, if a party is facing parallel arbitrations with the same parties regarding similar or identical claims and/or issues of fact or law, the prudent course of action would be to withdraw without prejudice from one proceeding and focus all issues and claims in the remaining proceeding. Things, however, get complicated if the party not seeking withdrawal refuses to terminate one of the proceedings unless the party seeking withdrawal does so with prejudice. This is because a dismissal with prejudice, even if the case was not argued at all, could have a res judicata effect on any subsequent proceeding brought by the same parties regarding similar or identical issues and claims.

This is particularly the case in civil law systems, where most civil law jurisdictions apply a restrictive approach to res judicata. In essence, civil law jurisdictions recur to what is commonly known as the “triple identity” test, which will be met when the same parties submit the same claims relying on the same facts or legal grounds. In addition, and with respect to the same claims and same facts or legal grounds, certain civil law systems, like Switzerland, apply an even more restrictive approach as some jurisdictions only look at the dispositive portions of the decision or award, while others, such as Belgium and France, might look into the reasoning as well. This means that res judicata applies only to the judgment’s holding, that is what has been judged (granted or denied), and the reasons of the judgment have no binding effect whatsoever on this assessment (but may be used in certain circumstances to assist the analysis for purposes of understanding the judgment’s holding). And in some limited cases, certain civil law systems might apply a form of common law collateral estoppel (as explained below), which requires a party to assert all claims arising from the same nucleus of facts or legal grounds in one proceeding. If a party does not, any subsequent claims based on that nucleus of facts or legal grounds will be precluded.

Against this backdrop, and in the presence of different parallel arbitrations applying different civil law principles of res judicata, it is imperative to know which civil law system will be the most favorable for a party if that party were to withdraw with prejudice from one of the proceedings; or if it could reasonably anticipate which proceeding will end first. By favorable I mean designing a legal strategy that would ensure that any res judicata defense heard by a subsequent tribunal would force that tribunal to apply the most restrictive and narrow application of res judicata, thus making it hard for that subsequent tribunal to dismiss a party’s claims.

The “plot thickens” when common law jurisdictions are involved. Contrary to civil law jurisdictions, common law systems like the United States (New York in particular) tend to make a clear distinction between claim preclusion (i.e. res judicata) and issue preclusion (i.e. collateral estoppel). Issue preclusion  essentially means that a party will be prevented from re-litigating with another party to a previous proceeding (or even a related third party), an issue of fact or law that was addressed and dealt with in the prior proceeding.

The relevance of issue preclusion in multi-fora disputes was recently highlighted in the arbitral award in Lao Holdings v. Lao People’s Democratic Republic of 11 August 2021. The recent award is the latest culmination in a decade-long multi-fora dispute that involved two treaty arbitrations and three commercial arbitrations between a series of related parties. In this most recent commercial arbitration, the tribunal was required to apply the doctrine of collateral estoppel under New York law. In doing so, the tribunal found that most of the claimants’ claims in the latest commercial arbitration were barred under collateral estoppel, thereby dismissing them.

More specifically, the Tribunal found that the doctrine of collateral estoppel:

  1. prevents “re-litigation of an issue of law or fact that was raised, litigated, and actually decided by a judgment in a prior proceeding between the parties […] regardless of whether or not the two proceedings are based on the same claim”. (See Par. 137.)
  2. applies between cases with different parties so long as the related parties are “in privity.” In privity requires some connection between the related parties, be it as an agent, successor or any other form that will establish a relationship justifying preclusion. (See Par. 147.)
  3. requires: (1) the presence of identical issues; (2) which are necessarily decided in the prior action; (3) and are decisive of the present action; and (4) whereby the party facing estoppel had a full and fair opportunity to contest the prior decision. (See Par. 157.)

After analyzing the above, the Tribunal found that all of these requirements were met. Of note, however, the Tribunal held that the requirement of identical issues does not need to amount to the exact same claims, so long as the issue decided “by necessary implication” in the first action is enough to preclude the second action. Therefore, collateral estoppel under common law systems provide greater latitude for barring a subsequent action than res judicata under civil law systems, particularly since neither identity of parties nor identity of claims is required; it is sufficient to have parties “in privity” and claims addressed, even by implication, between both proceedings.

 

Conclusion

In the presence of multi-fora disputes, always bear in mind that res judicata and/or collateral estoppel are just around the corner. This is certainly what recent experience has demonstrated, particularly when it is used as a sword to completely undermine subsequent proceedings between identical or related parties. To avoid this, then, one should, as a measure of good practice, foresee the possibility of multi-fora disputes so that one can either (i) implement mechanisms early on that will allow for multiple proceedings to go unfettered; or (ii) be fully cognizant of the applicable jurisdictions at play so one can design the best legal strategy once faced with a res judicata or collateral estoppel defense. Either way, plan ahead and thread carefully!

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The 2022 SOAS Counsel in Arbitration Training: A Concrete Solution to Skills Development for African Counsel in Arbitration

Sun, 2022-12-18 00:24

This year, the arbitration team at SOAS consisting of Emilia Onyema, Steven Finizio and Baiju Vasani in cooperation with the African Legal Support Facility of the African Development Bank, organised and delivered four separate “counsel in arbitration skills-based training” workshops in collaboration with four arbitral centres in Africa: in Lagos (LACIAC), Douala (CMAG), Kigali (KIAC) and Cairo (CRCICA). Participants worked from a case study prepared by our SOAS team which included fact witness statements and expert reports. Over the course of three days, participants made written and oral submissions before panels of three individuals who practice as international arbitrators. The submissions focused on case theory and opening submissions, examination of witnesses and closing submissions and were made in-person at each location. 97 participants, including associates at law firms, in house government agencies and ministries of justice, participated in our four training sessions this year.

This post provides an overview of the training program and offers some insights on how such skills-based training can support the development (and numbers) of African practitioners as counsel in arbitration.

 

Capacity Deficit

The feedback from some respondents to our 2018 SOAS arbitration in Africa survey was that Africans are not as well represented in international arbitration as counsel and arbitrators when compared with their participation as parties. In relation to counsel, capacity deficit was mentioned as one reason for the poor representation. This is further supported by informal comments from some colleagues that sit as arbitrators in international arbitration references in some African jurisdictions.

Indeed, acting as counsel in international arbitration proceedings involves various skills that practitioners need an opportunity to develop and practice. Most training programs in arbitration focus on the role of the arbitrator or are theoretical, with a clear gap in the provision of skills-based training for counsel who represent parties before the arbitral tribunal. In recognition of the fact that party autonomy mandates that arbitrators should rely on the presentation of the case by the parties (which they do through counsel in the vast majority of cases) as the basis on which the tribunal will make its decision, it becomes apparent that the final outcomes of cases may be heavily impacted by the quality and ability of counsel in the arbitration. This informed the design of the SOAS Counsel in arbitration training as skills-based. The facilitators were qualified practitioners in their home jurisdictions, who also act as arbitrators in international arbitration.1) The arbitral tribunals and facilitators were composed of: Mrs Funke Adekoya, SAN, Mr Tunde Fagbohunlu, SAN, Professor Emilia Onyema, Mr Baiju Vasani, Mrs Marie Andre-Ngwe, Professor Walid Ben Hamida, Ms Gisele Stephens-Chu, Dr Sylvie Bebohi, Dr Gaston Kenfack Djouani, Ms Lindsay Reimschussel, Ms Ndanga Kamau, Mr John Ohaga, SC, Mr Thierry Ngoga Gakuba, Professor Steven Finizio, Michael Sullivan, KC, Mr Taher Hozayen, Dr Yasser Mansour, Dr Nagla Nasser, Professor Dr. Mohamed AbdelWahab, Dr Amira Mahmoud, Dr Ismail Selim, and Dr Mohamed Hafez. jQuery('#footnote_plugin_tooltip_43856_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43856_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); They could therefore share from their own practical and lived experiences.

 

Importance of the Delivery Model and Style

Oftentimes, training sessions are delivered without practical demonstration and participants are left with theoretical knowledge of a concept or skill. The success of the delivery model adopted in the SOAS training is the co-learning element which also gives the participants the opportunity to demonstrate the skills they have learned and receive immediate feedback.

Each training was also supported by quantum experts from FTI Consulting, Secretariat, HKA, NERA and Accuracy, who all provide such services in international arbitration. These experts delivered webinars on quantum assessment in international arbitration, and also acted as expert witnesses examined by participants during the training.

The facilitators worked with each group with their national nuances and shared our experience, ensuring co-learning and respect. The participants’ familiarity and knowledge of the facilitators from their region gave them greater confidence as to the quality and value of the training.  In addition, in-person participation led to relationship-building between the participants and the facilitators, which is an important element in the development of arbitration practices and the local arbitration communities.

To ensure that the participants were well-immersed in the practical sessions, the in-person hearings were held over three days with oral submissions before the arbitral tribunals in location. The case file was emailed to the participants two weeks before the in-person hearings and the participants were allocated into groups of claimants and respondents. The week before the hearings, webinars were held on specific topics by the facilitators and the damages experts that supported the particular training.

There were also in-person discussions on case theory and strategy, role and selection of fact and expert witnesses, examination of witnesses, written and oral closing submissions, ethics and the role of the arbitral tribunal. Over the three days, participants made written and oral submissions to the tribunals and received individual feedback.

The training was delivered in Arabic (Cairo only), English (Cairo, Lagos and Kigali) and French (Douala only) as the languages most commonly used in arbitration in the locations of the training. This also allowed for inclusivity, ease of access, relevance and familiarity, for the participants, all of which participants in their feedback noted and commended.

 

The Future

To ensure continued impact, the SOAS team has offered the case file (with proper attribution to SOAS) to the host arbitral centres we worked with this year so they can continue to run the training as they require. A further nine trainings will be held in 2023 with a new case study available in the Arabic, English, French and Portuguese languages, in nine different African cities.

 

Conclusion

At SOAS, our arbitration team does not just look at inclusivity as a one-sided coin (appoint or work with Africans) but as a double-sided coin in which we actively support the preparation of our African colleagues to excel in their domestic practices and, when the opportunity presents itself, in their international practice as well. In this way, we contribute to the elimination of some of the biases preventing the opening of the field of arbitration to all those qualified to participate whether as counsel, arbitrator, tribunal secretary, expert, or any other role. We will continue to work with our practitioner colleagues and our sponsors to co-learn and deliver value for their sponsorship for the benefit of the international arbitration community.

 

* I am grateful to Ms Gisele Stephens-Chu for her review, but all errors remain mine.

References[+]

References ↑1 The arbitral tribunals and facilitators were composed of: Mrs Funke Adekoya, SAN, Mr Tunde Fagbohunlu, SAN, Professor Emilia Onyema, Mr Baiju Vasani, Mrs Marie Andre-Ngwe, Professor Walid Ben Hamida, Ms Gisele Stephens-Chu, Dr Sylvie Bebohi, Dr Gaston Kenfack Djouani, Ms Lindsay Reimschussel, Ms Ndanga Kamau, Mr John Ohaga, SC, Mr Thierry Ngoga Gakuba, Professor Steven Finizio, Michael Sullivan, KC, Mr Taher Hozayen, Dr Yasser Mansour, Dr Nagla Nasser, Professor Dr. Mohamed AbdelWahab, Dr Amira Mahmoud, Dr Ismail Selim, and Dr Mohamed Hafez. function footnote_expand_reference_container_43856_30() { jQuery('#footnote_references_container_43856_30').show(); jQuery('#footnote_reference_container_collapse_button_43856_30').text('−'); } function footnote_collapse_reference_container_43856_30() { jQuery('#footnote_references_container_43856_30').hide(); jQuery('#footnote_reference_container_collapse_button_43856_30').text('+'); } function footnote_expand_collapse_reference_container_43856_30() { if (jQuery('#footnote_references_container_43856_30').is(':hidden')) { footnote_expand_reference_container_43856_30(); } else { footnote_collapse_reference_container_43856_30(); } } function footnote_moveToReference_43856_30(p_str_TargetID) { footnote_expand_reference_container_43856_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_43856_30(p_str_TargetID) { footnote_expand_reference_container_43856_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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Istanbul Arbitration Week 2022 Recap: Energy-Related Panels

Sat, 2022-12-17 00:30

As part of the 2022 Istanbul Arbitration Week (ISTAW) organized from 10 to 14 October 2022, the Energy Disputes Arbitration Center (EDAC), which is the only energy sector-based arbitration center with its own rules, hosted several panels in relation to energy arbitration at historical Sait Halim Pasha Mansion by the Bosphorus. This post provides a succinct coverage for three of these panels.

 

Panel 1: Arbitration as an ADR Mechanism for Administrative Disputes in Respect of the Energy Sector in light of International Approaches

A first panel was held on “Arbitration as an Alternative Dispute Resolution Mechanism for Administrative Disputes in respect of the Energy Sector in light of International Approaches”. Moderated by Yeşim Bezen, the panel was composed of Aykut Bakırcı, Sophia Von Dewall and Assoc. Prof. Nilay Arat. Discussions focused on a controversial topic, i.e. whether arbitration, as opposed to a full remedy action before Turkish domestic courts, is a suitable mechanism for the resolution of administrative disputes in the energy sector.

Aykut Bakırcı first mentioned the 1999 Turkish constitutional amendment regulating which of the services carried out by the public legal entity can be made through private law contract. Turkish Law (Law No. 4501) allows for disputes arising from concession agreements to be resolved by arbitration. Provided that there is an element of extraneity, international arbitration can come into play.

Although it is well settled that only Turkish administrative courts can rule on the annulment of an administrative act, the relevant question is whether compensation is possible through arbitration if an administrative act directly has an impact on an investment. Assoc. Prof Nilay Arat examined these issues, including full remedy actions under Turkish administrative law. She first drew a distinction between the “administrative actions”, i.e. conducts that do not change any legal status, and the “administrative acts”, which are non-regulatory actions taken by administrative authorities. The distinction is important because only administrative acts can be annulled. For the investor, be it foreign or Turkish, full remedy action is designed to provide compensation. But the question – where other alternative paths of relief are available, including through arbitration – is whether the amount of the remedy awarded through the domestic court action genuinely constitutes a full remedy.

Sophia Von Dewall raised the question in connection with the parameters to be applied to the quantification of loss during full remedy action before Turkish administrative courts. She noted that the “compensation issue” has not fully developed under Turkish law yet, as the courts’ judgments do not articulate the approach to valuation in depth. However, in any case, there should be an actual and existing account for any loss of profits.

Sophia Von Dewall also touched on the advantages of resorting to arbitration for the compensation of loss of profit as opposed to a full remedy action before domestic court. She noted that under international law, the standard is for full reparation of the breach. In arbitration proceedings, parties’ quantum experts provide reports to support use of the discounted cash flow (DCF) method to calculate the loss of profit for energy disputes.

 

Panel 2: Arbitration in the Midst of the Global Energy Crisis

A second energy-related panel was held on “Arbitration in the Midst of the Global Energy Crisis”. The panelists Cihat Köşger, Prof. Kamalia Mehtiyeva, Dr. Rahmi Kopar, Prateek Bagaria and Roy Schondorf were joined by moderator Berceste Elif Duranay.

As background, Prateek Bagaria described the impacts of the global energy crisis on the European energy market, including Russia’s cuts to energy supply .

Cihat Köşger elaborated on possible energy arbitration disputes involving Russia and Russia related parties, noting that not only is there a gas supply crisis but also an oil supply crisis. The set aside of the Russian oil (constituting ten percent of global supply) eventually leads to an increase of the oil price. Although the Russian oil seems to be cheaper, it comes with an additional cost which consists of insurance and transportation which affects the global inflation. Some of the refineries in Eastern Europe desperately use the Russian crude oil for structural and technical reasons. For instance, Turkish refineries get fifty percent of their oil from Russia. There are other options such as Basra oil.

The sanctions made it harder to supply oil. As a result, refineries faced the risk of shutdowns. This means that refineries may not be able to restart. Following the pandemic, the focus moved towards force majeure. Interpretation of force majeure clauses is expected for disputes arising out of gas supply contracts. Gas supply crisis led to shutdowns in Europe and has domino effect on the disputes in numerous sectors.

Roy Schondorf commented on the disruption of economic activity due to the energy crisis and its connection to possible arbitration claims. He noted, in particular, that during times of economic pressure, particularly in reacting quicky to urgent circumstances, businesses may try to resolve their disputes in different ways. They might, for instance, seek to settle claims or not pursue a dispute at all.

Prof. Dr. Kamalia Mehtiyeva described the impacts of changes in landscape and geopolitics in the region and in the rest of the world. For instance, in order to help the European Union (“EU”) diversify the energy supply, some countries such as Israel, Egypt, Canada and Azerbaijan came into play. The legal nature of the agreements concluded between the EU and these countries was questioned and the panel agreed that these were bilateral memoranda of understanding (MoU) which, under public international law, might have binding effect depending on their wording. The panel agreed such agreements definitely fell in a grey zone insofar as the commitments under them were concerned.

Dr. Rahmi Kopar looked at indirect disputes that may arise out of these MoUs. Canada, for example, needs to build infrastructure. By the time the facilities are constructed the EU’s demand may fade away. If the prices go back to previous levels, this might create problems including “stranded” investments. This may give rise to investment disputes. Gas price review arbitrations may also increase in the future.

Finally, Prateek Bagaria also mentioned that these disputes may lead to new regulations and policy responses which, in turn, may themselves generate new disputes. In order to manage this potential caseload, it is better to prepare and to plan in advance. Mr. Bagaria advised that litigation finance may be of huge importance. As cash flow from business will be limited, financing and monetizing these disputes will be of essence.

 

Panel 3: The Energy Transition – A Smorgasbord of New Disputes?

Moderated by Paul Stothard, a third energy-related panel discussed “The Energy Transition – a smorgasbord of new disputes?”. The panelists were James Rogers, Dr. Esra Bektaş and Ergin Mizrahi.

Paul Stothard stated that the energy transition refers to political and market driven change from fossil fuels to renewables and non-carbon intensive forms of fuel including but not limited to nuclear, bio fuels, solar and wind to mitigate the ongoing climate change. Climate change disputes are broader than energy transition disputes.

Dr. Esra Bektaş analysed how the Paris Agreement on Climate Change contributes to sustainability. The signatory countries submit their Nationally Determined Contributions (“NDCs”) in order to show how they will contribute to the energy transition phase. For instance, Turkey promised to make a contribution in sectors such as energy, infrastructure, transport, agriculture and waste management. Corporate social responsibility and ESG principles have become hot topics regarding corporate duties toward employees, environment and consumers.

James Rogers then focused on the tension between States and investors, noting that investors care their business whereas States are becoming more socially and environmentally aware. And the population is deemed as the third party. Competing needs give rise to regulations from the States’ end.

Finally, Ergin Mizrahi explored the hurdles of the enforcement procedure in Turkey. Some national courts’ decisions declared arbitration clauses invalid for not being drafted in Turkish. However, even if the arbitration clause is deemed invalid, given the fact that Parties signed Terms of Reference (“TOR”) until the stage of enforcement, the implied intention to arbitrate should be enforced. The practice in Turkey now involves two-columned arbitration clauses both in English and Turkish while the rest of the documents may be in Turkish only.

Ergin Mizrahi also noted that, in Turkey, public policy defenses are explained in a vague way. In energy disputes there may be public implications such as electricity cuts. According to the European Court of Human Rights, if a court refuses to enforce an award based on non-proportionable consideration of public policy over parties’ interest, it may constitute a treaty violation on the part of the country of enforcement.

 

Conclusion

 

ISTAW 2022 offered its participants an unforgettable arbitration week with panels, keynote speeches, Bosphorus tour, breakfast and closing cocktail. Organised with the contributions of sponsors and supporters consisted of leading international law firms, arbitration centers, arbitration organisations and media institutions, ISTAW 2022 welcomed arbitrators, lawyers, academics and arbitration experts from all over the world in this unprecedented event. And ISTAW 2023 is on its way – stay tuned!

 

 

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Istanbul Arbitration Week 2022 Recap: Global Developments in Turkey and Istanbul’s Place in the World of Arbitration

Sat, 2022-12-17 00:08

As part of the 2022 Istanbul Arbitration Week (ISTAW) organized from 10 to 14 October 2022, the Energy Disputes Arbitration Center (EDAC) hosted two panels in relation to arbitration developments in Turkey and Istanbul’s place in the world of arbitration, on which this post aims to report (see also our coverage of ISTAW energy-related panels).

These panels followed a dynamic format and fostered an open discussion regarding the future of international arbitration, new arbitration techniques, developments, evolving interpretations and views, and discussed the best practices for international arbitration in the new virtual reality. The novelties and the conflicts brought by the energy transition and the Energy Charter Treaty were also evaluated during the panels.

 

Panel 1: Global Developments Affecting Turkey and The Region

Moderated by Andrew Clarke, the first panel discussion was held on “Global Developments Affecting Turkey And The Region”. Sebastian Neave, Danielle Morris, Geneviève Poirier, Svetlana London and Prof. Dr. H. Ercüment Erdem gave their insights into practical consequences and implications of the global developments affecting Turkey and the region, in particular centring on the various impacts of the crisis in the Ukraine.

Andrew Clarke observed that “dispruption” is the key word for the energy markets. Russian gas has been taken off the European market such that European countries are now seeking alternative suppliers. The intention was to replace 60% from LNG sources and 33% from an increase in renewables. While European storage of gas is at 90%,there has also been an increase not only in gas prices but also in electricity prices. Mr. Clarke concluded that all markets are, therefore, challenged. Prof. Dr. H. Ercüment Erdem also emphasized that the costs of energy resources are increasing day by day. The tension in the region has a direct impact on the production of electricity from natural gas. The price increase has a domino effect in the market. Turkey purchases gas from Russia and pays in ruble while it also signed a Memorandum of Understanding (“MoU”) with Ukraine for the reconstruction of the country. Istanbul may perfectly be the suitable place for the seat of any related arbitration. Prof. Dr. H. Ercüment Erdem suggested that Istanbul should be promoted in this sense.

Sebastian Neave centered his remarks on the role of Turkey in the midst of global developments. The mediating role of Turkey in the conflict is clearly a difficult job. But Turkey has managed to achieve a number of notable successes in the form of securing a grain deal in July 2022 and negotiating a number of prisoner swaps between the parties. Turkey’s maintenance of relations with both sides to act as a facilitator of talks between them has become an imperative for the future peace.

Geneviève Poirier highlighted that some sanctions, such as freezing the assets of individuals, is an old tactic but now on a new scale. Thousands of Russian individuals are now subject to sanctions. Some of the new sanctions are in relation to the provision of services to Russia and Russian businesses in the fields of, e.g., IT consultancy, architecture, engineering, legal and auditing services.

Svetlana London provided observations regarding the US and EU sanctions and Russia’s counter-sanctions. Some industries cannot exit the market such as medical instrument providers. The framework enables Russian companies to comply with the obligations, in a way they can, such as making payments in Russian rubles inside Russia or break down relationships. Although force majeure became a relevant legal principle, some companies failed to terminate contracts on this ground, Russian courts relying on other relevant reasons to terminate such contracts under Russian Law.

Geneviève Poirier considered that under Russian law, external courts or arbitration bodies are restricted from hearing certain sanctions-impacted disputes, and it is possible to get an anti-suit or anti-arbitration injunction if it is demonstrated that the party is properly affected by sanctions. That paved the way for any party, who felt that sanctions might play a role in their disputes, to get an anti-suit or anti-arbitration injunction and have the matter heard instead in new Russian arbitral courts. The risk is that the Court has the power to award the reverse of the claim (plus cost) that is against the party disadvantaged by the spectrum of sanctions.

Sebastian Neave stated that the global developments gave rise to new issues while commodities disputes in Europe and complicated shipping issues in the Black Sea are rampant. It is not surprising to see that various sanction packages disrupted efforts to enforce against Russian assets both privately held and linked to the State. There has been a huge growth in requests both from Turkish parties and otherwise against Turkish parties.

Danielle Morris focused on broader trends impacting disputes in the region, noting that an increased policy focus on environmental issues is likely to lead to an increase in investment arbitration claims. The investment arbitrations may fall into two different categories. The first category corresponds to disputes where the State has acted out of purportedly environmental concerns but an arbitral tribunal determines that in fact the government was motivated by political interests or desire to favor domestic competitors where the State is held liable.

The second category is comprised of disputes where the State is motivated by legitimate environmental concerns which is more difficult because an arbitral tribunal needs to balance the competing concerns holding the State’s commitments in an investment protection treaty on the one hand with the State’s recognised right to regulate on the other hand. For this reason, the outcome of these cases has been less uniform. Some arbitral tribunals have required the State to pay compensation for the damage to foreign investment whereas others have held that the State was acting within its police powers and no compensation was due.

 

Panel 2: Istanbul’s Place in The World of Arbitration

Prof. Dr. Can Yeğinsu delivered a keynote speech on “Istanbul’s Place in the World of Arbitration”, starting by looking at Istanbul’s geopolitical importance. Istanbul indeed unites Europe with Asia. The constant of this city’s geopolitical significance should not be allowed to overshadow another long term and longstanding distinguishing feature of the city: Istanbul is above all a city of transformation.

Prof. Dr. Can Yeğinsu focused on Istanbul’s potential future place in the world of arbitration.

He stated that international cooperation, such as inward and outward investment, innovation, transportation and distribution, is indispensable to any thriving Turkish economy. Any party’s concerns, whatever their nationality is, about being given a fair chance to be heard is going to become more acute the moment one crosses a border. Just as the English party might worry about Istanbul historically so the Turkish party has worried about London.

But the concern here for the Turkish party is about inequality of arms. This can be everywhere. So long as Turkish parties feel like and act like outsiders in the system of international adjudication there is only so far Turkey can progress as an international center for the peaceful settlement of disputes. The reality on the ground is encouraging as this stage is well passed in Turkey. The greater confidence comes from the experience. This has been a critical shift and a considerable step forward. Today international arbitration is increasingly accepted by Turkish parties as a natural incident. Now eminent Turkish arbitrators are selected by arbitral institutions or joint nomination of arbitrators to decide cases having no connection with Turkey.

Then, Prof. Dr. Can Yeğinsu focused on arbitral institutions as key actors of arbitration. The International Chamber of Commerce (ICC) is the leading arbitral institution in Turkey. Other international centers used by Turkish parties include the Swiss Arbitration Center (SAC), the Stockholm Chamber of Commerce (SCC) and the London Court of International Arbitration (LCIA). Turkish parties are also turning to their homegrown institutions such as the Istanbul Arbitration Center, the Istanbul Chamber, the Turkish Union of Chambers and most prominently the EDAC. The majority of the parties using arbitral institutions based in Turkey are themselves Turkish and the majority of the cases are domestic. The process of internationalization will slowly take on. The Turkish arbitration centers, such as EDAC, have made a remarkable contribution through their efforts to raise awareness of international arbitration both nationally and internationally in Turkey.

 

Conclusion: Turkey’s Geopolitical Importance in The Midst Of Energy Crisis

Due to its geopolitical importance, Turkey is located on Russia, Azerbaijan and Iran natural gas and Iraq oil pipelines, thus making Turkey an energy crossroads. Turkey has important energy projects and new projects are foreseeable. In the context of the wordwide energy crisis, the energy arteries of the EU may pass through Turkey. This means that as a country, Turkey needs to keep the energy infrastructure active and improve the latter. As energy projects increase, so do contracts arising from energy law. For this reason, the possibility of new disputes increases. Therefore, an active period in terms of energy arbitration in the upcoming period is highly likely.

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Argentina: New Precedent on Preliminary Measures and International Arbitration

Fri, 2022-12-16 00:06

The Commercial Court of Appeals in the City of Buenos Aires recently granted a request for preliminary measures. These measures aimed to obtain the necessary elements to analyze and determine whether the counterparty had breached a stock purchase agreement that included an arbitration clause as the dispute-settlement mechanism.

In this post, we discuss whether courts may issue preliminary measures in connection with a dispute covered by an arbitration clause, the two categories of preliminary measures provided for under Argentine law, and which courts have jurisdiction over these measures.

 

Introduction

In the last seven years, important amendments to improve Argentinian legislation on both local and international arbitration have been introduced.

One of the most important changes in the 2015 Argentine Civil and Commercial Code (CCC) was the inclusion of specific rules about local arbitration agreements, something that the previous civil or commercial codes did not contemplate. Although the CCC’s private international law provisions do not have specific regulation for arbitration, article 2605 allows the parties to agree on the forum:

“In international matters referring to property, the parties are entitled to extend jurisdiction to judges or arbitrators outside the Argentine Republic, unless Argentine judges have exclusive jurisdiction, or the extension of jurisdiction is prohibited by law”. Likewise, section 2606 of the CCC states that: “The judge chosen by the parties has exclusive jurisdiction, unless they expressly decide otherwise.”

On the other hand, in 2018, the Law on International Commercial Arbitration (LACI) was enacted. The LACI is mainly based on the Model Law of the United Nations Commission on International Trade Law (UNCITRAL). In this sense, it has been argued that Argentina has taken a significant milestone that marks a strong endorsement of international commercial arbitration (All, P. M.; Rubaja, N.; “Habemus Ley de Arbitraje Comercial Internacional”. La Ley, 2018).

Argentinian case law has also followed the new trends in arbitration. In Sowitec Operation GMBH, the Chamber of Commercial Appeals in the City of Buenos Aires (June 22, 2021), analyzed a company’s request to obtain the necessary elements to evaluate and verify whether its counterparty had breached a share purchase agreement that contained an arbitration clause.

 

Relevant provisions in Argentine Law

Although preliminary measures are not common in relation to arbitration clauses, they are relevant at the time of discussing whether courts may issue preliminary measures in connection with a dispute covered by an arbitration clause. Additionally, those who consider that courts may issue preliminary measures -even if the dispute is subject to an arbitration clause- have debated whether these measures should only be issued by the courts of the seat of the arbitration.

Various provisions in the Argentine legislation seek to answer these questions. Article 1655 of the CCC (on domestic arbitration) provides that the parties may request interim and preliminary measures to a court “without this being considered a breach of the arbitration agreement or a waiver of arbitral jurisdiction (…)”.

Additionally, the relevant provisions of private international law in the CCC establish: “Argentine judges are competent to order provisional and precautionary measures (…) in cases of urgency, when the goods or persons are or might be in the country, even if they lack international jurisdiction to decide on the main proceedings” (article 2603, paragraph B, CCC). Additionally, the forum of necessity is determined in the following terms: “Although the rules of this Code do not grant international jurisdiction to Argentine judges, they may exceptionally intervene with the purpose of avoiding denial of justice…” (art. 2602, CCC).

Finally, the LACI provides that “[i]t shall not be incompatible with an arbitration agreement for a party to seek, either before or during arbitral proceedings, a precautionary measure of protection and for a court to grant such measures(art. 21, LACI). In this sense, the LACI establishes a joint competence between the arbitral tribunal and the judicial court to issue interim measures, according to article 38 (“Unless otherwise agreed by the parties, the arbitral tribunal may, at the request of a party, grant interim measures of protection”) and article 61 (“The court shall have the same jurisdiction to grant precautionary measures of protection in arbitral proceedings, whether or not the arbitral proceedings take place in the country of its jurisdiction, as it has in judicial proceedings. The court shall exercise such jurisdiction in accordance with its own procedures and taking into account the distinctive features of international arbitration”).

 

The Facts of the Case

In 2016, Sowitec Operation GmbH entered into a purchase contract with two companies for 100% of the shares corresponding to the company Loma de los Vientos S.A. Sowitec stated that the initial price was USD 5,625,000, which was partially paid through a first payment of USD 2,250,000. The balance of the price was to be paid in three instalments in accordance with the provisions of the contract.

Sowitec argued that the contract provided for the buyers’ obligation to “pay an additional price if Loma de los Vientos S.A. entered into one or more Supply Contracts” with Compañía Administradora del Mercado Mayorista Eléctrico S.A. (CAMMESA) relating to an energy project.

In this context, Sowitec sought as preliminary procedure that CAMMESA be required to provide information regarding the project. In its request, Sowitec argued that it sought to obtain the necessary elements to evaluate and verify whether the buyers had breached the contract. Sowitec argued that, with this information, it would be able to “file a real and concrete claim against the buyers”.

 

The Decision

The first instance judge partially granted Sowitec’s request and Sowitec appealed. In the appeal, the Chamber first held that the contract included the following arbitration clause:

“any dispute, claim, or controversy arising from this contract; or the breach, termination, fulfilment, interpretation, or validity thereof, including the determination of the scope or the applicability of arbitration to this case, shall be finally settled pursuant to binding arbitration in accordance with the in-force rules of arbitration of the International Chamber of Commerce (“ICC”). The arbitration proceedings shall take place in Amsterdam, The Netherlands (…)”.

Secondly, before analysing Sowitec’s request, the Chamber considered that a preliminary measure under Argentine law is “a procedure to ensure the parties the adequacy and precision of their allegations, allowing them to access elements of judgment susceptible of delimiting, as accurately as possible, the object and other aspects of their future claim or opposition, or the obtaining of measures that facilitate the subsequent proceedings”. In this regard, the Chamber stated that the preliminary measure requested by Sowitec was exclusively aimed at obtaining information to determine whether there was a “case”, and therefore differentiated such request from those preliminary measures “aimed at securing evidence“.

Finally, the Chamber held that under Argentine law, preliminary measures were not regulated in an exhaustive manner, therefore it was up to the “judge’s discretion to admit measures other than those contemplated by the law, as long as it was duly justified that the proceeding was essential to properly and usefully file the claim.

After these considerations, the Chamber concluded that, notwithstanding “the corresponding arbitration jurisdiction (…), there is no obstacle in making a judicial pronouncement regarding the preliminary proceedings under examination“, since “the procedural assistance requested by the appellant for this preliminary proceedings, which should be provided by this state jurisdiction due to its close proximity to the case, is suitable, subject to the rules of the lex fori and within the described framework“.

Considering this, the Chamber granted Sowitec’s appeal even though the arbitration proceedings would eventually take place in Amsterdam; modified the first instance judgment, and fully granted Sowitec’s request, ordering the issuance of an official letter addressed to CAMMESA, requesting the company to provide information regarding the energy project and the supply contracts entered into with the defendant.

 

Conclusions

The judgment under discussion is important insofar it analyses the applicability of preliminary measures in connection with a dispute subject to arbitration. In this case, the Chamber distinguished the two categories of preliminary measures under Argentine Law and considered that courts may issue preliminary measures in connection with a dispute covered by an arbitration clause. Moreover, the Chamber concluded that the power to grant these measures is not exclusive to the courts of the seat of arbitration. In turn, the decision is favourable to arbitration since the preliminary measures would allow Sowitec to eventually gather elements to file a request for arbitration, and the relief granted was not found to be a waiver of arbitration, therefore it did not preclude the party to file a request for arbitration.

 

This post is an expression of the authors’ personal opinions and does not necessary reflect Marval O’Farrell Mairal’s views.

 

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Anxieties about Achmea: Dutch Interim Relief Judge Refuses to Torpedo London-seated intra-EU Arbitration

Thu, 2022-12-15 00:35

The Amsterdam district court has recently refused to order the termination of a London-seated intra-EU investment arbitration against Poland. Whilst the outcome of the judgment is hardly surprising, the decision contains some interesting thoughts on the ‘desirability’ of the Achmea decision. This blog will discuss the current status of Achmea in the case law of the Court of Justice of the European Union (CJEU) and domestic courts, before providing some reflections on the reasoning of the interim relief judge in Amsterdam, whose decision is currently under appeal at the Amsterdam court of appeal whilst proceedings on the merits have also been commenced before the district court.

 

Achmea Unlimited?

Over the past years, the CJEU has continuously expanded its ruling in the Achmea case. The Court has now established that EU law is incompatible not only with investment arbitration under intra-EU BITs but also with the intra-EU application of the arbitration clause of the Energy Charter Treaty. The CJEU has also determined that this incompatibility extends to arbitrations governed by the ICSID Convention: in Micula, the Court ruled that as of Romania’s accession to the EU, ‘the system of judicial remedies provided for by the EU and FEU Treaties replaced [the BIT’s] arbitration procedure’ and that the consent given to that procedure by Romania ‘lacked any force’ as of then (see here). In Romatsa, the Court made explicit that the Micula award could not have ‘any effect’ and could not be enforced.

In spite of this increasingly categorical case law of the Court, it is less certain how member state courts will approach the incompatibility between EU law and intra-EU investment arbitration (and any obligations incumbent on these courts under the ICSID Convention) in the variety of circumstances in which this issue may arise. Whilst intra-EU awards have been set aside in Paris, and the enforcement of intra-EU awards has been refused in Luxembourg and Sweden, German courts have issued divergent rulings on whether intra-EU ICSID proceedings are admissible (see here and here). The recent decision of the Amsterdam interim relief judge adds to the developing canvas of domestic judgments assessing the implications of Achmea (see also here and here).

 

Poland’s Request to the Amsterdam Court

The Amsterdam court rejected Poland’s request to order the Dutch investor to end its arbitration against Poland, which was brought under the (meanwhile terminated) Netherlands-Poland BIT. The court noted that the relevant question was not whether the tribunal would have jurisdiction, as only the tribunal was authorised to decide on its jurisdiction at this stage. Rather, for Poland’s request to succeed, it would have to demonstrate that the continuation of the proceedings by the investor would be unlawful because these proceedings were evidently frivolous.

Moreover, in the interim relief proceedings, the court would only be competent to award temporary measures. At most, the interim relief judge could order the investor to cooperate with a stay (and not termination) of the arbitration proceedings pending the conclusion of the main court proceedings on whether the continuation of the arbitration would be unlawful. The interim relief judge saw no reason to do so.

The court considered that the assessment of whether proceedings were unlawful should be made with restraint, in light of the fundamental right of access to justice (Article 6 of the ECHR – see on the potential role of the ECtHR in this context here). The court did note that the arbitration proceedings ‘possibly’ lacked a valid basis, in light of the Achmea ruling and the conclusion of the Agreement for the Termination of BITs between Member States of the EU which entered into force between the Netherlands and Poland after the commencement of the arbitration proceedings. For these reasons, the court considered that the BIT between the Netherlands and Poland could no longer operate as a basis for the arbitration. However, it was not certain that the tribunal would also decline jurisdiction.

In this respect, the court considered that when the investor initiated the arbitration, the Termination Agreement had not yet entered into force and the BIT’s sunset clause was still applicable. Moreover, the arbitration was seated in England, where the setting aside court would not be bound by EU law. In this respect, the court referred to the UK Supreme Court’s judgment in Micula (although this judgment was rendered when the UK was still bound by EU law – see comment here). All in all, the district court concluded that there was a ‘high chance’ that the tribunal would assume jurisdiction and that the set aside judge would reject a challenge based on an alleged lack of jurisdiction. Accordingly, the arbitration could not be considered frivolous, and its continuation would not be unlawful.

So far, the judgment did not contain any surprises, but the court did not stop here. The interim relief judge noted that ‘within the EU, there is a lot of debate on the Achmea judgment and its consequences’, for two reasons.

 

The Future of Intra-EU Arbitration Outside the EU

First, according to the court, the ‘formal consequences’ of the judgment had not yet ‘fully crystallised’. Whilst an arbitral award issued on the basis of an intra-EU BIT would not be enforceable in member states, this would be ‘(possibly) different’ outside the EU. This point seems accurate, as the fate of intra-EU awards in the United States (see here) shows. Courts outside the EU will not consider themselves bound by EU law, whilst they do have obligations under the ICSID Convention or the New York Convention. As one US judge held in the context of the Micula saga: ‘[a]s a party to the ICSID Convention, the United States has a compelling interest in fulfilling its obligation … to recognize and enforce ICSID awards regardless of the actions of another state’, referring to ‘the ICSID Convention’s expansive spirit on which many American investors rely when they seek to confirm awards in the national courts of the Convention’s other member states’.

 

The Limits of Mutual Trust

The second point noted by district court was the current debate about the ‘(desirability of the) judgment’s consequences’. According to the court, many doubt the CJEU’s assumption that investors are sufficiently protected by EU law also without intra-EU BITs. In this respect, the court noted two developments: first, ‘the problem of challenges to the independence of the Polish judiciary’, and second, the intention of the EU and member states to establish an Investment Court System.

The first point, concerning the independence of the Polish judiciary, raises interesting questions. Within the EU, member states are required to presume that other member states comply with their obligations under EU law, including the obligation to ensure access to effective judicial remedies. In Achmea, the CJEU mentioned this principle of ‘mutual trust’ in order to distinguish arbitration clauses in intra-EU BITs from those in agreements concluded by the EU. The Court seemed implicitly to argue that offering investment arbitration to intra-EU investors because of perceived deficiencies in the protection provided by the judiciary of another member state is difficult to square with this principle (see on the relevance of mutual trust in the Achmea judgment also here). However, the mutual trust required by EU law is not absolute, which might mean that if there is genuine concern about the quality of the protection offered by the domestic courts of one member state to the investors of another, the incompatibility between EU law and investment arbitration may fade away.

 

The Hopes of New-style Investment Protection

The second development mentioned by the Amsterdam court is that ‘apparently also the member states consider that after Achmea and the conclusion of the Termination Agreement there is a gap in the legal protection of foreign investors’. The court pointed to the conclusion of CETA and its reference to an Investment Court System as a new model for investor-state dispute settlement. The court considered that since the ‘new rules of investment protection are not yet in force’, investment arbitration was ‘possibly’ the only genuine remedy that the Dutch investor could rely on.

The court’s reasoning is not entirely clear since the dispute settlement mechanisms established by CETA will not apply intra-EU. It is also unlikely that the CJEU would consider an intra-EU Investment Court System compatible with EU law, unless subject to its own supervision. Possibly, the district court considered that by including an investment protection chapter in CETA, the EU and its member states showed that they are not opposed to offering special legal protection to foreign investors. Whether all member states still think so remains to be seen. The Irish Supreme Court recently ruled that CETA’s dispute settlement mechanism conflicted with the Irish Constitution because it would infringe the ‘judicial sovereignty of the State’.

 

Conclusions

Although the CJEU has expressed increasingly clear and categorical views on intra-EU investment arbitration, the precise implications in member state courts are still not fully determined. The Amsterdam district court’s decision acknowledges the continuing viability of intra-EU arbitration seated outside the EU (although recognising that enforcement within the EU is unlikely), whilst expressing some doubts as to the wisdom of the course taken by the CJEU. If the quality of judicial remedies in some member states backslides, and non-EU investors are given access to investment arbitration, the question as to whether intra-EU investors should not have similar rights becomes increasingly salient.

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Open Position: Assistant Editor of Kluwer Arbitration Blog

Thu, 2022-12-15 00:01

The Editorial Board of Kluwer Arbitration Blog announces the opening of the following position with Kluwer Arbitration Blog: Assistant Editor for Southeast Asia.

The Assistant Editor reports directly to the coordinating Associate Editor and is expected to (1) collect, edit and review guest submissions from the designated region for posting on the Blog, while actively being involved in the coverage of the assigned region; and (2) write blog posts as contributor. You have the opportunity to work with a dynamic and dedicated team and liaise with the arbitration community and various stakeholders.

The Assistant Editor will work remotely. Please note that this is a non-remunerated position. If you are interested, please submit a resume and cover letter by email to the Managing Editor, Dr Crina Baltag, [email protected].

The deadline for receiving the application is 31 December 2022. Only shortlisted candidates will be contacted. Interviews with the shortlisted candidates will be scheduled between 9 and 13 January 2023.

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A Second Look on Kabab-Ji v. Kout Food or Promoting a Formalist Transnational Contract Law Theory

Wed, 2022-12-14 00:02

The landmark decision of the UK Supreme Court (the “Court”) handed down in 2021 in the case Kabab-Ji SAL v. Kout Food Group  has already attracted considerable attention. Thus far comments focused on the Court’s construction of the New York Convention of 1958. Yet, the decision deserves a second look – which this post aims to do – because it also provides guidance on how international arbitral tribunals should interpret sophisticated contracts, in particular choice of law clauses and references to transnational contract laws or international standards.

 

Factual and Procedural Background

The Court had to rule on a request for exequatur. It decided the case based on the conclusion that English law applied to both, the contract as such and its arbitration clause. This is in sharp contrast to a recently published judgement of the French Cassation Court, which refers to the same arbitral award. However, it was delivered in an annulment suit. The French Court held that English law applies to the contract but French law to the arbitration clause. We focus on the Supreme Court’s decision because it inspired our recently published book on “Contract Law in International Commercial Arbitration”, where we propose a transnational contract law theory and interpretation methodology, that explain the dominance of English, New York, and Swiss contract law in cross-border transactions and arbitration.

The dispute arose out of a franchise contract which provided that:

“the arbitrator(s) shall apply the provisions contained in the Agreement. The arbitrator(s) shall also apply principles of law generally recognized in international transactions. The arbitrator(s) may have to take into consideration some mandatory provisions of some countries i.e. provisions that appear later on to have an influence on the Agreement. Under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement (clause 14). This Agreement shall be governed by and construed in accordance with the laws of England (clause 15).”

The parties were agreed – and the Court accepted – that the reference to ‘principles of law generally recognized in international transactions’ was to be understood as a reference to the UNIDROIT Principles of International Commercial Contracts (para 31). When analyzing the normative quality of these principles the Court cited a passage of the preamble of the Principles, where their purpose and function are exhibited: ‘they (the UNIDROIT Principles) shall be applied when the parties have agreed that their contract be governed by them and that they may be used to interpret or supplement domestic law’. On this basis the Court concluded that the UNIDROIT Principles were not intended to have the force of law in their own right.

 

The Court’s Qualification of the UNIDROIT Principles

The Court’s qualification is correct in underlining the difference between the weight of classic law on the one hand and international principles and standards on the other. Only endorsement or ratification can lift transnational soft law on the level of national law in the strict sense; to put it differently, the products of the democratic law-making process have a distinct and superior normative quality. Transnationalism cannot substitute democracy.

The Court raised the question but did not finally decide whether the UNIDROIT Principles constitute law for the purposes of the New York Convention and the UK Arbitration Act. Yet, it emphasized the predominance of the parties’ choice of law clause in favor of English law. Indeed, the parties established in the quoted passage of the contract a hierarchy of norms that arbitrators were to follow. Firstly, they were to apply the provisions of the franchise contract; secondly, English contract law, and thirdly, also the UNIDROIT Principles. Furthermore, the parties agreed that ‘under no circumstances shall the arbitrator(s) apply any rule(s) that contradict(s) the strict wording of the Agreement’ (para 37).

The Court concluded that the contract’s wording ‘is absolutely clear and that there is no good reason to infer that the parties intended to except clause 14 from the choice of law to govern all the terms of their contract’ (paras 39 and 48). In fact, the systematic order of the contract confirms the UK Court’s position, and therefore the French Court is wrong. The governing law clause follows the dispute resolution clause. Thus, it is clearly meant to be an umbrella clause which covers all other clauses of the contract, especially clause 14 on dispute resolution and the norms that arbitrators shall apply.

The following passage of the judgment is key to understating the Court’s position:

“In the present case the claimant is seeking to rely on the UNIDROIT Principles to contradict both the No Oral Modification clause and the minimum requirements set out in Rock Advertising which must, in English law, be satisfied if a party is to be precluded by its conduct from relying on such clauses. Such reliance on the UNIDROIT Principles is contractually impermissible” (para 72).

The passage illustrates that the Court values the choice of the applicable national contract law higher than the additional reference to international soft law (UNIDROIT Principles).

This priority corresponds to the preferences of sophisticated parties to business transactions. According to the statistics of the ICC parties almost always rely on a national contract law.1)According to ICC statistics for 2020, choice-of-law clauses were included in substantive contractual provisions in 95%; see ICC Dispute Resolution Statistics: 2020 (ICC 2021). jQuery('#footnote_plugin_tooltip_43659_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43659_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Out of all contracts which, in 2020, became subject to an ICC-arbitration, only 2% included a reference to rules or instruments other than national laws, such as the United Nations Convention on Contracts for the International Sale of Goods (hereinafter CISG), the UNIDROIT Principles, International Commercial Law, and the ICC Incoterms. Parties preferred the selection of a national contract law with English law sitting top of the table followed by New York and Swiss contract law. English law alone had a market share of 13%.

 

The Strength of the Formalist or Minimalist Approach

The dominant laws are characterized by a strong commitment to the wording of commercial contracts, reluctance to construct or create implied terms, and a narrow interpretation of general clauses and imprecise terms, such as ‘good faith’ and ‘reasonable’. Thereby, they guarantee predictability of judgements and maximum party autonomy. The Court stated that ‘it is not contrary to good faith to interpret the terms of the Agreement in accordance with their express wording’ (para 74).

Notably, the UNIDROIT Principles and especially the CISG are very detailed and packed with unprecise terms. Jonathan Morgan sounds the alert2)Morgan, Contract Law Minimalism (CUP 2013) 187. jQuery('#footnote_plugin_tooltip_43659_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43659_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });: “The Convention is, by contrast (to English law), riddled with standards requiring discretion in their application (including over thirty uses of “reasonable” or “reasonableness”). Whatever their possible diplomatic usefulness, such vague terms have proved repellent to commercial contractors.” In the same vein, Gary B. Born points out, there is a tendency of international investors to avoid laws from jurisdictions that are more ‘likely to import general principles of good faith and reasonableness into contractual relations’.3)Born, International Arbitration and Forum Selection Agreements (6th edn, 2021) 167. jQuery('#footnote_plugin_tooltip_43659_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_43659_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Parties avoid such contract laws because they give adjudicators significant leeway and discretionary power to depart from the literal wording of the contract or to modify its content on grounds such as imbalance of contractual obligations or corrective justice. Thereby, such laws cause uncertainty as to the enforcement of the agreed risk allocation which underlies the pricing of each contract.

Even those who are more favorable to interference in the name of a balance of contractual obligations or corrective justice cannot deny that such an approach reduces the predictability of court decisions and arbitral awards. On the contrary, as Morgan stated in ringing tones, ‘English contract law generally displays hostility to judicial discretion’.4)Morgan, supra n. 5, 95. jQuery('#footnote_plugin_tooltip_43659_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_43659_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); New York and Swiss contract follow this path which explains the quoted ICC statistics. Sophisticated parties prefer choosing a contract law, that is considered (in the market) as highly predictable, frequently selected (familiarity), and strongly committed to party autonomy. As the Supreme Court underlined English contract law satisfies these conditions. We conclude that CISG and UNIDROIT Principles do not, otherwise they would be more successful.

 

Conclusion

Consequently, international commercial arbitration should not focus on promoting transnational contract laws but rather promote the development of a contract law theory and a methodology for interpreting complex contracts and remedies for breach. Such a theory and methodology, if it is not made solely for ivory tower discussions, must fit the preferences and expectations of sophisticated dealmakers and arbitration users. The setting and features of international arbitration justify a tailor-made transnational approach because tribunals with arbitrators, that hail from different jurisdictions, have more room for case specific solutions than courts do when they perform their slightly different mission, which includes consistency and development of “their” national contract law.

References[+]

References ↑1 According to ICC statistics for 2020, choice-of-law clauses were included in substantive contractual provisions in 95%; see ICC Dispute Resolution Statistics: 2020 (ICC 2021). ↑2 Morgan, Contract Law Minimalism (CUP 2013) 187. ↑3 Born, International Arbitration and Forum Selection Agreements (6th edn, 2021) 167. ↑4 Morgan, supra n. 5, 95. function footnote_expand_reference_container_43659_30() { jQuery('#footnote_references_container_43659_30').show(); jQuery('#footnote_reference_container_collapse_button_43659_30').text('−'); } function footnote_collapse_reference_container_43659_30() { jQuery('#footnote_references_container_43659_30').hide(); jQuery('#footnote_reference_container_collapse_button_43659_30').text('+'); } function footnote_expand_collapse_reference_container_43659_30() { if (jQuery('#footnote_references_container_43659_30').is(':hidden')) { footnote_expand_reference_container_43659_30(); } else { footnote_collapse_reference_container_43659_30(); } } function footnote_moveToReference_43659_30(p_str_TargetID) { footnote_expand_reference_container_43659_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_43659_30(p_str_TargetID) { footnote_expand_reference_container_43659_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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The New York Convention and Taiwan: It’s Time to Be Sensible

Tue, 2022-12-13 00:41

The Republic of China, also known as “Taiwan,” is among the world’s leading economies.  In 2021, Taiwan had a gross domestic product of US$ 670 billion, predicted to increase by 6.45% in 2022; by 2026, Taiwan is projected to be the world’s twentieth largest economy.  Taiwan was the United States’ eleventh largest trading partner in 2021, and it has similar commercial relations with other leading economies, including Japan, Korea, the EU, the People’s Republic of China, and Singapore.  Likewise, foreign direct investment in Taiwan totaled US$ 116 billion in 2021, and outbound foreign direct investment from Taiwan totaled US$ 411 billion.

The commercial activities of Taiwanese companies and entrepreneurs inevitably give rise to cross-border commercial disputes between Taiwanese businesses and their foreign counterparts – as well as the need to resolve those disputes effectively and efficiently.  Unfortunately, the ability of Taiwanese and foreign companies to resolve these international commercial disputes is significantly impeded because Taiwan is currently unable to accede to the U.N. Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “Convention”) or to effectively participate in the Convention’s mechanisms for international dispute resolution.  Taiwan’s exclusion from the New York Convention and its framework for international arbitration is anomalous and damaging to increasingly important international trade and investment flows.

The New York Convention, with 171 Contracting States, plays an essential role in the resolution of cross-border commercial disputes: it provides uniform, international rules requiring the recognition and enforcement of international commercial arbitration agreements and arbitral awards.  The Convention’s vital role as the global constitution governing resolution of international commercial disputes, and facilitating cross-border trade and investment, is universally acknowledged.  In the classic assessment of the Convention by Stephen Schwebel, formerly President of the International Court of Justice, “It works.”

Despite the New York Convention’s essential role in contemporary international commerce, and the importance of Taiwan to contemporary international trade and investment between virtually all nations, Taiwan is not a Contracting State to the Convention.  Article VIII of the Convention provides only for accession to the Convention by states which are members of a U.N. specialized agency or the Statute of the International Court of Justice, or which have been invited to accede to the Convention by the U.N. General Assembly:

any State which is or hereafter becomes a member of any specialized agency of the United Nations, or which is or hereafter becomes a party to the Statute of the International Court of Justice, or any other State to which an invitation has been addressed by the General Assembly of the United Nations.

Of course, most nations, including EU member states and the United States, do not formally recognize Taiwan as a state.  Despite this policy of non-recognition, most nations have both robust trade relations and significant governmental dealings with Taiwan, including, as discussed below, numerous international agreements and other forms of inter-governmental cooperation, particularly in commercial matters.  A natural element of such relations would, one would think, include Taiwan’s inclusion in the New York Convention.

Nonetheless, the People’s Republic of China has blocked Taiwan’s accession to the Convention through any of the avenues provided by Article VIII, much as it has objected to Taiwan’s ratification of the Vienna Convention on the Law of Treaties.  Regrettably, China’s attitude appears likely to continue in the future.

Taiwan’s resulting exclusion from the New York Convention is irrational and damaging to both Taiwan and its principal trading partners, including the United States, the EU, Japan, Korea and, ironically, China.  In particular, Taiwan is not bound by the Convention’s obligations to recognize international arbitration agreements (in Article II) or arbitral awards (in Articles III, IV and V); conversely, the 80 or so Contracting States to the Convention that have adopted reciprocity reservations (under Article I of the Convention) are not obligated to recognize Taiwanese arbitral awards (or, arguably, associated arbitration agreements).

Taiwan’s resulting exclusion from the New York Convention inhibits international commerce, by making trade and investment with a major, and growing, economy less predictable and more risky; it also makes that commerce less efficient and fair.  More fundamentally, Taiwan’s exclusion from the Convention also reduces the efficacy of an otherwise global instrument which plays a vital role in advancing the rule of law in international commercial matters and permitting peaceful international dispute resolution.  Russia’s aggression and other crimes in Ukraine underscore the vital importance of international law, and Taiwan’s exclusion from the Convention inhibits its ability to advance the rule of law.

It makes neither good economic policy nor good international law to continue Taiwan’s exclusion from a major aspect of the world’s economic and legal order.  It is of vital importance to both Taiwan and its trading partners to facilitate the efficient and effective resolution of cross-border commercial disputes – as the New York Convention does.  It is likewise of vital importance, particularly today, to enhance the rule of international law and to facilitate the peaceful resolution of international disputes – again, as the Convention does.  Excluding Taiwan from the Convention serves no legitimate purpose.

The fact that most nations do not formally recognize Taiwan as a state provides no legitimate reason to exclude it from the Convention.  Notwithstanding the lack of formal diplomatic recognition, Taiwan is party to numerous international economic organizations, including the World Trade Organization (“WTO”), the Asian Development Bank and the Asia Pacific Economic Cooperation, as well as the treaties establishing these institutions.  Among other things, Taiwan participates actively in the WTO dispute resolution mechanisms (resolving interstate disputes over cross-border trade and investment).  Similarly, Taiwan is party to nearly 40 bilateral investment or investment protection treaties and to a number of free trade agreements; virtually all of these international agreements have been concluded principally by states that do not formally recognize Taiwan as a state or maintain formal diplomatic relations with Taiwan; again, all of these treaties provide for the participation of Taiwan and Taiwanese companies in international dispute resolution, similar in most essential respects to dispute resolution under the New York Convention.

Given Taiwan’s economic importance, and its role in the WTO and other international trade and investment agreements, it makes no sense to exclude it from the New York Convention.  That exclusion undermines the objectives of both the Convention and international law more generally – by inhibiting international trade and investment and undermining the rule of law in international affairs.

Excluding Taiwan from the Convention is also anomalous.  Put simply, how does it make sense, in today’s world, for states like Afghanistan, Syria, Venezuela, Iran and Belarus to be parties to the Convention, and part of the international legal framework for commercial arbitration, but Taiwan not to be?  Why does it make sense for Sao Tome, Andorra, and Cape Verde to be parties to the Convention, but Taiwan not to be?  How is it that North Korea, Yemen, Chad and Somaliland would be able to accede to the Convention, as treaty partners with the United States, the EU and Japan, but Taiwan cannot?  The simple answer is that it makes no sense to exclude Taiwan from the Convention, while doing so injures not only Taiwanese businesses, but also companies in the United States, the EU, Japan, Korea and elsewhere.

There are ready means for remedying the current status (or lack of status) of Taiwan in the international legal regime for resolving cross-border commercial disputes.  These remedies are capable of easy, uncomplicated implementation and should raise no legitimate political concerns – either in the United States, Europe or elsewhere, including China.

Three remedies should be considered on the international level: (a) an amendment to the New York Convention, (b) the adoption of a new treaty – with a reach aspiring to that of the Convention’s 171 current jurisdictions – that would provide for reciprocal recognition and enforcement of international arbitration agreements and arbitral awards involving Taiwan and (c) a series of smaller-scale bilateral and multilateral trade agreements to the same effect.  Each of these types of international agreement is fully compatible with international law (and not dissimilar from either Taiwan’s participation in the WTO or its 40 or so investment protection agreements with countries around the world); each of these types of international agreement would also remedy the current, irrational exclusion of Taiwan from the Convention.

Remedies for Taiwan’s exclusion from the Convention are also possible, if less desirable, on a domestic level.  Those legislative remedies would vary among states, depending on existing national statutory instruments. In the United States, for example, Congress could amend Chapter 2 of the Federal Arbitration Act, the domestic U.S. legislation implementing the Convention, allowing for arbitration agreements and awards involving Taiwan and Taiwanese parties to be enforced in the United States on the same terms as the Convention.  Alternatively, the United States could conclude a congressional executive agreement (like the North American Free Trade Agreement or the United States-Mexico-Canada Agreement), which would similarly provide for mutual recognition and enforcement of international arbitration agreements and awards on terms paralleling the Convention.  Each of these options would complement existing Taiwanese legislation by effectively ensuring that Taiwanese awards and agreements are recognized and enforced in the United States.  Comparable legislation or bilateral agreements could be adopted in other states.

All of the foregoing proposals would largely or entirely remedy Taiwan’s exclusion from the New York Convention.  The most effective means of remedying that exclusion would be simply to amend the Convention – thereby extending the Convention’s uniform, global rules for dispute resolution to cross-border trade and investment involving Taiwan.  Nonetheless, political inertia and reservations regarding China’s potential reactions may make a series of bilateral (or regional) treaties incorporating the Convention’s substance less controversial.  In either case, international agreements would be preferable to domestic legislative solutions.

 

The authors are, respectively, the Chair and an associate of the International Arbitration Practice Group at Wilmer Cutler Pickering Hale and Dorr LLP.  Mr. Born is the author of “International Commercial Arbitration” (3d ed. 2021). The authors’ views do not represent those of either their law firm or of any organizations with which they are affiliated. 

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International Arbitration as the New Frontier for Reconceptualizing the International Legal Personality and Responsibility of Foreign Investors in the Post-Pandemic World

Mon, 2022-12-12 00:19

The author presented on this topic at the ACICA/CIArb Future Frontiers Conference, held in Melbourne, Australia on 7 November 2022 during Australian Arbitration Week.  This piece elaborates on the presentation that was delivered.

In the last decade, as more states have refused to comply with arbitral awards, attempts have been made to seize the assets of state-owned entities in satisfaction of states’ arbitral debts. Underlying many of these cases is a reconceptualization of the international legal personality of the state, and of its corresponding rights, immunities and obligations. Flowing from the introduction of the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles for Business and Human Rights, we have also seen the emergence of a similar conversation regarding the international legal personality and responsibility of non-state actors, specifically of foreign investors.

The post-pandemic era has further fueled, and amplified, this reconceptualization of the international legal personality and responsibility of foreign investors – through the avalanche of ESG regulations worldwide mandating human rights due diligence reporting across global supply chain networks, the proliferation of sanctions levelled against businesses and financial institutions involved in or facilitating transnational crime such as modern slavery or money laundering, the intensified policy initiatives promoting transitions to greener economies, and also, the promulgation of new generation treaties expressly imposing sustainable development obligations on foreign investors.

Against this backdrop, the traditional Westphalian state-centric conceptualization of international law is being increasingly challenged, the once-disparate fields of public international law and investment law are converging, and the question being increasingly asked is not what rights a foreign investor has, but rather, what obligations a foreign investor owes instead. It becomes worthwhile then to take a step back and consider whether the international arbitration community is prepared for this new post-pandemic era focused on advancing sustainable development. In re-examining the status quo, this piece will analyze three pre-pandemic arbitral cases. These three cases stand out for their particular prescience and together exemplify how international arbitration is becoming the new frontier through which foreign investors may be recognized as subjects under international law, and consequently have responsibilities, if not obligations, vis-à-vis international human rights, the environment, and good governance.

 

I. Recognizing Foreign Investors as Subjects Under International Law

The first case is Urbaser v. Argentina (ICSID Case No. ARB/07/26), where the tribunal recognized that because “international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce,” “it can no longer be admitted that companies operating internationally are immune from becoming subjects of international law.” The tribunal considered that whereas “positive” international law obligations “to perform” could only bind states, “negative” obligations – i.e. directions to respect a particular right, and not “engage in activity aimed at destroying” such rights – could be of “immediate application, not only upon States, but equally to individuals and other private parties.”  (Emphasis added; Paras 1195, 1199, 1208-1210).

Second, in Bear Creek v. Peru (ICSID Case No. ARB/14/21), the tribunal did not adopt Urbaser’s distinction between “positive” or “negative” international law obligations. Instead, the tribunal was divided on whether a particular international instrument – there, the International Labour Organization’s Indigenous and Tribal Peoples Convention (ILO Convention 169) – imposed “direct” obligations on non-state actors. Whereas the majority decided that the Convention imposed “direct obligations on states only,” the dissenting arbitrator opined that “does not…mean that [the Convention] is without significance or legal effects” for a foreign investor. (Emphasis added). In recognizing that “indigenous and tribal peoples also have rights under international law and these are not lesser rights” subordinated to an investor’s rights, the dissenting arbitrator found that an investor’s international law “responsibilities are no less than those of the government.” (Emphasis added).  In the dissenter’s view, a “significant and material” failure to comply with such responsibilities led to damages being halved.  (Dissenting opinion, paras 9-10, 36-39).

Finally, in David Aven v. Costa Rica (Case No. UNCT/15/3/, para. 738), the tribunal went further than both Urbaser and Bear Creek, finding that international law obligations that could be characterized as “obligations erga omnes” – such as those concerning the “protection of the environment” – could be imposed on foreign investors because in falling within the “concern of all states,” states would have a “legal interest in their protection.” (Emphasis added, para 738).  David Aven thus opened the door to the possibility of foreign investors being not only obliged to respect certain international law rights (i.e. Urbaser’s so-called “negative” obligations), but being additionally obliged to proactively protect such rights (i.e. “positive” obligations).

When viewed together, the Urbaser, Bear Creek and David Aven trio reflect changing understandings of the international legal personality of foreign investors. Concerns as to whether such a conceptual evolution is contentious can be addressed by recalling that investment treaties governing the relationship between state and foreign investor are typically interpreted pursuant to the Vienna Convention on the Law of Treaties (VCLT), and accordingly, ought to be interpreted in light of the treaty’s object and purpose, and keeping in mind any relevant rules or principles of international law such as (but not limited to) “respect for, and observance of, human rights.” Recognizing that foreign investors can be subjects of international law and have associated responsibilities, if not obligations, under international law thus becomes not so much an exercise of mental gymnastics, but rather an exercise of purposive and contextual interpretation, one that recognizes that investment law and international arbitration should not operate in a silo carved out from the broader auspices of international law and international law developments. See further e.g., here (para 1189 and 1200) and here.

 

II. The International Law Responsibility of Foreign Investors

Intertwined with the emerging recognition of the foreign investor as subjects of international law is the idea that responsibility for respecting and protecting human rights, preserving the environment, and not undermining good governance, is and should be a joint responsibility for both state and investor. Perhaps the more critical, and controversial, issue then is how the international responsibility of the foreign investor can be accounted for.

In Bear Creek the only case of the trio of cases discussed herein that endeavoured to give force to this idea 1) This is likely because in both Urbaser and David Aven, the invocation of the international law obligation was defeated (or perhaps more precisely, left unresolved as obiter statements) at the merits stage of the proceedings, and that being so, the tribunal in both Urbaser and David Aven did not have the opportunity to consider how to account for the joint responsibility of the state and investor.  Both tribunals similarly considered that the international law obligations respectively invoked by the respondent states in their counterclaims were not “based on international law” per se, but rather as arising in relation to the underlying investment treaty. See, Urbaser v. Argentina, at para 1206-1209; David Aven v. Costa Rica, at para 739-743.  This dichotomy seems odd, considering that in order to succeed in raising the counterclaim in the first instance (an endeavour in which they did succeed, as both tribunals accepted jurisdiction), the respondent states needed to establish a sufficient nexus to the investor’s claim which arose from the underlying investment treaty.  By contrast, in Bear Creek, the international law obligation invoked – being, whether the claimant investor had obtained a “social license” in accordance with ILO 69 – was a crucial issue accounted for at the damages assessment point instead; Bear Creek Final Award, at para 408. jQuery('#footnote_plugin_tooltip_43607_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43607_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); – the tribunal accounted for the joint responsibility of the state and the investor as a question of damages.  For the majority of the tribunal, joint responsibility was accounted for by quantifying the impact of the state’s action on the economic viability of the underlying investment, and considering the investor’s non-compliance with international law only to the extent that such non-compliance had an economic impact on the investment’s future profitability. Not only did this focus leave the impact of non-compliance on the local indigenous community out of the calculation (and therefore unremediated), but it turned a blind eye to the counterfactual impact of what would have happened to the broader human rights or environmental landscape had there been no state action taken, i.e. the non-economic impacts. The Bear Creek dissenter’s alternative focus on quantifying the investor’s “contribution to the events” that led to the state’s action was equally problematic to the notion of joint responsibility, albeit for a different reason – such an approach runs the risk that an investor can choose to not comply with international human rights or environmental law safe in the knowledge that such non-compliance will merely be considered a form of contributory negligence that will offset or discount part of the damages award, but will not otherwise deprive him of compensation. Neither approach to accounting for the joint responsibility of the state and the investor for international human rights and the environment seems satisfactory. In fact, both approaches seem disconnected and at odds with a rapidly-changing world where the spotlight is increasingly on investors to assess, report and address human rights and environmental impacts in their operations or along their supply chain, and where states have made greater commitments to uphold human rights or taken bolder action to transition to greener economies. See further here and here.

Instead of accounting for the joint responsibility of the state and the investor as a question of damages, perhaps more thought ought to be given to recognizing that responsibility as a question of admissibility or of jurisdiction. See further e.g., here, here, and here. There are cases, for example, where tribunals have invoked an international public policy against corruption as a jurisdictional or admissibility bar, or have recognized that investment protection ought not to be granted at the outset for investments “made in violation of the most fundamental rules of protection of human rights.” As to whether an international public policy yet exists recognizing corporate social responsibility – specifically, an investor’s responsibility (if not obligation) towards international human rights and the environment (as opposed to only vis-à-vis corruption) – it is worth noting that the tribunal in Urbaser v. Argentina opined that “international law accepts corporate social responsibility as a standard of crucial importance for companies operating in the field of international commerce.” The unanimous adoption by the Bear Creek tribunal of the “social license to operate” concept – a term used to define the “broader scope” of the responsibility of companies to respect human rights – should also not be overlooked. Although it remains to be seen whether future tribunals will solidify this notion further, recognizing the existence of such an international public policy could assist in accounting for the joint responsibility of the state and the investor for international human rights and the environment, while being a less controversial alternative than attempting to identify and inflict specific “hard” international law obligations not otherwise imposed on investors by international law itself.

 

III.       Looking Forward

Overall, the Urbaser, Bear Creek and David Aven trio reflects an evolving understanding of the international legal personality and responsibility of non-state actors, specifically foreign investors. In the post-pandemic world, the foreign investor will not only have to be cognizant of an increasing array of obligations with an ESG flavour arising under the domestic laws of the countries in which it operates, but also of responsibilities, if not obligations, arising under international law as well.   Not only will disputes regarding the substance and scope of such international law responsibilities and the consequences of non-compliance be increasingly encountered in the international arbitration arena, but the way such disputes are resolved will also force us as international arbitration practitioners to consider what role we want to play in a post-pandemic world more focused on advancing sustainable development globally.

References[+]

References ↑1 This is likely because in both Urbaser and David Aven, the invocation of the international law obligation was defeated (or perhaps more precisely, left unresolved as obiter statements) at the merits stage of the proceedings, and that being so, the tribunal in both Urbaser and David Aven did not have the opportunity to consider how to account for the joint responsibility of the state and investor.  Both tribunals similarly considered that the international law obligations respectively invoked by the respondent states in their counterclaims were not “based on international law” per se, but rather as arising in relation to the underlying investment treaty. See, Urbaser v. Argentina, at para 1206-1209; David Aven v. Costa Rica, at para 739-743.  This dichotomy seems odd, considering that in order to succeed in raising the counterclaim in the first instance (an endeavour in which they did succeed, as both tribunals accepted jurisdiction), the respondent states needed to establish a sufficient nexus to the investor’s claim which arose from the underlying investment treaty.  By contrast, in Bear Creek, the international law obligation invoked – being, whether the claimant investor had obtained a “social license” in accordance with ILO 69 – was a crucial issue accounted for at the damages assessment point instead; Bear Creek Final Award, at para 408. function footnote_expand_reference_container_43607_30() { jQuery('#footnote_references_container_43607_30').show(); jQuery('#footnote_reference_container_collapse_button_43607_30').text('−'); } function footnote_collapse_reference_container_43607_30() { jQuery('#footnote_references_container_43607_30').hide(); jQuery('#footnote_reference_container_collapse_button_43607_30').text('+'); } function footnote_expand_collapse_reference_container_43607_30() { if (jQuery('#footnote_references_container_43607_30').is(':hidden')) { footnote_expand_reference_container_43607_30(); } else { footnote_collapse_reference_container_43607_30(); } } function footnote_moveToReference_43607_30(p_str_TargetID) { footnote_expand_reference_container_43607_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_43607_30(p_str_TargetID) { footnote_expand_reference_container_43607_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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ESG Clauses and Dispute Risks

Sun, 2022-12-11 00:30

In 2022, environmental, social and governance (“ESG”) is undoubtedly having a moment, from the cover page of the Economist, to new regulatory schemes in the US and in Europe, not to mention being a headline topic for arbitration conferences from Taipei to Paris, Rio de Janeiro, Singapore, Berlin and Hong Kong. Many reported ESG disputes to date have taken place in the public sphere in the form of strategic litigation, shareholder activism, or investment arbitrations that touch on environmental or human rights issues. But what can ESG mean for private commercial disputes brought to international arbitration?

ESG ratings, disclosure and reporting requirements are on the rise globally. For over a decade, the OECD, the UN, and others have been recommending in their soft law guidance that companies “influence suppliers through contractual arrangements” to maintain and improve sustainability and responsible business conduct.1)See, e.g., OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, http://dx.doi.org/10.1787/9789264115415-en, p. 24. jQuery('#footnote_plugin_tooltip_43582_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In addition, ESG has become a reputational issue, with public pressure for real change in terms of ESG impacts not only by companies themselves but impacts caused across corporate groups, supply chains and value chains.

In this context, contractual clauses that contain disclosure and reporting obligations, benchmarks, compliance assurances or targets on ESG issues are increasingly inserted into agreements between contractual partners. This practice will soon become hard law in the European Union (“EU”), as the EU’s proposed Corporate Sustainability Due Diligence Directive will require large companies to conduct human rights and environmental due diligence, which includes measures to identify, prevent and mitigate actual and potential adverse human rights and environmental impacts. Companies will also be required to seek contractual assurances from business partners to ensure compliance with the company’s code of conduct for corporate functions and operations, as well as “contractual cascading” of such assurances across the value chain.2)Proposed Corporate Sustainability Due Diligence Directive, Art. 7(2)(b). jQuery('#footnote_plugin_tooltip_43582_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Making ESG operational by way of contractual clauses inevitably leads to disputes over interpretation and application of the clauses, as some practitioners have already begun to see. Where the contract contains an arbitration agreement, these disputes will be resolved through arbitration, and such disputes are likely to proliferate together with the increasing use of ESG clauses.

 

Model Clauses
A quick search online will reveal legal boilerplate ESG clauses, which often take a catch-all or umbrella-style approach to compliance, e.g., by way of a broad representation or warranty.

Several initiatives have already developed more sophisticated model contractual clauses addressing ESG issues, which may provide inspiration to companies seeking to reach voluntary ESG targets or comply with new regulatory requirements. For example, in 2018 a Working Group of the American Bar Association Business Law Section released a set of model contractual clauses (“ABA MCCs 1.0”), updated with alternative clauses in 2021 (“ABA MCCs 2.0”).3)See https://www.americanbar.org/groups/human_rights/business-human-rights-initiative/contractual-clauses-project/; David V. Snyder, Susan Maslow and Sarah Dadush, American Bar Association Section of Business Law, Working Group to Draft Model Contract Clauses to Protect Human Rights in International Supply Chains, Balancing Buyer and Supplier Responsibilities: Model Contract Clauses to Protect Workers in International Supply Chains, Version 2.0 (19 April 2021), 77 Business Lawyer (ABA, Winter 2021-2022), American University, WCL Research Paper No. 2021-15 (“ABA Report”). jQuery('#footnote_plugin_tooltip_43582_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The aim of the clauses is to assist in the protection of workers’ human rights in the supply chain by creating “legally effective and operationally likely” human rights protections.4)https://businesslawtoday.org/2018/11/human-rights-protections-international-supply-chains-protecting-workers-managing-company-risk/. jQuery('#footnote_plugin_tooltip_43582_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); They are drafted on the basis of US law and the United Nations Convention on Contracts for the International Sale of Goods (CISG).5)ABA Report, pp. 2, 19. jQuery('#footnote_plugin_tooltip_43582_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The clauses are to be inserted into supply contracts, purchase orders, or similar documents for the sale of goods.6)ABA Report, p. 19. jQuery('#footnote_plugin_tooltip_43582_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

As an example of clauses addressing environmental issues, the Chancery Lane Project is a collaborative initiative that has, since 2019, provided contractual clauses under the law of England and Wales ready to incorporate into agreements.7) https://chancerylaneproject.org/about/; The Chancery Lane Project, Climate Contract Playbook, Edition 3, p. 9 https://online.flippingbook.com/view/527128/8/. jQuery('#footnote_plugin_tooltip_43582_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It provides more than 100 model clauses for various kinds of contracts, tailored to the type of contract and to specific climate-related goals.8) See https://chancerylaneproject.org/climate-clauses/. jQuery('#footnote_plugin_tooltip_43582_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Other model clause initiatives can be anticipated. In this regard, Article 12 of the EU’s proposed Corporate Sustainability Due Diligence Directive provides that the European Commission will adopt guidance about voluntary model contract clauses to support compliance with obligations under the Directive, which notably would address both environmental and human rights impacts.

 

Dispute Risks and Challenges
The relative novelty of ESG clauses and challenges associated with their drafting allows us to identify some potential issues in future disputes. Here we highlight just a few:

  • Interpretation

Since the enforcement of ESG clauses is a relatively new phenomenon, there are likely to be disputes over how to interpret them, and what concrete action is required to comply in a specific case. This is especially the case for broadly drafted clauses or those with imprecise language. It further remains to be seen what will be considered to constitute a material breach of an ESG clause, where this would give a party a right to terminate an agreement.

  • Regulatory Proliferation

In circumstances where ESG requirements may be derived from the law applicable to the parties at their seat, the law at the place of performance of a contract, the law governing the contract, and others, identification of the applicable requirements may prove challenging. Where those requirements are mandatory law, arbitral tribunals may further have to consider the impact of such mandatory law in proceedings that are governed by another law.

  • Measurability

Where a contract requires ESG benchmarking or third-party verification of ESG compliance, a big question is how to measure ESG impacts. While efforts are underway to improve this area, there is currently a lack of standardisation and consistency in ESG metrics, large divergences in the rankings of different providers, and a lack of transparency about the data used to arrive at ratings. ESG auditing is likely to become a significant area for compliance, and a matter of expert evidence in arbitral proceedings.

  • Supply chains

Ensuring ESG compliance across a supply chain is a potentially onerous obligation on companies. While businesses who have not already adapted become more accustomed to knowing what is going on in their supply chain, the sheer size of the task is likely to lead to disputes. It may also be unclear how far due diligence obligations extend. For example, the EU’s proposed Corporate Sustainability Due Diligence Directive imposes obligations where a relationship with a contractual partner “is expected to be lasting, in view of its intensity or duration and which does not represent a negligible or merely ancillary part of the value chain” (proposed Art. 3(f)). It will be necessary for decision-makers to give content to these standards in the circumstances of the specific case and under the applicable law.

Where the assessment of third-party conduct is an issue for ESG compliance (e.g., an environmental or human rights impact caused by another entity in the supply chain), this also brings typical challenges associated with third parties to arbitration, including the lack of jurisdiction over non-parties to the arbitration agreement, difficulties gathering evidence, and the potential for parallel proceedings.

  • Causation and Remedies

ESG issues bring into play new types of contractual remedies and requirements that affect existing remedies, which arbitral tribunals will have to assess. Causation also stands out as a complex matter, for example, where it is necessary to determine whether and how specific activities will be considered as a matter of fact and law to have caused environmental harm or an adverse human rights impact. There may be an additional layer of complexity when the entity that allegedly caused the harm is not a party to the proceedings, but it is argued that their adverse impact caused loss to the party bringing a claim.

It may be necessary to consider whether and how typical contractual remedies interact with more novel ESG remedies. ESG clauses that take a due diligence approach (such as the ABA MCCs 2.0, and the proposed Corporate Sustainability Due Diligence Directive) emphasise remediation to address and restore an adverse ESG impact. Remediation may take the form of apologies, restitution, rehabilitation, or financial or non-financial compensation.9) ABA MCCs 2.0, Clause 2.3(b). jQuery('#footnote_plugin_tooltip_43582_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_43582_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Where adverse impacts are not prevented or adequately mitigated, the proposed Corporate Sustainability Due Diligence Directive requires companies to refrain from entering into new relations with a partner in connection with which the impact has arisen. They must also temporarily suspend commercial relations while pursuing prevention and minimisation efforts and terminate the business relationship if the potential impact is severe. EU Member States will be obliged to provide for an option to terminate the business relationship in contracts governed by their laws.

Other potential remedies provided under the ABA MCCs 2.0 include, in the event of breach of human rights standards: (i) demanding appropriate assurances; (ii) obtaining an injunction with respect to non-compliance; (iii) requiring a supplier to terminate an agreement or affiliation with a specific factory, terminate a subcontract or remove an employee; (iv) suspending payments pending remedial action; (v) avoiding or cancelling the agreement; and (vi) obtaining damages. Worth noting in the ABA MCCs 2.0 is a potential waiver of privity of contract in relation to beneficiaries of the contract (which may include all buyers and suppliers in the supply chain), who may enforce human rights protections against the contractual parties.

These remedies give rise to novel considerations for parties and arbitral tribunals in deciding how they may play a role in arbitral proceedings, including monitoring or enforcement where relevant.

 

Conclusion
There is plenty of room for disagreement about how ESG clauses will be performed and enforced. As use of ESG clauses continues to increase, we are likely to see this play out in contractual disputes in arbitration. The way an ESG clause is drafted will have a significant impact on likely disputes, in terms of the precision of the language, the inclusion of specific obligations, whether those obligations are easily measurable, and how broadly the obligations extend down a company’s supply chain or value chain.

This post is based on the author’s presentation of a paper at the Taipei International Conference on Arbitration and Mediation during the Taiwan Arbitration Week on 5 October 2022. The paper is entitled “Under my Umbrella: Seeking Shelter under an ESG Clause”.

References[+]

References ↑1 See, e.g., OECD (2011), OECD Guidelines for Multinational Enterprises, OECD Publishing, http://dx.doi.org/10.1787/9789264115415-en, p. 24. ↑2 Proposed Corporate Sustainability Due Diligence Directive, Art. 7(2)(b). ↑3 See https://www.americanbar.org/groups/human_rights/business-human-rights-initiative/contractual-clauses-project/; David V. Snyder, Susan Maslow and Sarah Dadush, American Bar Association Section of Business Law, Working Group to Draft Model Contract Clauses to Protect Human Rights in International Supply Chains, Balancing Buyer and Supplier Responsibilities: Model Contract Clauses to Protect Workers in International Supply Chains, Version 2.0 (19 April 2021), 77 Business Lawyer (ABA, Winter 2021-2022), American University, WCL Research Paper No. 2021-15 (“ABA Report”). ↑4 https://businesslawtoday.org/2018/11/human-rights-protections-international-supply-chains-protecting-workers-managing-company-risk/. ↑5 ABA Report, pp. 2, 19. ↑6 ABA Report, p. 19. ↑7 https://chancerylaneproject.org/about/; The Chancery Lane Project, Climate Contract Playbook, Edition 3, p. 9 https://online.flippingbook.com/view/527128/8/. ↑8 See https://chancerylaneproject.org/climate-clauses/. ↑9 ABA MCCs 2.0, Clause 2.3(b). function footnote_expand_reference_container_43582_30() { jQuery('#footnote_references_container_43582_30').show(); jQuery('#footnote_reference_container_collapse_button_43582_30').text('−'); } function footnote_collapse_reference_container_43582_30() { jQuery('#footnote_references_container_43582_30').hide(); jQuery('#footnote_reference_container_collapse_button_43582_30').text('+'); } function footnote_expand_collapse_reference_container_43582_30() { if (jQuery('#footnote_references_container_43582_30').is(':hidden')) { footnote_expand_reference_container_43582_30(); } else { footnote_collapse_reference_container_43582_30(); } } function footnote_moveToReference_43582_30(p_str_TargetID) { footnote_expand_reference_container_43582_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_43582_30(p_str_TargetID) { footnote_expand_reference_container_43582_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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ICSID Annual Report 2022: Same Old but Different?

Sat, 2022-12-10 00:20

Considering the many ongoing discussions, especially in academia, on the perceived shortcomings, evils and presumable demise of Investor-state Dispute Settlement (ISDS), it is sometimes easy to forget that the system is alive and kicking and we should not be throwing in the towel just yet. Thankfully, last month ICSID published its Annual Report for the 2022 financial year, illustrating the sheer volume of developments in international investment law, and providing a more nuanced (or dare one say, balanced) picture of ISDS.

This post summarises the already accessible Report and provides a comparative overview of the figures by contrasting the numbers to the statistics from 2021 to 2018.

 

1. New and Administered Cases

In FY2022, ICSID registered 50 new cases which, while a drop from the 70 registered in FY2021, is still very much in line with the statistics from recent years (FY2020 – 40, FY2019 – 52, FY2018 – 57). FY2022 marked a year-on-year increase in a number of administered cases – 346, up from 332 in FY2021 (FY2020 – 303, FY2019 – 306, FY2018 – 279). Overall, the total number of cases administered by ICSID now stands at a respectable 888. As in previous years, the ICSID Secretariat also administered a smaller number of non-ICSID cases (mostly under the UNCITRAL Rules and other ad hoc rules).

 

2. Jurisdiction

In FY2022, the majority (56%) of cases were brought under bilateral investment treaties (BITs) (FY2021 – 63%, FY2020 – 57%, 2019 – 64%, 2018 – 60%). There was a slight increase (of +3%) of cases brought under the Energy Charter Treaty (11%), though this proportion is still lower than in FY2020 (16%). In this regard, commentators have remarked that this increase will continue in light of news regarding the ECT modernisation process (see analysis here and here). While the vast majority of remaining cases have been brought under various multilateral investment agreement (MITs), an often-overlooked proportion invokes jurisdiction derived from an investment contract. This number has been in or close to double digits for years now, indeed in FY2022 it edged over the ECT again (FY2022 – 13%, FY2021 – 7%, FY2020 – 11%, FY2019 – 15%, FY2018 – 14%). Again, commentators have candidly started to make note of this development and its potential increase in the future.

 

3. Geographical Distribution of Cases

There have been slight shifts in the distribution of cases throughout the past 5 years without many clear trends emerging. Some commentators have suggested that the EU’s decision to ban intra-EU ISDS may produce dips in the number of cases. The numbers do not appear (not yet at least) to reflect this impact. Firstly, most of the intra-EU BITs were terminated in 2021 following the Court of Justice of the European Union’s ruling in Achmea and as such the reporting period for this report has likely been less impacted by these developments than might in future years. Secondly, the proportion of new cases registered in “Western Europe” has always been rather low (FY2018 – 4%, FY2019 – 10%, FY2020 – 13%, FY2021 – 10%, and this year – 8%). It ought to be noted, however, that ICSID categorises States such as the Czech Republic and Lithuania, both EU Member States, under “Eastern Europe & Central Asia”. This means that without a much deeper dive into the statistics, it is difficult to say what the impact the EU’s decision in banning intra-EU arbitration has had on ISDS in Europe.

Speaking of the Eastern European & Central Asia region, while in FY2018 it was responsible for 40% of new registered cases, this number has been on the decline (though not consistently) for years and is now at 20%. Perhaps the most visible trend is the growth of cases registered in “Central America & the Caribbean”, which now stands at 12%. South America was the largest singular region in FY2022, responsible for 22% of new cases, up from 14% in FY2021, but still down on its record of 32% in FY2020. Again, other regions have been rather consistent throughout the years. Of those not yet mentioned, in FY2022, Middle East & North Africa accounted for 12% of new cases, Sub-Saharan Africa for an additional 12%, South & East Asia & the Pacific for 8% and North America (including Mexico) for the final 6%.

 

4. Subject Matter: Economic Sectors

The economic sectors involved in ICSID proceedings are diverse. In the past five years, each Annual Report outlined at least nine categories of economic sectors, with Oil, Gas & Mining, Electric Power & Other Energy, and Construction consistently being the biggest three. Other sectors include information communications technology (ITC), Tourism, Transportation, Finance, Agriculture, among others.

In FY2022, a proportion of cases stemming from disputes involving Electric Power & Other Energy (24%), has for the first time surpassed that of Oil, Gas & Mining (22%). The former has also reached its highest level, while the latter came down from 30% in FY2020 and 29% in FY2021. This steady increase in disputes involving areas such as renewable energy should come as no surprise to observers. The growth in ISDS cases involving Electric Power & Other Energy, should be welcomed, showing not only that the sector is maturing, but also that international investment law protects not just the “evil” corporations but perhaps also the “good guys”… or at least the guys we come to really need at this point for energy transition.

 

5. Outcomes

As always, the statistics on outcomes prove possibly the most interesting read. ICSID reports that in FY2022, 29 cases were decided and a further 27 cases were settled or discontinued.

In its 2022 ICSID Caseload Statistics report (Issue 2022-2), ICSID explains that within the 27 cases settled or discontinued, 48% were settled at the request of both parties, 30% at the request of one party (under ICSID Arbitration Rule 44 and Additional Facility Rule 50), 18% were discontinued for lack of payment and in the remaining 4% of cases, settlement agreement was embodied in the award.

Regarding the 29 decided cases, in 14 of them the tribunals upheld claims in part or in full, and in 15 they decided in favour of the respondents (in eight cases all claims were dismissed, in six tribunals declined jurisdiction, and in one case the Tribunal dismissed the claim for being manifestly without legal merit). As shown below, this trend, which slightly favours the States, reflects previous years’ trends, with the small exception of FY2018. These numbers are particularly interesting when taken in view of increasing calls for the abandonment of the ISDS system as one that seemingly unproportionally favours the investor.

Finally, as in most previous years, in 2022 all the annulment proceedings have been unsuccessful. In the 17 annulment proceedings concluded in FY2022, the ad hoc committees rejected the applications on 14 occasions, while the remaining cases were discontinued. Again, this marks consistency in ICSID proceedings, as in previous year ad hoc committees have only annulled an award (once partially in FY2021, once in FY2020, once partially in FY2019).

 

6.Tribunal Appointments

Lack of diversity is an ongoing issue in ISDS. In the 2021 International Arbitration Survey,  while more than half of the surveyed agreed that some progress has been made in terms of gender diversity, less than a third believed this to be true in respect of geographic, age, cultural and, particularly, ethnic diversity. While the ICSID Annual Reports do not consider ethnicity in their statistics, they do report on geographic distribution of appointments by ICSID and the parties. Thus, in FY2022, 182 appointments were made to ICSID tribunals, commissions and ad hoc committees whereby individuals of 42 nationalities were represented (in FY2020 it reached a higher number, at 44). Notably, however, despite a growing number of cases, each year the proportion of first-time appointments remain rather low: in FY2022 and FY2021 – 11%, FY2020 and FY2019 – 15% and FY2018 – 17%. Perhaps, the words by Jan Paulsson in 2010 still ring true today: “boasting of a constant stream of new entrants’ fools no one acquainted with the field.”

While the numbers remain disappointing, ICSID itself actually plays a leading role in changing the status quo. Thus, for example, while women accounted for 24% of all appointments made to ICSID cases in FY2022 (FY2021 – 31%, FY2020 – 14%, FY2019 – 24%, FY2018 – 24%), 55% of them were appointed by ICSID. This is indeed in line with previous years where ICSID also tended to appoint most female appointees, followed usually by respondents, joint decisions of parties combined with co-arbitrators and then, often trailing behind, by claimants. Perhaps the Secretariat’s own consistent experience in having staff consisting of 24 nationalities with fluency in 25 languages, and of which 75% are women, plays a role in its visible commitment to diversity.

 

7. New Parties

ICSID prides itself in its wide and large membership. Indeed, in FY2022, ICSID welcomed its 156th and 157th Member State (by end of FY2022, ICSID numbered 164 signatories to the Convention). First to deposit its Instrument of Ratification in the latest financial year, was Ecuador which did so in August 2021, re-joining ICSID after previously denouncing the ICSID Convention in July 2009 (see here). Kyrgyz Republic followed in April 2022, 27 years after signing the Convention. In the last five years, two more States became signatories of the Convention: Djibouti in FY2020 and Mexico in FY2019. Notably, as of 21 September 2022, the ICSID Convention has one more Contracting Party – Angola, who signed the Convention in July 2022.

 

8. Spotlight, Outreach and Outlook

The final parts of each Annual Report include the overview of ICSID publications and official documents, reports of annual meetings and independent auditors’ report (FY2022-2019 prepared by Deloitte, FY2018 by KPMG). Each year ICSID also choses a theme which it puts in a “Spotlight”. Thus, in FY2018 the spotlight was on the ICSID Rules Amendment Process, which subsequently resulted in the topic of FY2022 spotlight: 2022 ICSID Rules and Regulations (for analysis see here). Throughout the years, other spotlights included Mediation (FY2021) and Technology (FY2020).

Finally, perhaps the most pleasant-to-read part of the Annual Report concerns the Centre’s Outreach and Training activities, highlighting events, training sessions and speaking engagements undertaken by the ICSID representatives in each financial year.

If any conclusions can be drawn from the last five Annual Report, they must touch upon ICSID’s consistency and professionalism, as well as upon the continuing popularity of ISDS system amongst claimants, and the strong position of the State within this system. While some Contracting Parties, or at the very least some representatives of those Parties, may have recently developed negative attitude towards ISDS, the numbers do not lie. In addition, if the Reports show us anything, is that perhaps the future of ISDS is not as morbid as some would say (or hope).

 

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The Proposed Multilateral Instrument on ISDS Reform(MIIR): An Update after the Conclusion of the 43rd Session of UNCITRAL Working Group III

Fri, 2022-12-09 00:01

Among the items on the agenda of the 43rd session of UNCITRAL Working Group III (“WGIII“) was the multilateral instrument on investment reform (the “MIIR“). This instrument is being developed as a mode for delivering the reforms to ISDS that are agreed upon by WGIII. Although the Secretariat was instructed to do further work on the MIIR at the end of the 43rd session, including to produce draft provisions of the proposed instrument, much of the detail of the MIIR remains to be agreed upon.

As a preliminary remark, WGIII is facing a “chicken and egg” problem in relation to its discussions on the individual reform elements vis-à-vis its discussions on the MIIR that should implement such elements. Already at the 39th session of WGIII in October 2020, differing views were expressed by delegations as to whether (i) the various individual reform options should first be decided upon, before the form of their implementation is worked out, or whether (ii) the form of implementation should be discussed in parallel to the development of the individual reform options (¶¶ 103-104). Similar concerns were noted at the 43rd session (¶ 67).

It was further noted at the 43rd session that the MIIR may only constitute a partial vehicle for implementing the reforms, as certain reform elements may be better implemented through means other than a multinational instrument, for example through “arbitration rules, guidance texts or model clauses” (¶ 70). Accordingly, it may form one of a range of means of implementation for the discussed reforms.

With the scope and content of the MIIR still unclear, the discussions in the 43rd session centred on two broad aspects of the MIIR, namely (i) its possible structure and how coherence and flexibility might be reflected, and (ii) its scope of application with regard to future and existing treaties. These three areas are addressed below.

 

Structure and Securing Coherence and Flexibility

There appears to have been a general consensus among the delegates at the 43rd session that the MIIR could operate as a “single legal instrument that could include core provisions along with optional protocols and/or annexes” (¶ 68). States would be able to sign up to core provisions and then have the flexibility to opt into protocols and/or annexes. In its Note on the MIIR prepared for the 43rd session, the Secretariat discusses two possible models for the instrument: (i) the 1992 UN Framework Convention on Climate Change (“UNFCCC“) as an example of a convention with protocols (the 1997 Kyoto Protocol and the 2015 Paris Agreement), noting that protocols can operate as treaties in their own right, i.e., without the need to sign up to the overarching framework convention, and (ii) the International Convention for the Prevention of Pollution from Ships (the MARPOL Convention), which operates as a “single convention with annexes” (¶¶ 9, 12). The Secretariat concludes that the MIIR could have both protocols and annexes (for example, the code of conduct as a protocol, and the list of treaties to which the reform elements apply as an annex) (¶ 13), but the possibility for States to opt into a protocol or annex without signing up to the instrument appears to have been rejected (¶ 69).

Potential “core provisions” of the MIIR were discussed at the 43rd session, which should serve to “achieve coherence” (¶ 72). The initial discussions as to which kinds of provisions may constitute potential “core provisions” covered (i) objectives of the MIIR (transparency, efficiency and sustainable development), (ii) modes of ISDS that may be selected by parties to the MIIR, (iii) governance of and amendments to the MIIR, and (iv) the interaction between the MIIR and its protocols/annexes (¶¶ 73-77). It was also suggested that generic rules that apply to all dispute resolution mechanisms might comprise the core provisions (e.g. definition of terms, entry into force and termination, scope of application) while rules specific to these different dispute resolution mechanisms (any agreement and rules on the appellate mechanism, the draft code of conduct, the multilateral investment court) could be placed in the respective protocols or annexes (¶ 78).

The need for flexibility was also highlighted, i.e., that the MIIR should be drafted in such a way as to permit future developments to be taken into account. In this context, the use of reservations as a primary means for this was viewed with caution, “as that could lead to legal uncertainties” (¶ 79).

 

Scope of Application to Investment Treaties

I. Existing Treaties

There appears to have been a consensus at the 43rd session that the application of any agreed reforms to existing investment agreements should be one of the objectives of the MIIR, but that such application should still remain the decision of the State Parties to the MIIR (¶ 82). It was noted that the manner of applying the MIIR to existing treaties may need to be explicitly set out, as not all States are parties to the Vienna Convention of the Law of Treaties (“VCLT“), which would otherwise serve as “a starting point for reflection on these issues” (¶ 83). Suggested options for the MIIR to interact with existing treaties were “amendment, inter se modification and suspension (whole or in part) of those agreements (¶ 84). In its Note prepared for the 43rd session, the Secretariat discusses potential models for the application of the MIIR to existing treaties, i.e., (i) the Mauritius Convention, (ii) the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting, and (iii) the 1957 European Convention on Extradition (¶¶ 38-39).

As explained in the Report on the 43rd session, a compatibility/conflicts clause would be needed for each reform option in order to clarify the relationship with prior investment agreements by specifying which provision(s) would prevail and under which circumstances. In this context, it was noted that there should little room for interpretation in this regard (¶ 86). The Secretariat was asked to develop standardised language for a compatibility or conflict clause that could apply in different situations while considering the issues that could arise in implementing reform elements into existing investment agreements (¶ 87).

 

II. Future Treaties

No consensus appears to have been reached in relation to the application of the MIIR to future treaties. The Report on the 43rd session merely notes that (i) on the one hand, doubts were expressed as to whether States should be prohibited from derogating from the MIIR in their future treaties and whether the MIIR could provide a complete set of dispute resolution provisions, while (ii) on the other hand, the view was expressed that a complete set of dispute resolution provisions could ensure coherence (¶ 80). The Report also notes that the general view was taken that States’ freedom to negotiate and agree on their investment obligations must be preserved (¶ 80). In its Note prepared for the 43rd session, the Secretariat remarks that WGIII “may also wish to consider” the interaction of the MIIR with future investment treaties entered into by parties to the MIIR “that address the same procedural aspects but in an inconsistent manner” (¶ 32).

Finally, according to the Report, the question was raised as to whether the provisions of the MIIR could apply in the context of State-to-State dispute settlement mechanisms to resolve investment disputes (¶ 81). No responses or further discussions of this are noted.

 

Outlook

As part of its preparatory work, the Secretariat has been asked to update its Note in light of the discussions at the 43rd session, to inter alia:

  • Prepare draft provisions on various reform elements for “inclusion in the MIIR, when appropriate”, as well as “draft provisions on the possible governance of the MIIR (including options for institutional support)” (¶¶ 71, 76);
  • Elaborate on those principles that could potentially constitute objectives of the MIIR (¶ 73) (including “for example, the protection of investor’s rights, including the procedural right to raise claims, transparency and efficiency of the proceedings, State’s right to regulate, sustainable development goals and so forth” (¶ 16));
  • In the context of modes of ISDS, “consider the underlying issues (including the relationship with the consent already provided by States under existing treaties and mechanisms) and examine whether such a provision would need to be developed” (¶ 74); and
  • Set out the relevant issues in relation to existing investment agreements and “develop a standardised language that could apply in different situations” (¶ 87).

Notably, issues of sustainable development and associated broader concerns (expressed for example here and here) continue to be largely absent from WGIII’s discussions on the MIIR. It remains to be seen whether the previously mentioned “holistic approach” to ISDS reform, “clearly setting forth the objective of achieving sustainable development through international investment” (¶ 106), will materialise.

With public comments by UNCITRAL Secretary Anna Joubin-Bret suggesting that a multilateral framework convention with an opt-in protocol for the multilateral investment court will be delivered by WGIII in 2026, there remains much to be discussed, not least the concerns of fragmentation identified by the Secretariat in the context of the use of protocols (¶ 10). Moreover, there is still no consensus on how each reform element might best be implemented or on how the development of the MIIR might dovetail with the development of the individual reforms. WGIII’s work plan indicates it will be focusing on other reform elements at its upcoming sessions, leaving these critical issues to be resolved later.

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International Law Weekend 2022: Interactions between Investment Law and the Vienna Convention on the Law of Treaties (“VCLT”)

Thu, 2022-12-08 00:54

International Law Weekend (“ILW”), held at Fordham Law School in New York City between October 20-22, 2022, celebrated the centennial anniversary of the American Branch of the International Law Association with a program entitled “The Next 100 Years of International Law.”  It brought together a wide variety of engaging panels and events to explore current debates about the future of public and private international law.  Among the many discussions at ILW that focused on issues relevant to international arbitration practitioners, a key thematic thread that emerged is the ongoing importance of the VCLT to international law and investor-State arbitration.

 

The Continued Role of the VCLT in Investor-State Arbitration

While in recent years, investment treaty drafters have sought to create increasingly comprehensive agreements, many bilateral and multilateral investment treaties still leave space for interpretation on critical questions.  With many, if not all, of its articles now being widely accepted as reflecting customary international law, the VCLT remains one of the most commonly used jurisprudential tools for arbitrators and counsel alike.  This post focuses on two panels highlighting the VCLT’s historic and future significance in the field of international investment law and related dispute resolution.

 

The Vienna Convention on the Law of Treaties in Investor-State Disputes: History, Evolution and Future

One of the most well-attended panels at ILW was “The Vienna Convention on the Law of Treaties in Investor-State Disputes: History, Evolution, and Future.”  This panel drew inspiration from an important new book on the subject, The Vienna Convention on the Law of Treaties in Investor-State Disputes: History, Evolution, and Future, which showcases the ongoing legal debates concerning the VCLT as a tool for investment tribunals and its future role in the development of the investor-State dispute resolution system.  The book, divided into four parts, addresses four distinct topics related to the VCLT and investment law:  (i) the application of the VCLT in investor-State disputes (in particular, Articles 31 through 33); (ii) issues related to the creation and application of treaties, and the VCLT’s role in resolving them; (iii) the current debates in investor-State arbitration and the solutions provided by the VCLT; and (iv) the future of investor-State arbitration and the VCLT’s role in it.

The panel was moderated by Diora Ziyaeva (Counsel, Dentons US LLP) and included as panelists the book’s editors, Prof. Kiran Nasir Gore (Professorial Lecturer in Law, George Washington University Law School; Independent Counsel & Arbitrator) and Prof. Esmé Shirlow (Associate Professor, Australian National University) as well as two of the book’s contributors, Shani Friedman (PhD Candidate and Research Fellow, Law Faculty, the Hebrew University of Jerusalem) and Dr. Michele Potestà (Partner, Lévy Kaufmann-Kohler).

Prof. Shirlow discussed the findings in the Appendix to the book, which summarizes the references to the VCLT in over 350 procedural orders, decisions and awards.  The Appendix demonstrates not only that tribunals frequently reference the VCLT (in particular, Articles 31 through 33).  The VCLT is applied not only as a matter of treaty law; parts of the VCLT reflect customary international law as applied to investment law instruments signed before the VCLT’s existence and to treaties between parties that are not party to the VCLT.  The enduring significance of the VCLT in investor-State disputes is thus apparent, with tribunals regularly turning to certain provisions for guidance on various challenges in different contexts.

The panelists also highlighted the role that the VCLT can play in ongoing efforts to reform the investor-State system.  Prof. Gore drew on the book’s contents to discuss the  future of this field and the critical moment now arising for investor-State disputes in light of ongoing reform initiatives.  The VCLT, as a unifying mechanism, can guide drafters of new procedural rules and substantive agreements.  As a well-settled interpretive instrument, the VCLT can assist drafters in achieving greater coherence and predictability—a key consideration for those concerned about fragmentation both within international investment law and in public international law more broadly.  In particular, as decisions and awards cross-reference each other and the VCLT, the resulting jurisprudence should produce a deeper understanding of the applicability of the VCLT and lead to a more harmonized approach.

Apart from its general importance to investor-State arbitration, the VCLT has a key role to play in many of the specific debates that most vex the field of investor-State arbitration at present.  For example, Dr. Potestà explained that the VCLT might provide avenues for reform of the investor-State dispute resolution system.  He described his view that Article 41 of the VCLT—which concerns the modification of multilateral treaties between certain parties only—provides an avenue for certain Contracting Parties to the ICSID Convention to amend its existing framework.  His innovative proposal is premised on the idea that Article 41 could permit Contracting Parties to replace the existing annulment process with an appeal mechanism.  According to Dr. Potestà, such an amendment would be possible, as nothing in the ICSID Convention prohibits it, non-participating States would not be affected by the modification (since when an ICSID Contracting State does not agree to a modification, it simply remains bound by the existing framework—in this case, the annulment procedure), and it is consistent with the object and purpose of the Convention.

Similarly, the VCLT has been at the heart of debates over intra-EU investor-State arbitration.  As Ms. Friedman noted during the panel, Member States of the European Union have repeatedly relied on Articles 30 and 59 of the VCLT in their objections to the jurisdiction of investor-State tribunals post-Achmea.  She built upon her book contribution to explain that investor-State tribunals have repeatedly relied on these same Articles to reject such objections.  Even the rare tribunal to have taken a different view, Green Power v. Spain devoted 140 paragraphs of its award to the interpretation of the Energy Charter Treaty based on the VCLT’s Article 31, whatever the ultimate merits of that unique interpretation may have been.

 

Practicum on Human Rights

Debates framed by the VCLT also continue to surround questions of environmental and human rights claims and the jurisdiction of arbitral tribunals over such claims.  The “Practicum on Human Rights” at ILW, taking the form of a mock hearing, illustrated the complexities of advancing and defending against such claims.  Preeti Bhagnani (Partner at White & Case LLP) argued for the Claimant and Jennifer Haworth McCandless (Partner at Sidley Austin LLP) represented Respondent, while the mock tribunal included Michael Nolan (Independent Arbitrator, Arbitration Chambers), Mahnaz Malik (Barrister and Arbitrator, Twenty Essex) and Michael J. Stepek (Partner, Winston & Strawn LLP).

The Practicum involved counterclaims by the Respondent concerning the Claimant’s violations of indigenous rights and pollution of water sources, stated in response to State allegations that the Claimants’ employees committed human rights violations.  The implied question at the core of the exchange was whether such claims truly “related to” an investment so as to fall within the tribunal’s adjudicatory purview.  Through mock opening arguments and mock tribunal deliberations, the Practicum illustrated that a tribunal in like circumstances may well turn to the VCLT to assess the arguments.  When similar human rights (or even environmental) claims arise, tribunals will often be left to decide such questions—and, to do that, they will need to interpret the terms found in the treaties.

More generally, one of the major challenges that international investment tribunals have faced in recent years has been the harmonization of State’s divergent treaty obligations.  On the one hand, investment treaties require States to protect foreign investment.  On the other hand, States also have legal obligations under international human rights law, which may, in some instances, collide with their investment treaty commitments.

It is not always straightforward, however, how these distinct obligations should relate to one another.  For example, the Inter-American Court of Human Rights in Sawhoyamaxa Indigenous Community v. Paraguay held that the enforcement of “commercial” treaties (likely a reference to an investment treaty) “should always be compatible” with multilateral human rights agreements.  Investment tribunals, in turn, have sometimes emphasized investment protections, rather than human rights, in cases where both were in play.  Here too, the VCLT may provide a set of tools for tribunals grappling with such issues.

 

Conclusion

While the investment treaty landscape may change, and while drafters of new treaties may clarify some of the existing ambiguities, there is no indication that the VCLT will become any less relevant.  It continues to be a legal instrument that guides arbitrators, counsel and States alike in the interpretation, application and termination of treaties.

 

See prior International Law Weekend coverage here

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International Law Weekend 2022: Accountability for Global Regulatory Bodies

Thu, 2022-12-08 00:00

The 100th Annual Meeting of the American Branch of the International Law Association (“ABILA”), known as ABILA’s International Law Weekend (“ILW”), took place in New York City on October 20-22, 2022 and featured more than 30 panels relevant to the theme “The Next 100 Years of International Law.”  One recurring theme was the role of international law in ensuring accountability, a topic which, as discussed below, often implicates international dispute resolution.

A key pair of panels addressed the accountability of two entities that might vie for the title of the most important international regulatory body that you have never heard of.  The first, the Financial Action Task Force (“FATF”), is an intergovernmental body that sets global regulatory standards for combatting money laundering and financing of terrorism.  Its regulatory framework has broad effects that extend from the highest levels of global finance all the way down to everyday consumer banking.  The second, the Internet Corporation for Assigned Names and Numbers (“ICANN”), is a California non-profit corporation that has ultimate authority over the Internet’s domain name system with significant commercial and political consequences.

Because of the unique regulatory powers of these bodies and their positions outside of ordinary State structures (including administrative law frameworks), they pose unique challenges for accountability.  This post will review the accountability problems they present, and some possible solutions that intersect with various modes of dispute resolution, as suggested by the ILW panels on FATF and ICANN.

 

Accountability in the FATF Regulatory System

FATF describes itself as “the global money laundering and terrorist financing watchdog.”  The organization “sets international standards that aim to prevent these illegal activities and the harm they cause to society.”  These standards—most notably the FATF Recommendations—address measures to identify risks, to prevent illegal action in the financial sector, to allocate responsibilities, and to promote international cooperation.  They are then implemented at the domestic level by FATF members and others, subject to a peer monitoring and evaluation process to encourage and facilitate compliance.

The ILW panel, “Controlling Misimplementation and Misuse of Global Anti-Money Laundering Standards,” moderated by David Attanasio (Associate at Dechert LLP and Co-Chair of the ABILA Committee on International Investment Law), addressed potential negative impacts of FATF’s regulatory actions and the mechanisms available to control those impacts—including possible mechanism that might draw from the repertoire of international dispute resolution.  The panel included Elisa de Anda Madrazo (Vice President of FATF), Lucinda Low (Partner at Steptoe & Johnson), Alyssa Yamamoto (Legal Advisor to the U.N. Special Rapporteur on the Promotion and Protection of Human Rights while Countering Terrorism), and David Zaring (Professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania).

As de Anda Madrazo explained during the panel discussion, FATF has an important and valuable role in efforts to control money laundering and to counter terrorism financing, both through setting global standards and through reviewing State compliance with those standards.  She also underscored that FATF is effective even though its regulations and standards take the form of soft law.

However, precisely because FATF and its Recommendations are effective even though not legally binding, they can have real impact, sometimes in undesirable ways.  This practical effectiveness of the Recommendations can result in serious consequences—some of which are arguably undesirable—for participants in both domestic and international financial systems:

  • Individuals or companies in those States that are non-compliant with FATF standards may find it difficult or impossible to engage with banking and other financial institutions at the international level; those institutions may refuse to do business (or be prohibited from doing so) with such individuals or companies. As Zaring put it, FATF review can impose serious negative consequences for the citizens of States that are found to fall short of FATF standards.
  • Individuals and non-profit organizations may be targeted by States with adverse measures nominally based on the Recommendations (due to supposed money laundering or terrorism financing risk) but that are actually a form of political retaliation. In this regard, Yamamato observed that purported enforcement measures can be misused to target human rights defenders, journalists, civil society organizations, and vulnerable groups.
  • The financial institutions that are some of the front-line subjects of the FATF Recommendations may bear onerous compliance costs. Low noted that the FATF Recommendations have affected financial institutions most directly and that there has been extensive enforcement in the US and other jurisdictions in recent years.  Panelists observed that the result is often “overcompliance” to the disadvantage of potential customers as well as overly large compliance bureaucracies at financial institutions.
  • And, as several panelists mentioned, a secondary infrastructure of reporting services has grown up that purport to identify risks for money laundering or terrorism financing, such as for politically exposed persons (individuals holding prominent political functions). These private services can have a sharp impact on an individual’s ability to do business but themselves are subject to no formal oversight other than through general domestic legal mechanisms.

Nevertheless, as de Anda Madrazo emphasized, while the FATF Recommendations may have unintended consequences, it remains the case that global level action against money laundering and terrorism financing is needed and that FATF makes an important contribution to these efforts.

But these consequences do raise the question of how the various actors operating in the shadow the FATF Recommendations may be held accountable for overreach, whether deliberate or inadvertent.  As the panel made clear, the current system provides primarily for soft remedies, such as engagement and advocacy, including through influence of participants on FATF’s decision making.  In certain instances, especially regarding other actors, general purpose legal mechanisms, such as data privacy or administrative law, may provide for some accountability.

However, in the absence of general-purpose accountability mechanisms, is there a role for international dispute resolution in relationship to the FATF ecosystem?  The panel’s observations suggest a range of possibilities:

  • Human rights suits before regional human rights courts or UN treaty bodies may have a role where a State misuses the FATF Recommendations in a way that infringes upon human rights.
  • Investor-State arbitration may similarly restrain State action that targets specific foreign investors (whether individuals or companies) or otherwise treats them unfairly.
  • Ad hoc arbitration between FATF (or its members) and individual States—or also among others such as affected individuals or entities—could be used to resolve legal and factual disputes related to compliance with FATF standards

And, perhaps, FATF itself could facilitate the creation of neutral dispute resolution mechanisms, including for the decisions that the body itself takes.  The ICANN system discussed below, for example, may provide a possible model—employing tools from international arbitration—that could be adapted (with improvements that address ICANN’s shortcomings) to the FATF ecosystem.

 

Accountability in the ICANN Regulatory System

While ICANN is organized as a California non-profit corporation, it has ultimate regulatory authority over key aspects of the global Internet.  Its most important function from the perspective of non-technical Internet users is its authority over the Internet’s domain name system, which allows users to identify computers connected to the Internet based on ordinary names (as opposed to strings of numbers).  This naming system is quite familiar—arbitrationblog.kluwerarbitration.com is an example of such a domain name and it references the server on which you are currently reading this post.

The panel “Accountability in Internet Governance,” moderated by Rose Marie Wong (Associate at Dechert LLP), focused on ICANN’s oversight and accountability mechanisms.  The panel included Christopher Gibson (Professor of Law and Director of the Business Law and Financial Services Concentration at Suffolk University), Mike Rodenbaugh (Owner of Rodenbaugh Law), Kenneth B. Reisenfeld (Partner at BakerHostetler), and Aníbal Sabater (Partner at Chaffetz Lindsey LLP).

At a technical level, ICANN determines who may register domain names under each top-level domain—for example .COM, .NET, or .EDU—and indeed what top-level domain names exist.  These registries charge fees for each domain name, which can be a lucrative business.  During the course of the last decade, ICANN expanded the set of top level domains through an application process open to private entities (the New generic Top Level Domain Program), resulting in the addition of numerous new top level domains—including .ATTORNEY, .ENERGY, and .GOOGLE—to the Internet name space.  In short, ICANN has final authority over what names are available on the Internet and who is able to register them in return for a fee paid for each domain name.

Although ICANN also has more technical functions, its authority over the domain name system has significant impact on commercial, political, and individual interests.  This function has led to significant disputes of broad importance in two major categories:

  • Disputes have frequently arisen regarding the registration of domain names that allegedly overlap or infringe upon trademarks. Developing effective means to resolve such disputes was one of the major tasks confronting ICANN at its inception in the late 1990s, during a period in which the Internet was quickly becoming a technology of major global importance.
  • Disputes have also arisen regarding ICANN’s efforts to expand the number of top-level domain names, particularly when ICANN has made decisions among multiple applicants for the same top-level domain name. These disputes often concern ICANN’s fairness, neutrality, and diligence when making such decisions with significant commercial and public policy implications.

As with FATF, ICANN is subject to various forms of soft remedies, political and otherwise.  ICANN, however, has also established external accountability mechanisms—employing tools from international arbitration—that permit a nominally neutral decision on such disputes.

First, the ICANN Uniform Domain Name Dispute Resolution Policy (“UDRP”)—which allows for a form of arbitration in many cases—applies to all registered domain names.  As Gibson (who has decided more than 200 cases under the UDRP) observed, through the UDRP process, trademark owners may challenge the registration of a domain name registered anywhere in the world on the grounds that (i) the domain name is identical, or confusingly similar to, their trademark; (ii) the domain name registrant lacks rights or a legitimate interest in the domain name; and (iii) the domain name was registered and used in bad faith.

In the view of Gibson, the UDRP has been generally successful and may provide a model for international online dispute resolution systems more generally.  Since 1999, when the UDRP was created, more than 370 million domain names have been registered around the world, and more than 60,000 cases have been decided.  In May 2022, ICANN issued a status report on the UDRP that positively evaluated the effectiveness of the mechanism in terms of efficiency, fairness, and reducing the abusive registration of domain names.

Second, ICANN’s Independent Review Process mechanism, which applies more broadly than the UDRP, allows for challenges to ICANN’s actions and inactions—including by its Board, Directors, Officers, and Staff—such as decisions regarding new top level domain names.  The IRP provides for dispute resolution through international arbitration based on the ICDR International Arbitration Rules, supplemented by Interim Supplementary Procedures.  Sabater, who has acted as a panelist in an IRP, noted that, through this mechanism, ICANN has given its consent to be sued by any party who claims to be materially prejudiced by an act or omission adopted by ICANN—and that this is a very broad scope of consent.

However, the panelists noted that the Independent Review Process as it stands is far from ideal.  For example, Reisenfeld (who has acted as an Emergency Panelist in an IRP) observed that, while the Emergency Panelist procedure envisioned in ICDR Rules is designed to be efficient and expeditious, it has proven to be cumbersome and time consuming.  This is problematic, especially since, as Reisenfeld explained, Emergency Panelists are appointed to address requests for interim relief, such as stay requests to preserve the status quo and prevent ICANN from completing an auction or from registering a contested top-level domain name.

Sabater also noted that, on the merits, IRP panels have had limited authority and could not “step into the shoes” of ICANN—at least under the prior IRP framework pursuant to which Sabater sat as an IRP panelist for the .PERSIANGULF dispute.  He observed that his panel simply assessed whether ICANN, in making its decision on that top-level domain name, was subject to a conflict of interest or failed to exercise due diligence but that it did not review the merits of ICANN’s decision.  That said, despite the limitations Sabater’s panel found in its mandate, the panel nevertheless concluded that ICANN had failed to perform adequate due diligence and should have more fully engaged with participants.

Even if the IRP as it then stood or even as it currently stands may not be fully adequate, as Sabater noted, it is a remarkable experiment in accountability for an organization that wields significant regulatory power outside of a State framework.  If its challenges were addressed, it might provide guidance to other organizations—such as FATF—that share certain structural similarities with ICANN.

 

Conclusion

ICANN and FATF provide an interesting contrast as to how accountability may be brought to global regulatory bodies.  While FATF has not yet provided for formal accountability procedures, ICANN has taken initial steps toward subjecting itself to external accountability.  Its example suggests that the tools of international arbitration may have a valuable role to play in these efforts, both for ICANN itself and for other regulatory bodies like FATF.

 

See prior International Law Weekend coverage here

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Is the CETA Joint Committee about to Issue Its first Joint Interpretation of the Investment Chapter?

Wed, 2022-12-07 00:48

Recently, the European Commission (EC) and the German Federal Government jointly released a draft decision on clarifications to certain provisions in the Investment Chapter (Chapter 8) of the Comprehensive Economic and Trade Agreement (CETA). More specifically, they have agreed upon (1) a more precise scope of circumstances that may give rise to violations of Article 8.10 (fair and equitable treatment, or FET) and Annex 8-A (indirect expropriation) of the CETA; (2) mitigating measures and duties that should be considered by investment tribunals when determining any breach of Chapter 8 and calculating monetary damages in the final award; and (3) the importance of the climate protection objectives in interpreting and implementing the CETA. This post summarises specific clarifications included in the draft decision and highlights important implications of this development.

 

A More Precise Definition of FET and Indirect Expropriation

While the CETA’s Investment Chapter includes a list of measures that may constitute a breach of the FET and indirect expropriation clauses, the draft decision further discusses and specifies each of the listed elements, thereby providing a more precise definition and scope of these two contentious provisions.

(a) Fair and Equitable Treatment

According to Article 8.10.2 of the CETA, a state breaches the FET obligation if its regulatory measure is a denial of justice, fundamental breach of due process, manifest arbitrariness, targeted discrimination on manifestly wrongful grounds, and abusive treatment of investors like coercion, duress and harassment. The draft decision clarifies that this list is exhaustive and outlines a more circumstantial description of states’ regulatory measures (in terms of the type of states’ actions and the level of the seriousness of misconduct) that will or will not constitute a violation of the FET clause.

For instance, the draft decision specifies that a ‘denial of justice’ in the meaning of Article 8.10.2. does not include an unfavourable outcome in an investor’s challenge of an impugned measure in domestic proceedings. To constitute ‘manifest arbitrariness’, it requires that the concerned measure ‘does not contain the reasons’, ‘is patently not founded on reason or fact’, ‘is based on unreasonable discretion, prejudice or personal preference’ or ‘is taken in wilful disregard of due process and proper procedure’. It further specifies that ‘a merely inconsistent or questionable application of a policy or procedure’ is excluded from the scope of manifest arbitrariness.

Importantly, this draft decision provides a further explanation of the types of legitimate expectation protected under Article 8.10.4 of the CETA. It specifies that only ‘written, specific and unambiguous representations made to an investor by the competent authority of a Party’ may be considered by investment tribunals in determining if a legitimate and justifiable expectation has been formed by ‘a prudent and informed investor’.

(b) Indirect Expropriation

Similarly, the draft decision provides some detailed interpretations of the concept of indirect expropriation contained in Article 8.12 and Annex 8-A of the CETA. Paragraph 2 of Annex 8-A provides that to determine if a measure constitutes an indirect expropriation, the tribunal should engage in a case-by-case analysis. It specifies that necessary considerations include, inter alia, a measure’s economic impact, duration, character (notably its object, context, and intent) and the measure’s relationship with ‘distinct, reasonable investment-backed expectations’. The draft decision specifies in respect of a measure’s duration that the permanent nature of the complained measure is not sufficient alone to establish an indirect expropriation. In respect of the investors’ expectations, the draft decision reiterates the requirement for a ‘written, specific and unambiguous representation’ as also provided for the FET clause.

The draft decision has also interpreted the relationship between indirect expropriations and measures protecting legitimate public welfare objectives. As provided in paragraph 3 of the Annex 8-A, non-discriminatory measures for public interests may constitute an indirect expropriation in exceptionally rare circumstances, when the impact is ‘so severe in light of its purpose that it appears manifestly excessive’. The draft decision defines manifestly excessive as ‘manifestly disproportionate to its intended policy objectives in that it would be perceived as undeniable unreasonable in light of its purpose’.

Additionally, the draft decision briefly comments on the Russia-Ukraine conflicts in the international investment law context to reaffirm the national security exception embodied in Article 28.6 of the CETA. It emphasises that the parties to CETA are entitled to take actions, when necessary, to protect their essential security interests ‘in time of war or other emergency in international relations’.

 

Investors’ Mitigating Duties and Contributory Fault

The draft decision also requires investment tribunals to consider the duties of an investor to mitigate damage, and further provides an express role for domestic compensation mechanisms. The draft provides, in particular, that tribunals should assess if any damage prevention and mitigation measures are available to the investor and if the investor has actually accessed, or voluntarily accepted compensation under, any national compensation schemes.

Furthermore, the draft decision adds rules of ‘contributory fault’ to Article 38.9 of the CETA. It requires investment tribunals to investigate if there is any unreasonable failure by the investor to reduce the damages arising from a breach and also to assess whether the investor has unreasonably incurred expenses in conducting its claim. Tribunals are also directed to consider investors’ wilful or negligent action(s) or omission(s) which contributes to the claimed injury.

 

Objectives of Climate Change Protection

Last but not least, the draft decision has again stressed the significance of climate change protection in interpreting and enforcing the CETA, although this objective has been expressly illustrated in a Joint Interpretative Instrument adopted at the time of signature.

Given the CETA parties’ shared responsibilities to implement the Paris Agreement, the draft decision recalls that investors should expect regulatory measures to be taken by States seeking to combat climate change. It also directs investment tribunals to shape their interpretations of the CETA’s Investment Chapter by taking due consideration of host states’ climate neutrality objectives and commitments under the Paris Agreement. It further provides that any interpretation should be made so as to allow the CETA parties to ‘pursue their respective climate change mitigation and adaptation policies’.

 

Implications of this Development

There has recently been a proliferation of clauses in investment treaties which expressly allow treaty parties to jointly issue binding interpretative statements (see here and here). The concepts of FET, most-favoured-nation (MFN) treatment, and expropriation have been the main subjects of existing practice under such clauses (see here and here). It is thus unsurprising that the draft decision released by the EC and Germany has also touched upon these substantive standards.

The purpose of this draft decision is said to secure the CETA parties’ right to regulate on ‘climate, energy, and health policies … to achieve legitimate public objectives’ and also to prevent ‘the misuse of investor to State dispute settlement mechanism by investors’ (see here). At some level, this is consistent with the primary function of a binding joint investment treaty interpretation, which is aimed at providing ‘authentic’ clarifications of treaty provisions to ‘avoid and correct any misrepresentation’ of a given agreement. However, one may be skeptical about whether this goal can be effectively and fully achieved by the above clarifications of the CETA’s Investment Chapter.

First, the draft decision partially addresses the existing ambiguities and brings in new ones. Some clarifications do provide useful guidance to investment tribunals, for instance, by explicitly limiting the scope of ‘manifest arbitrariness’ to a handful of circumstances. However, in assessing these circumstances, certain ambiguities remain. What precisely it means for a measure to be ‘patently not founded on reason or fact’ or ‘taken in wilful disregard of due process and proper procedure’ is unclear, it being uncertain how serious or gross states’ misconduct should be to satisfy the threshold of ‘patently’ and wilful disregard’. Similarly, although the draft specifies several situations that might constitute a ‘blatant miscarriage of justice’, it does not explicate if these situations are exhaustive, and the meaning of this concept therefore remain unsettled.

On top of this, the draft decision confirms a large policy space for regulatory measures to combat climate change, which creates a relatively asymmetric effect, particularly from an investor’s perspective. On the one hand, it sets forth a high standard – ‘wholly disproportionate’ and ‘undeniably unreasonable’ – for a measure to constitute an indirect expropriation. On the other, investors are asked to expect host states’ actions to address the present or future consequences caused by climate change in a broad and general manner, which may lead to an unstable and unpredictable investment climate and cause great difficulties for investors to properly develop their investment strategies.

Moreover, the timing of joint interpretations is an important consideration, as it affects when and to whom the statements will become effective. The current draft version does not include this detail, but one may expect that the CETA Joint Committee is likely to decide, in its final version, a specific date of effect, provided that the procedure for the adoption of interpretations has allowed it to do so. That being said, considering that these ‘interpretations’ are significant additions to the original text, concerns may arise as to whether they are more like ‘disguised amendments’ of the treaty, with attendance concerns likely to then arise as to their retroactive effects.

If approved, the draft would become the first joint interpretation statement specifically attached to the CETA’s Investment Chapter, thereby binding investor-state tribunals established under Chapter 8 of the CETA (see Article 8.31.3 of the CETA). Nonetheless, it is worth mentioning that the CETA Joint Committee has already issued a Joint Interpretative Instrument at the time of signature of the CETA, which discusses, though briefly, a wider range of aspects, such as public services, investment protection, trade and sustainable development, government procurement, indigenous peoples’ rights, among others. A couple of joint declarations respectively on expropriation and intellectual property rights (Annex 8-D) and denial of benefits and national security (Annex 8-E) have also been annexed to Chapter 8 upon the conclusion of the treaty. Still, this draft statement remains to be discussed by all other European Union Member States, Canada, the CETA Committee on Services and Investment, and ultimately the CETA Joint Committee.

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When Not to Enforce: Status of Enforcing Foreign Emergency Awards in Singapore

Tue, 2022-12-06 00:45

On 7 October 2022, the High Court of the Republic of Singapore (“High Court”) delivered a landmark decision on the enforceability of foreign emergency arbitration awards in CVG v CVH. The High Court rejected the enforceability of the emergency award on the ground of procedural irregularity, reinforcing the importance of due process even in cases where urgent interim relief is sought by the parties. Since the advent of accelerated resolution in complex international disputes, many commercial parties have begun favoring emergency arbitration as a viable form of recourse to obtain interim relief. Numerous jurisdictions, including India, the United States, the United Kingdom, Germany, China, and arbitral institutions such as the ICC and Stockholm Chamber of Commerce, have consequently amended their national laws to include within their scope newer and more efficient forms of dispute redressal. In the context of legislative changes on emergency arbitrations, however, two crucial aspects remain unexplored and have constrained parties to opt for emergency arbitrations. The first is the hurdle of enforcement of emergency arbitration awards and the second is the efficacy of such an arbitration vis-à-vis protection of the interest of the parties.

In 2012, Singapore amended its International Arbitration Act (“Act”) and included ‘emergency arbitrator’, among others, within the definition of ‘arbitral tribunal’ in Section 2(1) of the Act. But the same amendment did not apply to Part 3 of the Act, which deals with ‘foreign awards’ and includes provisions on recognition and enforcement of foreign awards. As such, the issue of whether foreign emergency arbitration awards are enforceable in Singapore had remained in doubt and had been a subject of debate. Now, CVG v CVH has answered the issue in the affirmative while also reminding parties that they should not take such enforceability for granted as foreign emergency arbitration awards are still subject to the same requirements as other awards.

 

Background

The parties in CVG v CVH were in a franchise business, with the Defendant being the Claimant’s franchisee in Singapore, Malaysia, Taiwan, and the Philippines.  The contractual relationships among the parties are governed by four different Franchise Agreements (“Agreements”). After change in the management of the Claimant’s company pursuant to a successful bankruptcy protection action filed by the Claimant under Chapter 11 of the United States Bankruptcy Code, disputes arose with respect to certain alleged breaches of the Agreements. The Defendant had thereafter terminated the Agreements alleging anticipatory repudiation and material breach and consequently disassociated themselves from the Claimant’s corporate group. The Claimant, in response, denied access to its corporate group in Singapore, which was treated by the Defendant as acceptance of the termination of their Agreements.

The Claimant then filed an arbitration with the International Centre for Dispute Resolution (ICDR). The arbitration was seated in the US state of Pennsylvania and Pennsylvanian law governed the proceedings. The Claimant also sought emergency measures. During the emergency measures hearing, the Claimant argued in favor of application of the agreed post-termination provisions in the Agreements. Significantly, in the post-hearing submissions, the Claimant took the position that it did not consider the Agreements to have been terminated yet.

The emergency arbitrator issued an award granting status quo of parties to the position before the termination of the Agreement on the basis that the Claimant did not treat the Agreements as terminated. The Claimant filed an application to enforce the award in the High Court in Singapore, to which the Respondent objected. It was this High Court case that gave rise to the decision.

 

The Outcome of CVG v CVH

The High Court took a purposive interpretation of the legislative intent and scheme of the International Arbitration Act and found that the definition of ‘arbitral tribunal’ in Section 2(1) of the Act would extend to Part 3 of the Act in Section 27(1).

The High Court, however, was quick to object to the enforcement of this emergency award on the ground that it violated principles of natural justice since the Respondent was unable to present its case in the context of certain submissions made by the Claimant in its post-hearing submissions. During the emergency arbitration hearing, the arbitral tribunal had enquired about the alternative submissions of the Claimant, in the event, the requested emergency measure was not granted. The tribunal had also raised this question in the list of issues given to the parties based on which they were required to make the post-hearing submissions.

In considering Section 31(2) of the Act, which regulates refusal of enforcement of foreign arbitral awards, the High Court held that while it was within the contemplation of the parties and their submissions that the decision on the matter would be with respect to the new case of the Claimant regarding its treatment of the status of the Agreement – thus satisfying the requirements under Section 31(2)(c) of the Act – the award was made on the alternative submission of the Claimant in the post-hearing submission stage. The High Court also ruled that the Claimant’s submission significantly deviated from its earlier position during the hearing stage.

 

The Future of Foreign Emergency Arbitral Awards in Singapore

The decision of the High Court comes at the height of an uproar in favor of accelerated arbitral procedures such as emergency arbitrations. By untangling the interplay between Section 2(1) of the Act and Part 3 of the Act, the High Court adopted a pro-arbitration approach to ensure enforceability of foreign emergency arbitrations in Singapore (in the absence of other reasons not to enforce as illustrated by the High Court in this case). Still, the preference for emergency arbitration as an alternative to seeking interim measures may have some negative ramifications so long as differential judicial interpretations exist of whether emergency arbitral awards are enforceable across various jurisdictions. Additionally, there is an absence of any guidance to govern the matter in the UNCITRAL Model Law and a lack of uniform guidelines and approaches in soft law instruments.

This situation highlights the need for arbitral institutions, arbitration practitioners and other stakeholders to collaborate on establishing the appropriate judicial frameworks to make enforcement of foreign emergency arbitral awards more uniform. It is important to recognize that the ultimate power to recognize and enforce such emergency arbitral awards lies with the national courts only. Therefore, for the success of exigence of accelerated arbitral process, it is pivotal to recognize the importance of judicial jurisprudence around the legality of such processes synchronous with legislative amendments and amendments to the rules of major arbitral institutions. The Indian illustration of Amazon.com NV Investment Holdings Inc. v. Future Retail Ltd (covered in another post here), is a useful reference in this regard. In this case, the Supreme Court of India upheld the validity of a SIAC emergency arbitrator award despite the absence of an express legislative provision in favor of emergency arbitral awards in the Indian Arbitration Act of 1996, purposively applying the pro-arbitration principles and recommendations of the Law Commission Reports.

The decision of the High Court also serves as an important reminder to parties and arbitrators that the fundamentals of arbitral procedure are not to be compromised despite the urgency with which emergency measures are typically sought. It may be reassuring for risk-averse parties to know that the dawn of emergency arbitrations through which parties seek emergency measures are not at the cost of procedural efficacy and in the best interest of the parties. However, as the procedural history in this case ends with this decision of the High Court, it remains to be seen how these decisions motivate national legislatures to proactively approach the subject of emergency arbitrations and the enforceability of the awards issued therefrom positively.

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Turkmenistan Accedes to the New York Convention

Mon, 2022-12-05 00:14

On 17 April 2022, the president of Turkmenistan signed a law on accession of Turkmenistan to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or “Convention”). The Government of Turkmenistan deposited the instrument of accession with the Secretary-General of the United Nations on 4 May 2022. In accordance with Article XII (2) of the Convention, it entered into force for Turkmenistan on 2 August 2022, and the country became the 170th State Party to the Convention.

Following the presidential announcement, Turkmenistan’s accession to the Convention was made subject to several declarations and reservations. In accordance with Article I (3) of the Convention, Turkmenistan will apply the Convention only to recognition and enforcement of awards made in the territory of another contracting State. Turkmenistan also declared that it would apply the Convention only to differences arising out of legal relationships, whether contractual or not, that are considered commercial under the laws of Turkmenistan. In addition, it has expressed a reservation with regard to retroactive application of the Convention such that the Convention only applies to awards that are issued after its entry into force for Turkmenistan.

This article explores the semantic peculiarities of Turkmenistan’s commercial arbitration laws that are a vestige of the country’s Soviet era and discusses the possible impact that Turkmenistan’s accession to the Convention will have for arbitration in the country.

 

Commercial Arbitration in Turkmenistan

Employing international arbitration as a means of settling disputes is a relatively new idea in Central Asia.1)Noah Rubins and Gorsha Sur, ‘Application of Article V of the New York Convention: A Central Asian Perspective’ (2008) 25 Journal of International Arbitration, p. 809. jQuery('#footnote_plugin_tooltip_43396_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); For a while, the domestic law of Turkmenistan did not identify arbitration as a means of dispute resolution. Turkmen law formally established a procedure for settlement of certain civil disputes through arbitral tribunals in the Directive on the Arbitral Tribunal, published as Annex 1 to the Civil Procedure Code of 1963. The Directive was redrafted to be effective from July 1, 2016.2)Rolf Knieper and Diora Ziyaeva, ‘Turkmenistan’ in Kaj Hobér and Yarik Kryvoi (eds), The Law and Practice of International Arbitration in the CIS Region, p. 348. jQuery('#footnote_plugin_tooltip_43396_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); On the other hand, international commercial arbitration is governed by the International Commercial Arbitration Law (ICA) and other relevant domestic laws of the country.

Several sources of law form the body of arbitration law of Turkmenistan, the operation of which is supplemented by the state-run arbitration courts system (see previous post here). State arbitration courts, a.k.a. state commercial dispute settlement courts, are but one example of the deeply rooted Soviet legacy in the legal systems of many post-Soviet States. Arbitration in the domestic legal system of the Soviet Union was almost unknown: the state run quasi-judicial system of arbitrazh courts resolved disputes between state enterprises while disputes involving individuals were settled in state courts.3)Hobér Kaj, Law and Practice of International Arbitration in the CIS Region (Kluwer Law International BV 2017), p. 4. jQuery('#footnote_plugin_tooltip_43396_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In theory, there is a clear distinction between arbitration as a means of private dispute settlement, and the state judicial system and its Arbitration Courts, a.k.a. Arbitrazh Courts, which are part of the judiciary. However, courts do not seem to discern the difference between the two systems in practice, especially when enforcing a foreign arbitral award or a judgment issued by foreign courts. To a large degree, this has to do with the phonetic resemblance between arbitration and arbitrazh. Originally, state arbitration courts were designed to assist the Soviet government in supervising central plans; they were neither part of the judiciary nor were they independent from any state institution. 4)Ibid., p. 346. jQuery('#footnote_plugin_tooltip_43396_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });After the fall of the Soviet Union, many post-Soviet States reformed their legal systems and abolished arbitration courts altogether. Others, like Turkmenistan, by contrast, kept them in place under the title of “economic courts,” or preserved the denomination “arbitration court.” 5)Ibid. jQuery('#footnote_plugin_tooltip_43396_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });It is important for Turkmenistan to implement further reforms to avoid semantic confusion because in practice the confusion that has arisen from use of such similar terms (i.e., “arbitration tribunal” v. “arbitration court”) has led to misapplication of the Convention on several occasions by courts of various different countries.

 

The Impact of the Convention on Arbitration in Turkmenistan: An Opinion  

Turkmenistan’s accession to the New York Convention represents the country’s latest step in the direction of upgrading its foreign arbitration laws. In September of 2021 the president of Turkmenistan ordered the Ministry of Justice to establish an International Arbitration Center under the Chamber of Commerce and Industry of Turkmenistan. These changes are primarily motivated by the desire to attract investment into the country and improve the business climate. However, the desire to improve foreign arbitration laws does not necessarily translate into the desire to improve the domestic arbitration laws. There is a discrepancy in the level of development and modernity between the domestic and foreign arbitration laws in Turkmenistan.

Turkmenistan does not have national arbitration law regulating the functioning of domestic arbitral tribunals and their procedure.6)Noah Rubins and Gorsha Sur, ‘Application of Article V of the New York Convention: A Central Asian Perspective’ (2008) 25 Journal of International Arbitration, p. 810. jQuery('#footnote_plugin_tooltip_43396_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The establishment and functioning of domestic arbitral tribunals are subject to the Civil Procedural Code of Turkmenistan (2016) and the Directive on the Arbitral Tribunal, published as Annex 1 to the Civil Procedure Code (“Directive”). The Directive consists of 19 articles and lays down general guidelines on functioning of ad hoc tribunals. Per Article 1 of the Directive, citizens of Turkmenistan can submit any disputes to arbitration except for labor and family ones. However, rather broad mandates to arbitrate can be limited by requirements found in other laws. For instance, Articles 113 and 114 of the Land Code of Turkmenistan provides that land disputes are to be solved by the Cabinet of Ministers of Turkmenistan, the state body on land management, local executive bodies, local self-governance bodies and the courts of Turkmenistan. Article 3 of the Directive reads that arbitration tribunals must be established ad hoc based on special agreement between the parties. Further, in relevant part, the Directive reads that parties cannot waive their right to arbitrate until the term specified in the arbitration agreement has expired.

The Arbitration Procedural Code of Turkmenistan (2021) regulates proceedings brought before local courts, the Arbitration / Arbitrazh Courts and the Supreme Court of Turkmenistan.7)Arbitration Procedural Code of Turkmenistan (2021), Article 1. jQuery('#footnote_plugin_tooltip_43396_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); If the practice of other post-Soviet states is any indication, it seems that some would qualify the Arbitration Courts of the country as a permanent arbitral body within the meaning of Article 1.2 the New York Convention. Hence there is a confusion as to the material scope of applicability of the New York Convention in some post-Soviet states.

The desire of the Turkmen government to modernize its foreign arbitration system is driven by the need to improve the business climate to attract investment into the country. However, it is not clear what is holding the government of Turkmenistan back from reforming its domestic arbitration laws. One way to look at the issue is to examine the matter in the context of the exercise of political clout in the country. Totalitarian political structure of the state is another feature inherited from the Soviet Union. The country holds the title of the most authoritarian of all former Soviet states. As such, it is reasonable to expect unwillingness of the government to develop its domestic arbitration system. This is because privatization of administration of justice could be seen as a threat to governmental authority. As Gary Born put it, “[t]o the totalitarian state, with its doctrine of the all-enslaving power of the state arbitration means an attempt of private individuals to free an important part of their activities from the dominating yoke of the governing group.”8)Gary Born, International Commercial Arbitration, Vol. 1 (Kluwer Law International BV 2021), p. 50. jQuery('#footnote_plugin_tooltip_43396_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_43396_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Concluding Remarks

Turkmenistan’s accession to the Convention is a landmark event for the country that provides an extra layer of assurance and certainty for international businesses in the Turkmen jurisdiction. As it stands now it is too early to conclude what sort of effects the accession is going to have on Turkmenistan’s arbitration market. Political matters aside, the country needs to make further improvements to its laws for the development of its domestic arbitration market and to break away from legacy Soviet legal institutions.

References[+]

References ↑1 Noah Rubins and Gorsha Sur, ‘Application of Article V of the New York Convention: A Central Asian Perspective’ (2008) 25 Journal of International Arbitration, p. 809. ↑2 Rolf Knieper and Diora Ziyaeva, ‘Turkmenistan’ in Kaj Hobér and Yarik Kryvoi (eds), The Law and Practice of International Arbitration in the CIS Region, p. 348. ↑3 Hobér Kaj, Law and Practice of International Arbitration in the CIS Region (Kluwer Law International BV 2017), p. 4. ↑4 Ibid., p. 346. ↑5 Ibid. ↑6 Noah Rubins and Gorsha Sur, ‘Application of Article V of the New York Convention: A Central Asian Perspective’ (2008) 25 Journal of International Arbitration, p. 810. ↑7 Arbitration Procedural Code of Turkmenistan (2021), Article 1. ↑8 Gary Born, International Commercial Arbitration, Vol. 1 (Kluwer Law International BV 2021), p. 50. function footnote_expand_reference_container_43396_30() { jQuery('#footnote_references_container_43396_30').show(); jQuery('#footnote_reference_container_collapse_button_43396_30').text('−'); } function footnote_collapse_reference_container_43396_30() { jQuery('#footnote_references_container_43396_30').hide(); jQuery('#footnote_reference_container_collapse_button_43396_30').text('+'); } function footnote_expand_collapse_reference_container_43396_30() { if (jQuery('#footnote_references_container_43396_30').is(':hidden')) { footnote_expand_reference_container_43396_30(); } else { footnote_collapse_reference_container_43396_30(); } } function footnote_moveToReference_43396_30(p_str_TargetID) { footnote_expand_reference_container_43396_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_43396_30(p_str_TargetID) { footnote_expand_reference_container_43396_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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