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Mexico’s New BIT with Hong Kong: AMLO’s Wink to Chinese Investments?

Sun, 2022-04-17 02:20

As he embarks on the second half of his term, Mexico’s President, Andres Manuel López Obrador (known as “AMLO”), continues to fight foreign investors in a myriad of sectors.  By now it is clear that his presidency will be marked by his stance against the private sector and previous administrations which, in his view, “pillaged Mexico during the neoliberal era” (to quote one of Mr. López Obrador’s recurrent mantras).

The list is extensive.  In the last three years AMLO and his cadres have scrapped Mexico City’s new airport, cancelled renewables auctions and a brewing plant, threatened to phase-out corn imports and called to expropriate lithium ores.  In the coming days, Mexico’s Congress will hold a decisive vote on a constitutional counter-reform in the energy sector which has already strained diplomatic ties and is questioned for its effects on existing investments and international treaties, like the USMCA — a treaty that AMLO inherited but did not promote.

Amid an unstable climate for foreign investment, it is unsurprising that under AMLO Mexico has ceased to expand its wide network of bilateral investment treaties (“BITs”).  But there is one exception: in June 2021 a new BIT between Mexico and Hong Kong (“Hong Kong BIT”) came into force.

In an official letter sent to Congress asking it to ratify the Hong Kong BIT— and in a tone that refutes his political narrative— AMLO advocates for investor protection, emphasizing that during the past years Mexico has made efforts to consolidate its position as an attractive destination to foreign investment and, in that context, BITs ensure foreign flows of capital which constitute a “fundamental supplement to promote economic growth and offer broader opportunities to achieve social wellbeing.”  In the same letter, AMLO indicates that BITs have allowed Mexico to integrate into the world’s economy as they “promote greater stability in the rules that govern foreign direct investment” and “stimulate competition and the enterprise spirit with the objective to ameliorate life conditions and the general wellbeing of the population by fostering development and economic growth.”  AMLO concludes that the Hong Kong BIT is compatible with Mexico’s legal system and consistent with its National Development Plan, as it “contributes to place Mexico as a solid economy in the mid and long term which will strengthen its capacity to attract foreign capital and secure the position of the Mexican State as a receiver of foreign direct investment.”

On June 16, 2021, Mexico’s Ministry of Economy hailed the new BIT for offering legal certainty that will ensure competition and heighten legal security to investors and investments of both parties alike.

Mexico already had one BIT in place with the People’s Republic of China, signed in 2008 and which is still in effect.  Yet, as some commentators noted, it was unclear whether that treaty would cover investments made by Chinese investors who channeled their investments through Hong Kongese entities (a frequent practice for Chinese international ventures).

The Hong Kong BIT maintains a similar structure to the country-to-country BITs signed by Mexico during the last decade, including the one with the People’s Republic of China.  The treaty, for example, affords Hong Kongese investors standard protections such as fair and equitable treatment and full protection and security (aligned with customary international law principles).  The Hong Kong BIT also sets forth compensation based on fair market value in the event of expropriation, and non-discrimination guarantees, among others safeguards.  Were injury to be inflicted, Hong Kongese investors can avail of treaty arbitration without resorting to Mexican courts.

The signing of the Hong Kong BIT comes at a strategic time for Chinese investors in Mexico, which will now have an additional alternative to protect their investments through the use of Hong Kongese vehicles.

There already are some examples of Chinese investments that could be protected in Mexico by means of the Hong Kong BIT, which applies to investments made prior to its entry into force.  In December 2020, a consortium led by Beijing-based China Railway and Construction Company (CRCC) won a bid to refurbish Mexico City’s subway line 1 for approximately US$ 1.8 billion.  As gleaned from the public contract, CRCC executed the agreement with at least one Hong Kongese entity as guarantor.  Also, in 2020, China’s State Power Investment Corporation (SPIC) acquired Zuma Energía, one of Mexico’s largest players in renewable energies, through a Hong Kongese company.

In executing the Hong Kong BIT AMLO’s administration has made a concession to Chinese (Hong Kongese) investors in Mexico, enhancing their protection under a new investment treaty.  Whether AMLO and his team are amenable to foreign investment and will observe international obligations is less clear.  It might just be that AMLO’s stance regarding foreign investment and a stable legal framework hinges on the nationality of foreign investors.

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Paris Arbitration Week Recap: Renewable Energies and Arbitration

Sat, 2022-04-16 01:48

As part of the 2022 Paris Arbitration Week, Three Crowns held on 31 March 2022 a conference on Renewable Energy and Arbitration. The panel was comprised of Marc Péresse (Head of Legal Offshore Wind at EDF Renewables), Fabien Roques (Executive Vice President with Compass Lexecon and Associate Professor in Economics at Paris Dauphine and at the European University Institute), and Kathryn Khamsi (Partner at Three Crowns). Shaparak Saleh (Partner at Three Crowns) acted as moderator. This post discusses the special features of renewable energy projects today, and how they are likely to give rise to arbitration proceedings in the future, from the perspective of an arbitration lawyer, an expert and an in-house counsel.

Connecting Renewable Energy to Arbitration

Shaparak Saleh acknowledged in her introductory speech that renewable energy is both a timely and growing area of focus for the arbitration community. The transition to renewable energies is not a recent concern. The ongoing energy crisis, which is manifest in the increase in the price of fossil energies, and climate change concerns, predates Russia’s invasion of Ukraine and has prompted many governments to increase their ambitions to develop renewable energy capabilities. Undoubtedly, the conflict in Ukraine now further highlights Europe’s energy vulnerability.

Shaparak emphasised that investments in renewables have increased considerably over the last two decades. In 2004, investments in renewable energy systems amounted to 37 billion US dollars. We are now looking at a 300 billion US dollars figure. Shaparak also emphasised that currently, roughly a quarter of total electricity generated worldwide comes from renewable resources. Renewable energies – in particular wind and solar – are the fastest growing sources of energy globally. In 2020, a net capacity of 278 gigawatts of renewable energy was added worldwide. This represents an increase of nearly 45 % in comparison to the capacity additions of the previous year.

Given this investment activity, and if any lessons are to be drawn from the previous wave of investment arbitrations, particularly in Spain, it is very likely that the number of renewable energy arbitrations will significantly rise in the future.

The panellists focused on three main topics and their relationship to arbitration: financing and construction; offtake arrangements and economic fundamentals; as well as regulation by the State.

Financing and Construction

Marc Péresse highlighted that arbitration has an increasing role to play regarding renewable energy projects as they become bigger and more complex. Such projects by their nature imply international or transnational aspects: they take place in various places in the world; involve contractors from diverse jurisdictions; construction is complex, with multiple contractors; and the projects are project-financed. Arbitration constitutes the natural forum for disputes concerning these projects, given their complex and transnational structure.

Fabien Roques noted that the industry is relatively young, and that technologies are all fixed-cost, heavy on capex and low on opex. This has several implications. For example, regarding financing, it is critical to have a set of contracts that ensure the investment will be repaid over time.

It is worth noting that all three panellists highlighted what is a unique feature of renewable energy projects: the extent to which they are third-party financed.  More particularly, Kathryn Khamsi discussed the issue of the timing of securing financing and sequencing of the contracts. She highlighted the multiplicity of contracts into which project companies enter (license or contract with the government, EPC contract, O&M contract, input arrangements, output contracts, financing arrangements). This begs the question of what happens when project contracts are concluded before securing financing, and financing is not secured thereafter. Contract drafting can assist in such cases.

Offtake Arrangements and Economic Fundamentals

Marc Péresse and Fabien Roques highlighted the main changes in the industry since its inception. They recalled that, up to a few years ago, renewables were more costly than their alternatives, prompting States to provide support in the form of feed-in-tariffs, which were the main drive in the industry. This has changed fundamentally, and renewables are now becoming competitive in many jurisdictions without the need for State subsidies.  The example of the Spanish cases shows that any change in the regulatory framework, by which States would go back on these subsidies, is likely to give rise to arbitration.

As a consequence, the nature of the agreements is changing and there is more exposure to market price, as well as volume and counterparty risks. For example, more and more tenders are now awarded to zero bid offers, with total or partial exposure to market price for the awardees. To mitigate price and volume risks, renewable energy producers and developers can secure offtake arrangements with large industrial offtakers, which are called green corporate power purchase agreements. These agreements ensure that a certain amount of megawatts of renewable energy produced is bought at a set price for a certain period of time. Another option is to aggregate a large number of users to buy energy from suppliers who themselves contract with renewables producers.

There is also increasingly indexation or references embedded in contracts to market prices, with corresponding clauses to renegotiate contracts. Events affecting the market, such as the current increase in electricity prices, could lead to reopening the contracts, to disputes and to arbitration.

Kathryn Khamsi elaborated on the different types of risks and risk allocation clauses.  For example, there are market risks, which can be dealt with by clauses that trigger adaptation or renegotiation in case of market change; regulatory risks, which can be addressed through change in law clauses; and construction and operation risks, which can be catered for with various types of clauses. Specifically in relation to change in law clauses, Kathryn mentioned considerations relevant to identifying (i) the change that triggers the remedy, and (ii) the specific remedy. She also noted that all parties have an interest in clarity of the contract; and parties to multiple contracts should ensure that the chosen remedy in one contract has its back-to-back equivalents in the other project contracts.

Regulation by the State

Marc Péresse and Fabien Roques identified the types of regulatory changes that can impact renewable energy projects: unilateral change of tariffs and/or contractual arrangements by the State, changes relating to the offtake contract in the context of corporate power purchase agreements, to the range of conditions for licensing the project, to connecting the project to the network, fiscal changes, changes affecting the balancing or profiling risks, or environmental constraints.  Such changes may give rise to arbitration.  In particular, investors are likely to argue that such changes violate their legitimate expectations.

Fabien Roques stressed that the role of economic or regulatory experts in renewable energy cases is not necessarily limited to quantum: they can also help to analyse the specificities of the regulatory framework and establish the legitimate expectations of the investor.

He noted that a lot of renewables cases are fundamentally about establishing what the underlying principles of the regulation in economic terms were and how that was embedded into the commitments that were taken by the State and the private party, in order to demonstrate that there has been a fundamental change in the rules of the game.

Kathryn Khamsi noted that there is a new wave of incentivisation of renewable energy projects, and drew certain lessons from the Spanish cases in that regard.

In conclusion, renewable energy projects, which have already given rise to a vast number of arbitrations in the past, are likely to result in even more arbitrations in the future.  Indeed, renewable energy projects become bigger and more complex, they are capital intensive, span years, involve multiple actors, a complex contractual structure and project finance, they are affected by market changes, and take place in changing regulatory environments. As such, they provide fertile ground for disputes. Nevertheless, as the panelists pointed out, there are ways for actors in the renewable energy sector to mitigate the risks associated with those disputes.  This includes, in particular, contract drafting.

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Paris Arbitration Week Recap: Keeping our Eye on the Ball with Sports at Paris Arbitration Week

Fri, 2022-04-15 01:48

Paris Arbitration Week 2022 demonstrated the arbitration community’s increasing interest in sports-related disputes, with three events dealing with sports arbitration. This post is a non-exhaustive account of those events. Panelists covered different topics, ranging from the venues of sports arbitration to diversity in arbitration panels, sports and competition law, the impact of Covid-19 and economic sanctions on sports disputes, the future of esports and the resolution of esports disputes.

On Tuesday, 29 March 2022, Accuracy hosted a panel entitled “Sports Disputes: Past, Present & Future”. The panel, moderated by Anthony Theau-Laurent (Accuracy), was composed of Philippe Bärtsch (Schellenberg Wittmer), Pierre Viguier (Gaillard Banifatemi Shelbaya Disputes), Marie-Cécile Rameau (Bredin Prat), Jean-Luc Juhan (Latham & Watkins), and Henri Philippe (Accuracy).

Similar topics were covered in a conference on “Sports Arbitration” held on Thursday, 31 March 2022, by the BVI International Arbitration Centre. Hana Doumal (BVI International Arbitration Centre) moderated the panel, which included Chriraz Abid (Advant Altana), Hervé Le Lay (Brown Rudnick), William Sternhimer (Morgan Sports Law), and Victor Bonnin (VB Arbitration).

In the meantime, the surge in interest around arbitration in the virtual space has become visible in the sports field. On 29 March 2022, Louis Degos (K&L Gates) and Sarra Saïdi (K&L Gates) hosted a session on “Esports & Arbitration”.

 

I. Back to Basics in Sports Arbitration

Panelists emphasised the importance and role of the Court of Arbitration for Sport (“CAS”) in relation to sports arbitration. During the Accuracy event, Mr. Bärtsch, for example, provided an overview of CAS. Established in 1984 by the International Olympic Committee (“IOC”), CAS deals with disciplinary and commercial disputes directly or indirectly linked to sport. Its two main divisions are the Ordinary Arbitration Division, which functions as a court of sole instance, and the Appeals Arbitration Division, which hears cases brought to it on appeal from federations and sports organisations (Article S.3 of the Code of Sports-related Arbitration).

This was echoed during the BVI conference. Ms. Abid emphasised the localised nature of first instance decisions, with CAS maintaining an overarching presence for appeals. The necessity for speedy dispute resolution was highlighted: sportspeople have very short careers, and the timing of competitions is set in stone, as demonstrated by the FIFA World Cup and Olympic panels during those events.

Sports arbitration beyond CAS was also placed in the spotlight. Mr. Sternhimer, for example, addressed sports law outside of CAS, with mentions being made of Sport Resolutions in London, the Qatar Sports Arbitration Foundation, and the Basketball Arbitral Tribunal. In many contractual disputes within sports, generalist arbitral institutions are used. Nevertheless, CAS remains the most prominent institution within sports arbitration.

Panelists also discussed the importance of ensuring sports arbitrators have the relevant expertise to hear such disputes. Mr. Bonnin, in particular, dealt with the importance of expertise in sports arbitration. CAS provides a closed list of around 400 arbitrators from nearly 100 jurisdictions. The closed list has faced criticism, but it was agreed that it met the need for expert arbitrators. The virtues of the closed list were further highlighted by anecdotes illustrating that arbitrators sometimes do not know which party has appointed them.

Mr. Le Lay expanded on the nature of sports arbitration in practice and how it differs from commercial arbitration. Provisional measures, for example, are available within the framework of CAS, but are uncommon. Ex parte hearings are in principle available, but in practice are almost never used. Tribunals will always give the other party an opportunity to be heard, even if the timeframe is only a few hours. Mr. Bärtsch emphasised that the standards of due process and consensus reached in commercial arbitration are higher than those granted by CAS, where athletes’ consent is not required.

 

II. Hot Topics in the Sports Sector

 

            Diversity

At the BVI conference, the topic of diversity in sports arbitration was raised. The panel agreed that sports arbitration did well in geographical diversity and many of the arbitrators had a varied range of backgrounds from both sports and the law. In gender diversity, there is still work to be done, although the list of CAS arbitrators is becoming more representative over time.

 

            Sports and Competition Law

At the Accuracy event, Ms. Rameau assessed the applicability of EU competition law to the activities of sports federations. Some activities, such as broadcasting, clearly fall under its scope of application. Others, such as the definition of sports rules, do not have an economic nature and thus fall outside it. Sports rules might, however, limit access to competition. That is the case with eligibility provisions. Those rules comply with competition provisions if (i) they pursue a legitimate objective, (ii) they are inherent in the organization of that sport, and (iii) the limitation imposed is proportionate to the goal.

In International Skating Union v. Commission, both the European Commission and the Court of Justice held that the eligibility rules of the International Skating Union (“ISU”) violated Article 101 TFEU due to the disproportionate restrictions on skaters’ freedom to take part in events not authorized by ISU.

 

            Covid-19 and Sanctions

Panelists at the Accuracy conference also covered the impact of Covid-19 and economic sanctions on sports disputes. According to Mr. Bärtsch, the one-sided nature of several sports related contracts, such as hosting agreements, favoured international federations in the disputes arising from events cancellation, postponement, or change of format as a result of the pandemic due to the limited contractual remedies available.

In addition to Covid-19, sanctions imposed as a result of the geopolitical situation between Russia and Ukraine are also impacting sports. Mr. Bärtsch and Mr. Juhan provided two examples: first, the case of Nikita Mazepin, a Russian F1 driver whose contract was terminated ; second, the case of Chelsea Football Club, no longer controlled by Roman Abramovič. The latest geopolitical developments raise a sensitive question: if a party terminates a contract for ethical or reputational reasons, are there legal grounds for justifying that termination? This question is unanswered but several disputes are likely to arise in the coming future.

 

III. Is Attention Shifting to Esports?

In the meantime, the global debate around blockchain, the metaverse and all things virtual might account for an increasing interest in esports.

During the event on “Esports & Arbitration”, Louis Degos and Sara Saïdi took the discussion on sports arbitration closer to the realms of virtual reality. They outlined the challenges and incentives for admitting esports as an Olympic discipline and discussed the suitability of arbitration as a mechanism to resolve esports disputes.

Esports is understood to refer to any type of organised computer gaming, ranging from simulations of real sports (as is the case with virtual cycling games like Zwift) to the more traditional video games involving a console (Fortnite, LoL, CS:GO).

 

            Young and Virtual: the Increasing Relevance of Esports

The panelists emphasised that esports attract a young audience, which is precisely what has been missing from recent Olympic games: the Rio Olympics attracted the oldest audience since 1960. By contrast, most of the esports global audience is under 35 years old. In addition, the financial stakes are often comparable to those in traditional sporting competitions. For instance, the 2019 Fortnite World Cup prize was €27 million, compared to €45 million at Wimbledon.

Crucially, esports and related IP rights are owned by private companies called “publishers”, who as key stakeholders have been advocating for esports to have Olympic status. The main issue, however, remains the continued absence of an international esports federation, despite a few unsuccessful attempts (such as a recent WESA initiative).

 

            Getting Esports Closer to Olympism

To become an Olympic sport, esports would need to fulfil five major criteria, the most important one being institutional compliance with the Olympic Movement (composed of the IOC, the International Sports Federations and the National Olympic Committees).

The panelists agreed that the absence of an international esports federation remains a crucial obstacle to joining the Olympic Movement. Mr. Degos also pointed out that certain video games might not be compatible with the Olympic Charter (in particular, the prohibition against violence).

In 2020 the IOC replaced the word “esports” with two distinct categories: gaming (which can be either casual or competitive) and virtual sports. Gaming includes video games not requiring any physical ability. By contrast, there are both physical and non-physical forms of virtual sports (e.g., cycling in Zwift, or playing FIFA).

 

            The Resolution of Esports Disputes

Arbitrable disputes arising from esports are currently being dealt with as typical commercial arbitrations, as opposed to via the CAS system. This will probably remain the appropriate forum for gaming, since most video games are subject to end user license agreements.

As for virtual sports, dispute resolution is currently dealt with internally. However, the panelists pointed out that as virtual sports become more professionalised, especially with the launch of the “Olympic Virtual Series” in 2021, it is likely that CAS or a similar institution will take an interest. The panelists ultimately advocated for the creation of a new arbitral institution for esports, conducting fully virtual proceedings based on the CAS ad hoc model. The authors of this post agree with the proposal: if cryptocurrencies benefit from a tailored dispute resolution platform, why shouldn’t esports?

 

IV. Concluding Remarks

Sports disputes is a growing field with more firms, individuals and organisations getting on board. The panelists offered advice to aspiring practitioners and emphasised the two Sports Arbitration Mooting Competitions that students can get involved in.

A few issues are unique to sports arbitration, such as the short time frame for hearing a dispute and the closed list of arbitrators at CAS. At the same time sports arbitration faces many of the same issues that are relevant within the wider arbitration community, such as diversity of arbitrators, specialist arbitral institutions and costs.

As for arbitration of esports, this topic has been gaining traction under the auspices of AIAC, in Asia, but it being discussed at Paris Arbitration Week is a first. Its relevance is bound to grow exponentially, in synergy with developments such as dispute resolution in the metaverse.

The varied nature of the events demonstrates the breadth of topics within sports disputes. Adjudicators addressing the impact of Covid-19 and economic sanctions on sports events and athletes’ employment will have to deal with sensitive and unexplored issues and their rulings will likely have an impact beyond the sports sector.

 

The views expressed in this post are the personal views of the authors and do not represent those of their respective employers/affiliated organisations or their employers’/affiliated organisations’ clients.

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Paris Arbitration Week Recap: The Fair and Equitable Treatment Standard – Update and Perspectives

Thu, 2022-04-14 01:47

As part of the 2022 Paris Arbitration Week, Jeantet organised a round table on “The Fair and Equitable Treatment Standard: Update and Perspective”. The panel was composed of Yuriy Pochtovyk (Legal Official, Energy Charter Secretariat), Prof. Kaj Hobér (Associate Member, 3 Verulam Buildings), Barton Legum (Partner, Honlet Legum Arbitration), Irena Alajbeg (Croatian Ministry of Foreign and European Affairs), Nir Deutsch (Legal Adviser, Israeli Ministry of Justice), and Lucia Raimanová (Partner, Allen & Overy) and was moderated by Dr Ioana Knoll-Tudor (Partner, Jeantet).

In recent years, the drafting of “Fair and Equitable Treatment” (FET) provisions has considerably evolved. While the first-generation FET clauses only referred to the FET standard alone, or sometimes in connection with international law and/or other standards of treatment, today’s clauses are more diverse and sophisticated. This evolution is illustrated both by new BITs as well as the ongoing modernization process of the Energy Charter Treaty (ECT). Our understanding of these changes increases in time, however despite the impact of these changes on the outcome of cases, certainty regarding both the level of protection provided to investors by FET articles and the method of their interpretation by tribunals has not been reached yet. These and other topics were put forward before the panel and addressed by the speakers as summarized below.

 

Status of the ECT Modernization Negotiations

The ECT is the most frequently invoked investment agreement. Currently the ECT Secretariat is aware of 145 ECT-based cases, concluded or still pending. From the 83 cases on which such information is available, a FET breach is alleged in 77 of them. A study conducted by the ECT Secretariat concerning investor grievances in the renewable energy sector identifies 119 publicly known cases brought based on IIAs. From the 60 cases on which public information is available, a breach of FET is alleged in 51. The FET is, undeniably, the most litigated substantive protection standard.

The current text of the FET clause in the ECT (Article 10.1)  is open-ended and neither links the FET to international law nor to the minimum standard of international law. Some tribunals, especially when scrutinising in the context of legitimate expectations, found that the ECT put a particular emphasis on the stability of the business and legal framework, mainly by reference to Article 2 ECT as well as to the first sentence of Article 10.1. A number of tribunals also found that denial of justice, breach of due process, discrimination on wrongful grounds, arbitrariness, harassment and coercion may amount to violations of the FET.

In November 2019, the Energy Charter Conference established the Modernisation Group to start negotiations on the modernisation of the ECT, including the topic of the definition of FET. 11 negotiation rounds already took place (in 7 of them the definition of FET was discussed) and two more rounds are scheduled for April and May, before Contracting States will try to reach an agreement in principle in June.

At this stage, only the EU has made available its text proposal for Article 10. The Contracting Parties keep moving forward with the negotiations of the definition of FET. Recently, the Modernisation Group agreed to discuss FET in conjunction with the umbrella clause, as well as advanced their discussions on the introduction of a stand-alone article on the right to regulate.

 

Historical Perspective on the ECT

During the negotiations, parties intended to craft a magna carta for energy, covering not only investment protection but also trade (which has now been replaced by the WTO treaties), environment (provisions not really enforceable under the ECT) and transit.

However, despite such a broad scope, negotiations were wrapped up in a haste, resulting in many provisions remaining unclear or lacking thorough legal analysis, like Article 10. The panel welcomed the current modernization negotiations, while noting that no treaty is perfect. The provisions of the Charter will thus continue to be interpreted on the basis of the Vienna Convention (VCLT), in conformity with the purpose of the treaty (Article 2 ECT).

 

Evolution of FET in the First NAFTA Cases

The panel has then drawn attention to the evolution of the FET standard in f the first NAFTA cases. Until the Loewen, Mondev and Methanex cases brought against the U.S., no formal position had been taken by the U.S. government on the content of NAFTA’s Article 1105. In these arbitrations, each claimant used the ordinary meaning approach of Article 31 VCLT. In the absence of any case law, at the time, the task of the arbitral tribunals was therefore to assess the fairness of the incriminated measures.

To the extent that Article 1105 framed the FET as subordinate to international law and the international minimum standard, NAFTA parties used it as a basis for resisting the ordinary meaning approach that was not generally available for contemporaneous European investment treaties. The Notes of Interpretation of Article 1105 adopted by the NAFTA Free Trade Commission in 2001 confirmed this position in a binding instrument. Although this interpretation did not end the debate on the obligations imposed by Article 1105, it provided an analytically rigorous structure for debating the content of the FET – a debate that continues until today.

 

Approach of a EU Member State (Croatia) and a Non-EU Country (Israel) Regarding Drafting Formulations of FET Clauses

Drafting of FET Clauses in Croatian BITs

Croatia concluded most of its BITs in the mid-90’s when there was neither sufficient awareness of the content of the FET nor case law to clarify its meaning. Indeed, it was only through case law that Croatia realized that an open-ended FET clause could be interpreted broadly.

Before Croatia’s accession to the EU, Croatian BITs incorporated four different approaches to the FET: (i) 6% did not contain a FET clause, (ii) 30% contained a FET clause without reference to international law or other criteria, (iii) 25% connected the FET to the national treatment or MFN standards, and (iv) 39% referred to the FET in accordance with international law.

During the EU accession process, two arbitrations were initiated against Croatia, both invoking a FET breach. As a consequence, Croatia reconsidered its investment policy aiming at (i) clarifying existing standards; (ii) ensuring more consistency and predictability in the tribunals’ interpretation and (iii) the right balance between protecting investors’ rights and preserving the State’s right to regulate.

One of the questions that remains open is the way in which FET clauses of old BITs should be dealt with. Two solutions are under consideration: amending these provisions in order to narrow their scope, or adopting an interpretative statement.

Drafting of FET Clauses in Israeli BITs

Moving on to the position of a non-EU Member State, the example of Israel and its position towards the FET also confirmed a clear evolution in terms of drafting technique. Israel’s existing FET article formulations were discussed in connection with their interpretation by arbitral tribunals. The first example was the FET clause of the Israel-Georgia BIT (1995) which could be considered as one of the “first-generation” style articles. On the basis of this BIT, in the Fuchs v. Georgia case, the tribunal mentioned that Georgia claimed that the FET was synonymous with the customary international law standard while the investor claimed that the FET could be breached by a conduct of a “less egregious nature” and decided that the FET clause allowed the investor to develop legitimate expectation that the State “would conduct itself vis-à-vis his investment in a manner that was reasonably justifiable and did not manifestly violate basic requirements of consistency, transparency, even-handedness and non-discrimination”.

A second example related to the Israel-Guatemala BIT (2006) which contained a more “modern” version FET clause, referring in its drafting to what could be considered a rather vague notion of providing the FET standard “in accordance with the provisions of this agreement“. In IC Power v. Guatemala, the arbitral tribunal was asked to determine whether actions of national courts could amount to a FET breach under the Israel-Guatemala BIT, even if they could not be considered as “denial of justice”. The tribunal decided that “such conclusion cannot be extended to the FET standard in the Treaty, which is agreed sets a lower threshold for a violation than customary minimum…”. With doubts raised regarding the aforementioned agreement, the award could be read in a manner the renders the FET standard in the BIT, when not directly qualified to the minimum standard of treatment, as perhaps containing more than the customary minimum standard.

Israel’s most recent BITs contain a variety of drafting formulations: the Israel-Japan BIT (2017) contains a FET clause referring to customary international law, the Israel-South Korea BIT (2020) contains a FET clause referring to denial of justice and the Israel-UAE BIT (2021), took over the CETA model drafting, with a closed list approach. These examples of drafting styles and tribunals decisions containing various positions by disputing parties raises the question of whether these drafting formulations differ from each other in the level of protection that they provide or if they mean the same and governments were just reacting to the tribunals’ interpretation. As suggested by the speakers, a possible answer may be found in the dynamics of treaty negotiations, and the understanding that international relations and cultural elements add a challenge to the question of renegotiating treaties and clarifying what previous treaties have meant.

 

Different Drafting Formulations and the Impact on Case Outcome

The final intervention proposed to look at three drafting formulations of FET clauses and apply each of them to a mock scenario, with an aim to consider the effects of these drafting formulations on the outcome of the case.

The first drafting formulation was extracted from the Albania-Israel BIT (1996) and reads: “Investments (…) shall be accorded fair and equitable treatment”. This unqualified clause gives the tribunal some leeway to balance the State and investor’s interest when determining what is fair and equitable.

In the second drafting formulation, the Canada-China BIT (2012), the FET clause was linked to the minimum standard of treatment. Tribunals have neither searched for general State practice nor for opinio juris to determine the content of minimum standard of treatment, as this is very difficult to do in practice. Rather, on the whole, they ascribed a meaning to the minimum standard of treatment. Although tribunals have not been consistent in their approach, the interpretation of the minimum standard of treatment tends to be narrower and the liability threshold higher.

The third drafting formulation was that of the CETA Article 8.10, favoured by the EU. Here, the intent is to limit the tribunals’ interpretative function and move away from the FET as a standard to the FET as a closed list of possible behaviours. At the same time, CETA Article 8.9 exempts a Contracting Party from liability if it regulates in pursuit of legitimate policy objectives. Therefore, a breach would be potentially more difficult to establish than under the minimum standard of treatment.

Conclusion

The panel concluded that the wording of FET clauses will continue to be of utmost importance.

Finally, the speakers were asked whether one should aim for a uniform level of protection or rather a uniform method of interpretation, with clearly identified criteria, providing more predictability in the interpretation of the FET standard, both for investors and for States. A more uniform method of interpretation was favoured by the majority of panellists.

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Paris Arbitration Week Recap: The Impact of Russian Sanctions on International Commercial Arbitration – From Arbitrability to Enforcement

Wed, 2022-04-13 01:47

As part of the 2022 Paris Arbitration Week, Jeantet organised a conference on The impact of Russian sanctions on international commercial arbitration: from arbitrability to enforcement”. The panel was composed of Crina Baltag (Associate Professor, Stockholm University; and Editor of the Kluwer Arbitration Blog), David Lasfargue (Partner, Jeantet), Niamh Leinwather (Secretary General, VIAC), Evgenyia Rubinina (Partner, Enyo Law), Jacques-Alexandre Genet (Partner, Archipel) and was moderated by Dr. Ioana Knoll-Tudor (Partner, Jeantet).

In light of the current situation in Ukraine, several states took sanctions against Russia, which, in turn, took a series of counter sanctions. The session addressed the issues described below.

The Origins of Economic Sanctions and an Overview of Their Effect on International Arbitration

Over the years, economic sanctions moved from focusing on external goals, such as preventing wars between states, to more internal goals, e.g., concerns with human rights inside of a state. Since March 2014, the EU imposed economic sanctions against Russia for the illegal annexation of Crimea and Sebastopol, then in February 2020, as a consequence of the recognition by Russia of Donetsk and Lugansk and most recently following Russia’s aggression of Ukraine.

The issue of arbitrability of a dispute involving economic sanctions emerged already in 19941)Fincantieri-Cantieri Navali Italiani SpA v Iraq (1994) Riv. Dell’arb 4 (1994) (Corte di Appello di Genova/Genoa Court of Appeal, Italy). jQuery('#footnote_plugin_tooltip_41087_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41087_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, when the Genoa Court of Appeal concluded that a national court had jurisdiction, not an arbitral tribunal, since sanctions touched upon the issue of public policy. This position has nevertheless evolved and in the recent years national courts have constantly confirmed that arbitral tribunals are competent to decide on the arbitrability of the matter.

Although, generally, arbitration is not prohibited by economic sanctions, there are significant consequences when it comes to the information the arbitral institution has to gather with respect to the parties. An illustration of this being Article 10 of the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, which provides that the SCC can ask for additional information from the parties to understand at the outset of the proceedings if economic sanctions might have an impact on the matter.

Current Sanctions and Counter Sanctions

In 2022, the EU took four packages of sanctions: (i) full blocking sanctions on a large list of individuals and entities and blocking the assets of the CPR, (ii) prohibition to provide specialized financial messaging services to certain banks, i.e., no longer using SWIFT for certain banks, and to sale, supply, transfer or export bank notes to Russia, (iii) prohibition to invest and co-invest with the Russian investment funds and (iv) ban on exportation of certain products and trade restrictions, especially the luxury goods. As far as the US sanctions are concerned, the economic sanctions are similar, having the same targets.

In light of these sanctions, Russia developed a series of countermeasures, promptly releasing a list of “unfriendly States”, which includes all the EU countries, as well as other countries supporting sanctions against Russia.

Among Russia’s first reactions to sanctions was the issuance of the presidential decree dated 28 February 2022, through which it obliged residents involved in foreign economic activities to sell 80% of all the foreign currency they receive from non-residents. This measure is aimed at protecting the rouble and to avoid transfer of currencies abroad.

This was shortly followed by a draft presidential decree dated 9 March 2022 targeting entities with more than 100 employees and owned by shareholders from “unfriendly states” for more than 25%. The draft decree stated that if the executive bodies of the company stop managing the company, leading it to cease or terminate its activity or risking going bankrupt, then the board members or the state bodies could file a request with the court asking for the out in place of an external administration of the company. In this case, the shareholders will be obliged to resume the activity of the company and consequently ask for the cancellation of the proceedings; otherwise, the court might transfer the management of the company to an external administration, that is a public institution. This draft decree raised a lot of concern that an expropriation wave is under preparation. Nonetheless, for the time being, this is only a draft which has not been enacted yet.

How Arbitral Institutions, Notably VIAC, Deal With the Issue of Economic Sanctions

VIAC has a system of checking public websites, including the official website of the parties and entities involved in the arbitration, as well as internal database by using the screening-off and screening-on functions. Equally important, the parties, the arbitrators, but also the subject matter of the dispute play an important role in order to determine if it falls into the scope of the sanctions’ regime. Additionally, VIAC requires the parties to provide more information on their identity, the related entities, and the ultimate beneficial ownership.

Checks are conducted at all relevant stages of the proceedings, particularly at the submission of the statement of claim and of the answer, since money transfers are involved and sanctions might have an impact on such payments.

In order to ensure compliance with economic international sanctions, administrative measures may be taken if (i) one of the parties is under sanctions regime, (ii) one of the parties or their related entity is a citizen of a country subject to sanctions, (iii) one of the related entities is listed under the sanction regime such as entities or individuals directly or indirectly owned, and who are controlling a party in the matter, if they are directly or indirectly owned by a party or they are affiliated in some way.

A worth mentioning novelty in the field is the new regulation that came into force in March 2022, namely article 5. a. a), §1 of the Council Regulation (EU) No 269/2014, which provides that it should be prohibited to engage in any transaction directly or indirectly with a various list of legal entities provided under annex 19 of the same regulation.

Among the challenges this provision may pose in practice is the absence of a definition of the term “transaction”. The current interpretation of VIAC is that legal services are not considered a transaction and that is due to a violation of the right to be heard and the access to justice of the parties that it might trigger.

Russia’s “Anti-Sanctions” Reforms of its Commercial Procedure Code

Pursuant to reforms of the Russian Commercial Procedure Code of June 2020, namely the introduction of Article 248, sanctioned parties (including Russian parties or foreign parties that are subject to sanctions against Russia) are allowed to bring a claim at their place of residence or incorporation, provided that this dispute has not already been brought before a foreign court or before an arbitral tribunal seated outside of Russia, even if the contract contains an arbitration clause or a foreign court dispute clause. In the event arbitration or proceedings before courts are commenced, there is the possibility to ask the Russian courts to order an anti-suit injunction against these proceedings.

Although the initial expectations of the arbitration community were that these provisions would be interpreted in a fairly narrow way, this was not the case.

The interpretation of the aforementioned provision was outlined by the Russian Supreme Court in the Uraltransmash v Pesa case (previously discussed here). Uraltransmash was subject to sectorial sanctions but was able to participate in an SCC arbitration. Despite this, it applied for an anti-arbitration injunction against the SCC arbitration in front of the Russian courts. The Russian Supreme Court overturned all the decisions of lowers courts interpreting Article 248 narrowly and held that the intention of the legislator was to enable all sanctioned parties to take advantage of this article because if a Russian party was subject to sanctions, it meant that it could not get justice before foreign courts or foreign seated arbitrations.

Further amendments have been proposed to the Russian Commercial Procedure Code, a relevant example being the proposal from November 2021 which, if enacted, would give Russian courts exclusive jurisdiction over claims against parties where it is alleged that the foreign counterparty receives a de facto benefit from sanctions, and where the foreign counterparty did not perform its contractual obligations as a result of the sanctions.

In terms of practical implications of these reforms, sanctioned Russian parties can choose where to bring their claim. Although in some cases it might be useful to bring these claims in Russia, the practical utility might be limited, due to uncertainties that may arise in connection to the extent to which the New York Convention might prevent the enforcement of such decisions, which were in breach of a valid arbitration agreement, outside of Russia.

The Impact of Sanctions on Enforcement in the Context of International Arbitration

The panel made first the difference between freezing of assets, which means that the funds remain in the hands of the debtor and seizure, which is a way of depriving the debtor of the property, with the funds being in the end turned over to the seizing creditor.

Economic sanctions may have two major consequences at the stage of enforcement of awards.

The first one is that award debtors are precluded from making any payments to sanctioned award creditors. The question of the interest on these amounts comes then into question, depending on the national law of the debtors. It might prove useful for creditors to put these amounts into an escrow account, in order to interrupt interests from running. The second one is that sanctioned award debtors are precluded from paying with their frozen funds.

In a recent ruling, the ECJ decided that a private creditor looking to obtain an interim measure on frozen funds, has first to refer to the national competent authorities. In most countries, the competent authority is the Ministry of Finance from which the creditor has to obtain a prior authorisation in order to possibly perform an attachment in the future. It can be concluded that the ECJ found a way to prevent in practice any interim measure being performed on frozen funds, since such a prior authorisation will be very difficult to obtain.

Difficulties will arise in practice while trying to enforce awards against targeted or listed Russian entities, as it is probable it will not be possible to enforce against frozen funds.

Conclusion

Sanctions and counter-sanctions raise a number of questions, for the procedural strategies of the parties, for the conduct of arbitration proceedings by arbitral institutions and also for the enforcement of the arbitral awards. With unprecedented economic sanctions taken against Russia and countersanctions taken by Russia, almost weekly, the arbitration community will continue to pay attention and reflect on the impact on these sanctions on arbitration procedures and enforcement.

References[+]

References ↑1 Fincantieri-Cantieri Navali Italiani SpA v Iraq (1994) Riv. Dell’arb 4 (1994) (Corte di Appello di Genova/Genoa Court of Appeal, Italy). function footnote_expand_reference_container_41087_30() { jQuery('#footnote_references_container_41087_30').show(); jQuery('#footnote_reference_container_collapse_button_41087_30').text('−'); } function footnote_collapse_reference_container_41087_30() { jQuery('#footnote_references_container_41087_30').hide(); jQuery('#footnote_reference_container_collapse_button_41087_30').text('+'); } function footnote_expand_collapse_reference_container_41087_30() { if (jQuery('#footnote_references_container_41087_30').is(':hidden')) { footnote_expand_reference_container_41087_30(); } else { footnote_collapse_reference_container_41087_30(); } } function footnote_moveToReference_41087_30(p_str_TargetID) { footnote_expand_reference_container_41087_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_41087_30(p_str_TargetID) { footnote_expand_reference_container_41087_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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Still Not Ready to Cast the Dice: German and Italian Courts Tread Lightly on the Issue of CISG and Arbitration Agreements

Tue, 2022-04-12 02:04

On 26 November 2020, the German Federal Supreme Court (BundesgerichtshofBGH) intervened in the “disputed” question of the applicability of the CISG to arbitration agreements (I ZR 245/19, para. 28). The Decision—based on the specific factual circumstances of the case and the most-favorable-law provision (Article VII) of the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (NYC)— falls short of providing the conclusive answer in the heated debate.

Quite the opposite, the Decision adds fuel to the controversy as to which law governs the arbitration agreement in the absence of an express agreement by the parties, and includes valuable pointers on the incorporation by reference of a party’s general terms and conditions. Apart from comparing German and Italian case-law on these topics, this contribution ponders whether state courts are rightly exercising restraint in favor of arbitral tribunals.

 

I. BGH Decision

The dispute arose out of the delivery of allegedly contaminated goods to a German purchaser, who subrogated its rights to its insurance policy holder (Claimant). The delivery was made by a Dutch vendor (Respondent, jointly with Claimant, the Parties). In its confirmation letters (named “sales contract”) to Claimant’s orders, Respondent referred to both (1) the Netherlands Spice Trade Association (Nederlandse Vereniging voor de Specerijhandel or NVS) conditions and (2) its own “general conditions of sale and delivery”. The NVS conditions identified Dutch law, with the exclusion of the 1980 United Nations Convention on Contracts for the International Sale of Goods (CISG), as the law applicable to the parties’ contractual agreement (Articles 17-18) and provided for arbitration seated in the Netherlands (Article 16). The second set of conditions contained a choice-of-forum clause in favor of the competent courts of the purchaser’s registered office. Respondent signed all the confirmation letters; Claimant none of those regarding the disputed delivery.

The dispute reached the BGH upon Claimant’s request for revision of the Bremen Court of Appeal’s decision that found that the Parties’ contract did not validly incorporate the arbitration agreement in the NVS conditions. So held the BGH, too. After finding that the Parties had not validly concluded an arbitration “agreement in writing” under Article II(2) NYC (paras. 14-16), the BGH applied German law as the most-favorable-law under Article VII NYC that it had previously considered applicable to both exequatur and declaration of enforceability proceedings (Article V NYC) and arbitration objections (Article II NYC, cf. paras. 17-19; BGH 30.09.2010 III ZB 69/09; see also Tarawali/Gerardy, 19/4 SchiedsVZ (2021) p. 213).

The BGH found that the Parties’ agreement lacked formal validity and the NVS conditions were not validly incorporated by reference under German substantive law (§1031(1)-(3) German Code of Civil Procedure, ZivilprozessordnungZPO). And since German law includes the CISG, the BGH considered the scholarship on (i) the principle of separability of the arbitration agreement and (ii) Article 4 CISG on the convention’s limited scope of application to the formation of the contract and the parties’ respective rights and obligations. However, the BGH ended up endorsing the applicability of the CISG to arbitration agreements based on Articles 19(3) and 81(1) CISG (on the consequences  of (a) an alteration of the terms during negotiations or (b) the avoidance of the contract on a dispute resolution clause, cf. paras. 30-33). (For both schools of thought, see Flecke-Giammarco/Grimm, CISG and Arbitration Agreements, pp. 45, 49; Schwenzer/Jaeger, The CISG in International Arbitration, pp. 318-320; Koch, Surprising Terms in Standard Contracts under the CISG, pp. 598-599). It found that the meeting of the minds concerned the contract-law dimension of the agreement (Articles 14-24 CISG) and excluded the application of the freedom of form principle (Article 11 CISG, cf. paras. 33, 36, 53). In the absence of specific rules on incorporation of standard conditions in the CISG, the BGH applied Article 8 CISG on contract interpretation. Because of Respondent’s additional reference to its own conditions electing domestic courts and the circumstance that the NVS conditions were not “sent or made otherwise available” to the opposing party, the BGH excluded that based on any trade usage or a reasonable person’s interpretation (Article 8(2)-(3) CISG, cf. paras. 36-39) the NVS conditions were validly incorporated into the contract (Kröll, 19/3 SchiedsVZ, pp. 128-129/NJW 2021, p. 832).

In the end, the BGH considered German conflict-of-law rules, which led in that case to the application of Dutch law. However, the BGH did not assess Dutch law, because this includes the CISG and the BGH had already excluded a valid incorporation of the NVS conditions into the contract under the CISG (paras. 40-49, 56).

 

II. Italian Case-Law

Due to the limited scope of application of the BGH Decision (the most-favorable-law provision), a comparison with case-law of other jurisdictions is difficult. Nevertheless, it is interesting to see, from a comparative analysis, how other state courts have pronounced to identify decision patterns. One example is the Italian Cassation Court. This court has so far excluded the applicability of the CISG to forum selection clauses, but has not yet pronounced on arbitration agreements.

Most decisions of the Cassation Court concerned recognition and enforcement proceedings, and for this purpose it found sufficient the meeting of the parties’ minds on the arbitration agreement under the applicable law: leaving any evaluation regarding the formal requirements to the arbitral tribunal (21/01/2000, n. 671, referring to 2448/1980, 4392/1988, 1269/75, 1877/76, 6055/82). For instance, it recognized an arbitral award based on what was considered a valid arbitration agreement under the applicable law: an arbitration clause in the purchase orders referred to in the invoices that the seller delivered to the buyer along with the shipment (15/04/1980, n. 2448).

The Cassation Court’s case-law further recognizes the conclusion of international contracts through so-called facta concludentia when in conformity with international trade usages in the specific economic sector (17/01/2005, n. 731).  The Cassation Court applied this case-law to the dispute resolution clause between the parties to an international sales contract (although in that case the corresponding requirements were lacking, cf. 5/10/2009, n. 21191, para. 2). Besides, in several decisions the Cassation Court held that the special formal requirements of Italian law for contractual clauses as choices-of-law or courts do not apply in case of incorporation of a party’s terms and conditions (relatio perfecta, cf. n. 9863/2021, p. 10, 18041/2012, 7403/2016, 3479/2007).

The Cassation Court also found that the CISG only regulates the parties’ substantive obligations but dictates no jurisdictional rule (in case of forum selection clauses, cf. 26/02/2016, n. 3802, para. 3.3, referring to 5/10/2009, n. 21191, para. 8). (Interestingly in 25.03.2015 VIII ZR 125/14 also the BGH found applicable to forum selection clauses the lex fori and not the CISG under Article 4 CISG, but in its latest Decision it took distance from that ruling excluding the application of any autonomous law under Article VII NYC , cf. para. 34). The Cassation Court further held that once the parties’ agreement refers to general terms and conditions, as per their usage, the objecting party bears the burden of proving any different agreement between the parties (good faith principle, cf. 15/04/2021, n. 9863.)

 

III. Arbitral Tribunals’ Case-Law (Brief Comparison)

A common position is that arbitral tribunals enjoy greater leeway in the (non-)application of the CISG: differently from domestic courts, they do not belong to a specific jurisdiction (See Flecke-Giammarco/Grimm, CISG and Arbitration Agreements, pp. 46-47). Yet there are instances where arbitral tribunals applied the CISG based on party autonomy, on a comparative analysis or as a most-favorable standard (Ibid, pp. 51-53; Schwenzer/Jaeger, The CISG in International Arbitration, p. 325). However, there are tendencies to interpret broadly the “written requirement” of Article II through Article VII NYC among national courts, too (See Praštalo, Uniformity in the Application of the CISG, p. 197, fn 1084 referring to UNCITRAL Guide; Schwenzer/Tebel, The Word is not Enough–Arbitration, Choice of Forum and Choice of Law Clauses Under the CISG, pp. 742-743; and in 21/09/2005 III ZB 18/05 the BGH—though based on the old German private international law that was in the meantime replaced by the EU Regulation 593/2008 that does not apply to arbitration and forum agreements—set aside the regional court’s decision and referred the matter back to it with the instruction to consider Dutch law’s more permissive form requirements (under Article VII NYC)—allowing for references on invoices or letterheads in long-standing professional relations, cf. pp. 307-308.)

 

IV. Conclusion

Does the BGH Decision signal enduring caution? The Decision has been applauded but also criticized for bringing only partial clarity on several questions: (1) Why did the BGH apply §1031 ZPO to the formal requirements? (2) What would happen outside the analogous application of Article V or of Article VII NYC? (3) Would different courts decide according to different laws depending on whether a clause is mutually agreed or not? (Masser/Harraschain, 19/2 SchiedsVZ, p. 104; BeckOK BGB, Hau/Poseck, CISG Art. 4, para. 19) Besides, considering technological advances, shouldn’t formal and substantive validity requirements be applied more broadly?

Most importantly, to what extent should national courts finally decide on this issue, given that most national laws endorse the Kompetenz-Kompetenz principle, the NYC embodies the favor arbitratustenet, and arbitral tribunals enjoy greater leeway in the (non-)application of the CISG? For now, what is clear is that the dice have not been cast yet.

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Advocacy in Transnational Disputes: Seizing Opportunities the Pandemic has Revealed

Tue, 2022-04-12 01:45

One of the leading scholars in international dispute resolution today is Sundaresh Menon, the Chief Justice of the Supreme Court of Singapore. In March of 2021, he delivered the opening address at the Singapore International Commercial Court Symposium. As part of his welcome delivered virtually, he made some interesting observations:

History informs us that while pandemics of the past have largely been harbingers of destruction, they have also been agents of much-needed change. The Black Death, for example, swept through Europe in the 14th century and wiped out as much as a third of the world’s population. Yet, out of the ashes of that tragedy came the emancipation of millions of indentured labourers from serfdom as the sudden and severe depopulation caused by the plague dramatically raised the demand and wages for labour. The point is that some good can, and often does come out of the destruction and disruption wrought by crises. And there is one crucial difference between the situation then and now. Unlike our forebears, who were the unwitting victims or beneficiaries of forces beyond their comprehension and control, we enjoy an unprecedented level of access to data, information and technical know-how which affords us an unmatched ability to identify and seize the opportunities uncovered as the dust settles.

The Chief Justice then presented the following challenge:

If international dispute resolution were likened to a sturdy tree, then the long winter which the pandemic has ushered in seems the perfect time for the work of pruning it, discarding the dead branches of outmoded processes and procedures, so that we might make way for the growth of new and more productive sprouts in the coming spring.

His challenge is the theme for this post. It is, of course, premature to fully evaluate the impact of the pandemic on the institutions of international commercial arbitration or to propose major changes to its functioning parts. But one significant and obvious impact that can and should be analyzed now is the forced transition from live, in person evidentiary proceedings, to their virtual counterpart.

How well have we performed so far employing virtual meeting room technology in response to the pandemic? From my personal observations, commentary in the blogosphere, and information I have been able to obtain from colleagues, arbitral societies, and arbitral institutions, I would give us interim grades ranging from “A” to “F” with a very unscientific average grade of between C and C+.

There has been no shortage of analysis related to the legal and practical issues arising from use of remote procedures since the pandemic began in March 2020. I count more than forty articles on the Kluwer Arbitration Blog alone, since April 2020. This does not include the dozens of articles published by practitioners on firm websites and the arbitral forums and credentialing organizations have contributed new rules and guidelines.

Kluwer responded with remarkable speed by compiling and publishing a series of articles edited by Professor Doctor Maxi Scherer, Niuscha Bassiri, and Mohamed Abdel Wahab, into a book entitled International Arbitration and the COVID-19 Revolution. The Authors address a wide range of issues, from the mechanics of secure electronic filing to the legal framework for conducting virtual hearings that assures the fundamental fairness required of all dispute resolution processes. Chapter 7 surveys the experiences of users with virtual technologies.

Chapter 7 is authored by Gary Born, Annaliese Day QC, and Hafez Virjee. 201 participants in international arbitration were surveyed and 106 responded to the survey questions between June 10 and July 6, 2020. Thus, the survey responses ended just 5 months after the World Health Organization first declared the pandemic. The results of this early survey reinforced the preference of existing users for live evidentiary hearings over virtual evidentiary hearings, while acknowledging the significant increase in the number of preliminary scheduling conferences conducted virtually in the months immediately following the declaration of the pandemic.

Just recently the College of Commercial Arbitrators published the results of a survey it conducted among its 250 members, all of them experienced arbitrators engaged full time in service as neutrals. 137 Fellows responded and their responses were based on actual experiences in more than 500 remote video arbitrations, of which the majority were fully virtual. The results were preliminarily summarized as follows:

Overall, virtual proceedings were viewed very positively. The reasons for and benefits of virtual proceedings go well beyond avoiding pandemic related risks and problems and include efficiency, cost savings, and more expeditious scheduling. In general, there were few if any major negative impacts on the process or participants of conducting virtual proceedings with the exception of a minority but consistent view that virtual hearings impacted the assessment of witnesses. It is a reasonable inference from the survey that arbitration clause, institutional rules and laws should be revised where necessary to explicitly authorize virtual hearings where the parties agree or where the arbitrators order them.1) Readers who would like to see the CCA Survey results and summary may email the author of this blog post at [email protected] jQuery('#footnote_plugin_tooltip_41246_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41246_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The major commercial arbitration institutions are not yet tracking and releasing data to indicate how many cases under their administration are being conducted virtually, but I hope they will. My own experience since March 2020 was probably not unique. I was serving either as sole or one of three arbitrators in eleven active arbitration cases. Five of those cases had been scheduled for live hearings between March 2020 and March 2021. We held status conferences in all cases and by summer 2020, the parties in two of those cases agreed to reschedule final evidentiary hearings to be conducted virtually. Eventually all but one of the cases where I was serving as an arbitrator were reset for virtual evidentiary hearings by agreement, or the tribunal entered orders requiring it. To my knowledge, no such order has resulted in a court challenge to an award.

The first of these cases is illustrative. It went to virtual hearing on Zoom in November 2020. It was a complicated construction case with thousands of exhibits and involved testimony from 15 witnesses, most located in the Caribbean since the project was in Jamaica. The proceeding consumed ten full evidentiary hearing days, followed by a day of closing arguments in early December. I entered my Award before year-end. The parties reached a resolution based on the Award and it was not necessary to submit cost applications. The quality of the advocacy was exceptional. The technical Zoom hosting services were provided by a transcription firm that also provided software for receipt and organization of exhibits. Counsel and the transcription firm would receive an A from me for their work. They were excellent. Between November 2020 and November 2021, I participated in forty-five days of virtual evidentiary hearings in five separate arbitration proceedings. I also conducted several mediations by Zoom. There were some difficulties but they were not significant.

There are groups like the College of Commercial Arbitrators in the US and the Chartered Institute of Arbitrators in the UK that are constantly developing and revising best practices in arbitration generally and specifically virtual arbitration proceedings. But many in the international arbitration world are already beginning to argue it is essential for the international dispute resolution world to “get back to normal” as soon as possible. Some senior counsel and some arbitrators have only reluctantly participated in virtual proceedings and have no intention of seriously attempting to “re-tool” their skills for an arbitration process that facilitates greater use of virtual proceedings.

When data are collected that permit us to evaluate how virtual technologies performed, I predict users of international commercial arbitration will demand that providers and professionals make international arbitration services available virtually when the pandemic is in the rear-view mirror. There is already anecdotal evidence of this. For example, Lara Nicholls from Shell, is actively promoting within Shell and externally, a litigation virtual hearing pledge. She says it will be a simple (but hopefully effective) statement:

We pledge where ever feasible to promote virtual rather than in person hearings.

Shell’s commentary references many benefits that are being realized by the pandemic forced transition to online proceedings, but emphasizes the environmental benefits, the cost savings, and the positive impact on more diverse participation in arbitration and mediation. The commentary notes that although the Pledge is initially intended as an internal litigation Pledge, in time the expectation is that it will be adopted by Shell’s panel Law Firms as part of Shell’s “We Care” principles and, eventually, incorporated into the existing industry wide Campaign for Greener Arbitration pledge.

Freshfields Bruckhaus Deringer recently published its annual review, International Arbitration 2022 and concluded as follows with respect to virtual proceedings:

On the procedural front, the main question is whether remote hearings that have flourished during the pandemic will remain a more permanent fixture of the arbitration landscape in 2022 and beyond.

Overall, virtual hearings have worked well, while aligning with the ESG goals of companies and law firms. Some companies have even started to adopt policies requiring virtual hearings by default and law firms, such as Freshfields, have committed to further limit their carbon footprint by reducing travel and paper usage.

For these reasons, and due to persistent volatile travel and health restrictions, the trend towards remote hearings will likely continue in 2022 and outlast the pandemic. Remote procedural hearings will become the norm, with the cost of travelling for smaller hearings becoming increasingly harder to justify.

Remote merits hearings will also likely gain momentum for a wide range of cases as we continue to adapt to new skills and techniques and become more comfortable with the virtual environment. We also expect to see an increase of ‘hybrid’ hearings combining elements of in-person and virtual hearings in cases where parties are not comfortable with purely virtual hearings.

So, what are the reasons for resisting virtual proceedings? As we consider some of the most common objections to virtual evidentiary proceedings in international commercial arbitration, I am reminded of what in a 2013 presentation to the Bar of Ireland, I described as the four stages of disruptive technology in the legal profession. The first stage is resistance, the most stubborn and effective resistance coming from the most senior participants. The second stage is trial-and-error. During this stage, those who experiment with new technology and fail are criticized, often severely, by seniors opposed to the change. The third stage is acceptance and mainstreaming of the new technology. This is not uniformly good. Sometimes, people fall in love with technology that betrays them, or they adopt good technology but fail to properly implement it. The final stage is the smart application of good new technology. It is important to get from stage three to stage four quickly and it is important for older technologies that remain effective to be retained alongside newer technologies. Many transitions suffer reversal of hard-won gains during stages one and two because they take too long to smartly apply new technology and decide what will remain of the old.

The forced adoption of virtual technology during the pandemic demanded that we ignore the resistance stage and speed through the trial-and-error stage with lightning speed. When a few early users of Zoom were embarrassed by having a confidential hearing bombed by outsiders, Zoom turned off features that were previously controlled by default settings and the objections largely dissipated in the face of pandemic induced demand.

There is also the objection that it is not possible to provide the same quality of decision-making if arbitrators are not able to observe witnesses in a live setting while they are being cross-examined and when advocates are not in the same room as arbitrators. I call this the “watch them sweat” fallacy. I find this objection particularly unpersuasive in international arbitration and was pleased to read the recent post on this blog by Danielle Gonzalez Reyes reporting on the successful virtual Inaugural Edition of the Cross-Examination Moot.

There are, of course, unfortunate consequences of virtual arbitration hearings. We humans are social animals. I believe that dispute resolution is performed best and most fairly when it takes place in a social setting. It is this admission that reminds me to mention one of the most important principles of dispute resolution based on an adversary process. It is messy. It is imperfect. It cannot innovate and will not thrive if the perfect is permitted to be the enemy of the good. And more importantly, what we tend to think of as the perfect, is often a false profit. It is simply what we have come to think of as essential for international arbitration. As Chief Justice Menon challenged us, we need not accept that international dispute resolution had reached its zenith before the pandemic.

I hope that we will come to view this moment as an opportunity to permit access to international arbitration for millions of people who were not able to resolve their disputes this way prior to the pandemic. I hope that we will embrace the use of virtual meeting room technology and related technologies as part of what CJ Menon encouraged as “discarding the dead branches of outmoded processes and procedures, so that we might make way for the growth of new and more productive sprouts in the coming spring.”

 

Joe Matthews is an arbitrator and mediator. He graduated from the University of Miami School of Law in 1977. He is a Fellow and Chartered Arbitrator, Chartered Institute of Arbitrators, and a Fellow of the College of Commercial Arbitrators. He teaches Advocacy in International Dispute Resolution at Florida International University Law School. This blog post is a condensed version of the guest lecture he delivered to the LLM students at University of Stockholm Law School, Master in International Commercial Arbitration Law (ICAL) – March 24, 2022.

References[+]

References ↑1 Readers who would like to see the CCA Survey results and summary may email the author of this blog post at [email protected] function footnote_expand_reference_container_41246_30() { jQuery('#footnote_references_container_41246_30').show(); jQuery('#footnote_reference_container_collapse_button_41246_30').text('−'); } function footnote_collapse_reference_container_41246_30() { jQuery('#footnote_references_container_41246_30').hide(); jQuery('#footnote_reference_container_collapse_button_41246_30').text('+'); } function footnote_expand_collapse_reference_container_41246_30() { if (jQuery('#footnote_references_container_41246_30').is(':hidden')) { footnote_expand_reference_container_41246_30(); } else { footnote_collapse_reference_container_41246_30(); } } function footnote_moveToReference_41246_30(p_str_TargetID) { footnote_expand_reference_container_41246_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_41246_30(p_str_TargetID) { footnote_expand_reference_container_41246_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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New Generation Investment Treaties and Environmental Exceptions: A Case Study of Treaty Interpretation in Eco Oro Minerals Corp. v. Colombia

Mon, 2022-04-11 01:00

Environmental concerns now play an increasing role in investment disputes. In this regard, this post analyses the interpretation of an environmental carve-out in an investment treaty in the decision on jurisdiction and liability in Eco Oro Minerals Corp. (“Eco Oro”) v. Colombia.

 

Background and Award

This dispute arose from Colombia’s measures adopted in connection with the páramo ecosystem in the Santurbán highlands. Páramos play a central role in maintaining biodiversity due to their unique capacity to absorb and restore water.

Eco Oro, a Canadian mining company, held mining exploration and exploitation rights in an area that overlapped with the Santurbán páramo. Starting in 1994, Eco Oro invested over US$250 million over two decades in its mining project in Colombia. At the time of Eco Oro’s initial investments, there were no restrictions on mining activities in the páramos, nor were the páramos delimited or protected by law.

In 2012, Colombia adopted several measures to delimit the Santurbán páramo and suspended mining activities therein but granted some exceptions for companies that held mining rights in the area. However, in February 2016, the Colombian Constitutional Court struck down the exception to the ban on mining in the páramo ecosystems that would have permitted Eco Oro to continue its operations. Based on this decision, in August 2016, the National Mining Agency issued a resolution withdrawing Eco Oro’s permits in areas overlapping with the páramo.

Following this, in December 2016, Eco Oro filed a request for arbitration under the Canada-Colombia Free Trade Agreement (“FTA”), invoking Articles 805 (Minimum Standard of Treatment) and 811 (Expropriation). Eco Oro claimed that the measures taken by Colombia had deprived it of its rights under the concession contract and thus destroyed the value of its investment.

The majority of the Tribunal upheld Eco Oro’s claims under Article 805 of the FTA, finding that Colombia had failed to treat Eco Oro in accordance with the minimum standard of treatment. While accepting that a State cannot be bound to the rules and regulations in force at the time the investment is made, the majority held that several of Colombia’s actions had frustrated Eco Oro’s legitimate expectations.

 

The Tribunal’s Interpretation of the Environmental Carve-out in Eco Oro 

One of the key issues in dispute was the environmental carve-out in Article 2201(3) of the FTA. This provision, modelled after Article XX of the GATT, provides that, as long as measures are not applied in a manner that constitute arbitrary unjustifiable discrimination, or a disguised restriction on international trade or investment, nothing in the agreement shall be construed to prevent a Party from adopting measures necessary:

a.”to protect human, animal or plant life or health, includ[ing] environmental measures necessary to protect human, animal or plant life and health; or (…) c. for the conservation of living or non-living exhaustible natural resources.”

Relying on Article 31(1) of the VCLT, the Tribunal concluded that the “ordinary meaning [of Article 2201(3)] is that it does not prevent the payment of compensation (which payment does not prevent Colombia from adopting or enforcing measures to protect the environment) but only applies when a State is seeking to pass (adopt) or implement (enforce), inter alia, environmental measures” (paragraph 367). According to the Tribunal, had the Contracting Parties intended that a measure could be taken pursuant to Article 2201(3) without any liability for compensation, it would have been drafted in similar terms as Annex 811(2)(b), which makes explicit that the taking of such a measure would not give rise to any right to seek compensation. Therefore, the Tribunal concluded that Colombia’s actions should not have been taken without the payment of compensation, which it deemed to be a fundamental principle of international law.

 

The Environmental Carve-out and New Generation Treaties

The Tribunal’s finding that Colombia was still liable for compensation, notwithstanding the environmental exception has attracted flak. This interpretation is at odds with the generally accepted interpretation of Article XX of the GATT, after which the carve-out in Article 2201(3) of the Canada-Colombia FTA is modelled. According to this interpretation of Article XX of the GATT, if an exception to a violation is upheld, the State is under no obligation to change the measure or compensate the investor. The Tribunal’s analysis in Eco Oro is even more interesting since Canada, Colombia’s counterparty to the FTA, stated in its non-disputing party submission that no compensation was due to the investor if the measure in question met the requirements of Article 2201(3) since “there is no violation of the Agreement and no State liability” (paragraph  16; paragraph 836).

While the Tribunal relied on Article 31(1) of the VCLT to conclude that the “ordinary meaning” of the provision in question did not prevent the payment of compensation when a State sought to pass or implement inter alia environmental measures, the Tribunal did not accept Canada’s submission that payment of compensation is not required in such circumstances. In doing so, the Tribunal disregarded Articles 31(2)(a) and 31(3) of the VCLT which provide that any agreement between the parties regarding the interpretation of the treaty or the application of its provisions shall be relevant for interpretation. Other than stating that “it cannot accept Canada’s statement” because it did “not comport with the ordinary meaning of the Article [2201(3)] when construed in the context of the FTA as a whole and specifically in the context of Chapter Eight [(the Investment Chapter)]” (paragraph 836), the Tribunal did not explain its decision further. To address specifically the issue of inconsistency in treaty interpretation in investment arbitration, submissions from the governments of Costa Rica, Peru, Israel, Japan, Mexico and Peru during the sessions of UNCITRAL Working Group III have indicated that “the use of binding joint interpretation of treaty provisions by Parties should be encouraged, and it should be ensured that such joint interpretations would be binding on the ISDS tribunals” (paragraph 8).

The majority’s decision to place environmental protection and investment protection on an equal footing has drawn criticism from practitioners and academics alike. The Canada-Colombia FTA forms part of the “new generation” of investment treaties that, among others, provide guidance as to how public policy issues, such as environmental protection and human rights violations, should be addressed in the context of investment protection. These provisions are included in new generation BITs as a response to the criticisms levelled against the investor-State dispute settlement system. Some commentators have, however, questioned the utility of these new generation treaties (which contain considerably lengthier investment chapters), if arbitral tribunals continue to interpret them in the same manner as treaties which do not contain such express and detailed exceptions to investment protection.

The Tribunal’s approach to treaty interpretation raises the question of whether States will be inclined to push for different, and potentially stronger, wording to safeguard environmental protections in treaties going forward. For example, Canada’s 2021 Foreign Investment Promotion and Protection Agreement Model (“FIPA Model Treaty”) does not include the same GATT-style language. Instead, it affirms the Parties’ right to regulate based on “legitimate policy objectives, such as with respect to the protection of the environment and addressing climate change” (Article 3). Likewise, concerning the ability of the treaty parties to adopt binding interpretations of the underlying obligations, Canada appears to be moving in the same direction. Its 2021 FIPA Model Treaty provides that “[i]f serious concerns arise as regards matters of interpretation, the Minister for International Trade of Canada and [the contracting party] may agree to adopt an interpretation of this Agreement[, which] shall be binding on a Tribunal established under this Section.(Article 32(2)).

 

The Interpretation of Environmental Carve-outs in Similar Cases

The interpretation of environmental carve-outs has been tested in several investment arbitration proceedings. For example, the decision in Eco Oro is consistent with Infinito Gold v. Costa Rica. There, the tribunal held that the environmental carve-out in the Canada-Costa Rica BIT, which contains similar GATT-style language as that in the Canada-Colombia BIT, did not exempt Costa Rica from liability for breaches of its fair and equitable treatment obligation.

Both Eco Oro and Infinito Gold stand in contrast to the decision in David Aven v. Costa Rica. There, the tribunal held that the rights of investors are subordinate to the right of States to ensure that investments are carried out in a manner sensitive to environmental concerns, according to the carve-out provisions contained in Chapter Seventeen of the Central America-Dominican Republic-United States Free Trade Agreement (“CAFTA-DR”). The tribunal, however, made clear that such subordination is not absolute, but that adoption and enforcement of laws relating to environmental concerns are to be fair and non-discriminatory through due process of law.

 

Conclusion

Treaty interpretation of environmental carve-outs can vary significantly from case to case depending on the underlying treaty as well as the composition of the arbitral tribunal. The lack of uniformity in treaty interpretation, and thus, the lack of predictability in the outcome of investment proceedings, is currently being addressed by the UNCITRAL WGIII in proposals for ISDS reform. While the impact of Eco Oro on pending investment arbitration proceedings involving environmental carve-outs remains uncertain, this decision evidences crucial questions for debate: Are carve‑outs in new generation investment treaties fit for purpose? Will treaty drafters pull away from including GATT-style carve‑outs in investment treaties?

 

 

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Inaugural Edition of the Cross-Examination Moot: A New Challenge for the Next Generation of Arbitration Practitioners

Sun, 2022-04-10 01:00

Long before modern litigation or arbitration, Socrates famously cross-examined one of his accusers and, through systematic lines of questioning, undermined their claims. Though it did not save him Socrates looms large in the imagination of modern lawyers as one of the best cross-examiners of all time. Cross-examination is a complex, yet exciting discipline that requires, in the words of Francis L. Wellman, “the greatest ingenuity; a habit of logical thought; clearness of perception in general; infinite patience and self-control; power to read men’s minds intuitively, to judge of their characters by their faces, to appreciate their motives; ability to act with force and precision; a masterful knowledge of the subject-matter itself; an extreme caution; and, above all, the instinct to discover the weak point in the witness under examination.”

In late November of 2021, students from around the world connected to the first-ever Cross-Examination Moot via Zoom. Two years into the Covid-19 Pandemic, many moots have moved online. The Cross-Examination Moot is unique in that it celebrated its inaugural edition virtually. In this way, the Cross-Examination moot imitates life, as many practitioners begrudgingly accepted that they would need to conduct their cross-examinations through a screen. But the competition is also unique in another important way: of the many moots available to students, it is the first to judge them on their prowess at cross-examining fact and expert witnesses in international arbitration.

Though international arbitral practice blends the features of both common law and civil law systems, the influence of the common law is strongest in the proliferation of cross-examination, even in arbitrations in which both parties are from civil law jurisdictions. 1)See, ICC Commission Report, “The Accuracy of Fact Witness Memory in International Arbitration”, 2020, para 1.8. jQuery('#footnote_plugin_tooltip_41209_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41209_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Thus, no matter where they are from, “virtually every international arbitration practitioner will be called on to cross-examine witnesses at some time […].”2)Rachel D. Kent, “An Introduction to Cross-Examining Witnesses in International Arbitration”, 2006. jQuery('#footnote_plugin_tooltip_41209_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41209_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Yet, despite the importance of effective cross-examination skills to a lawyer in international arbitration, most students are not given much opportunity to develop them. This gap in legal training is exactly why Executive Directors Francisco Amallo and Ezequiel H. Vetulli, both arbitration practitioners with a background in academia, decided to found the Cross-Examination Moot.

Challenges of Preparing Students for Cross-Examination in International Arbitration

Though legal education in certain places may devote more time to learning cross-examination, it is a skill that can only truly be developed through consistent practice. For most young lawyers in international arbitration, the only opportunities to practice will come many years into their careers in real cases when there is no room for error.

An added barrier is that cross-examination in international arbitration differs significantly from the type of cross-examination performed in national courts. Thus, even in common-law countries where students may have participated in mock trials, they will be unfamiliar with the particularities of the type of cross-examination practiced in international arbitration proceedings, which answer to different needs and exist in a parallel procedural universe.

Cross-Examination in International Arbitration

Some of the hallmarks of traditional cross-examination are not desirable, or indeed, not possible in international arbitration proceedings. For instance, some tribunals may have a distaste for the aggressive approach to cross-examination typical in common-law jurisdictions, and it is important for examiners to adapt based on the tribunal’s preferences. The tightly-worded leading questions typical of a common-law litigator3)Iain Morley, “The Devil’s Advocate”, Chapter XIII, 2015, p. 158. jQuery('#footnote_plugin_tooltip_41209_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41209_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); may not be acceptable to a tribunal, which may favor a more open style of examination that allows a witness to give substantive answers. This means that, especially due to the lack of witness depositions and extensive discovery in general, examiners will often be required to ask questions to which they do not know the answer.4)Rachel Kent, p. 5. jQuery('#footnote_plugin_tooltip_41209_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41209_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Any well-seasoned common-law practitioner would be very uncomfortable with the very idea. Even the rules of evidence taught in most countries will not apply in international arbitration.

Instead, international arbitration style cross-examination has developed other features, which come with their own set of challenges. One of the most difficult is the adherence to the strict time limits allotted for the parties to conduct their examinations.5)Rachel Kent, p. 7. jQuery('#footnote_plugin_tooltip_41209_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41209_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 common for a party to be allotted a finite number of hours to examine (meaning direct, redirect and cross-examine) all the witnesses, forcing counsel to make tough choices about how to best utilize that time and adapt the time budget when everything does not go to plan. The time issue is exacerbated in cases where the need for translation slows down the entire process.

The multilingual nature of international arbitration proceedings and the use of interpreters is an added complication to an examiner for several reasons. One such reason is that the flow of the cross-examination may be stifled. The dialogue must be broken down into fragments so that interpreters have time to translate, and it is frustratingly common for counsel and witnesses to talk over each other. Another possible issue is that witnesses who understand the language of the proceedings well enough will often ask for an interpreter anyway. One cannot blame a witness who feels more comfortable hearing and answering questions in their native language, but this may allow the witness additional time to think of the answers to tough questions. Thus, a strategic question may lose some of its bite.

Another feature of arbitral proceedings that may disrupt the flow of cross-examination is the questioning of the witness by the tribunal itself. This practice is common in civil law countries, but a common-law lawyer may find it difficult to deal with the tribunal’s interjections in their carefully prepared lines of questioning or to be interrupted while conducting the cross-examination. Though this may be jarring, it can also have the advantage of giving counsel insight into which way the tribunal may be leaning on a certain issue or what is unclear to it, and thus adjust the cross-examination accordingly.

The Moot’s Inaugural Edition

The arbitration community agreed that there was a need for this type of moot, as evidenced by the cadre of top practitioners, institutions, and organizations involved in the event. During this past Paris Arbitration Week, the Cross-Examination Moot won Best Development at the GAR 2022 Awards.

The Cross-Examination Moot helps students develop a variety of skills beyond just witness preparation and examination. These include meticulous fact-finding, knowledge of complex quantum issues, the practice of procedural objections, and even how to interact with a tribunal effectively and appropriately. The organizers hope the novel Cross-Examination Moot will join the long-standing tradition of moots that have prepared young lawyers in essential advocacy skills. Given the success of the first edition, that goal is on track.

Forty teams composed of over 200 students and coaches from around the globe participated in the week-long competition. Over the course of 70 hearings, participants cross-examined witnesses and real quantum experts based on a mock case concerning a commercial dispute arising out of a contract for the construction of a wind farm.
Students were given less time to prepare than is typical with moot competitions since no written submission was necessary. Nevertheless, the case file was extremely challenging, comprised of nearly 250 pages, including eight witness statements, four expert reports on quantum, and more than 50 factual exhibits. Mastery of the facts and attention to detail was essential to success. The preliminary rounds focused on the examination of fact witnesses and discussed issues of delays in the construction of the wind farm and its generation efficiency. Eight teams made it to the elimination rounds, which focused on the examination of quantum experts and discussed various aspects of the discounted cash flow (DCF) methodology for damages calculations.

The winners of the semi-finals—the Jus Mundi Match—earned a subscription to Jus Mundi. The Yaroslav Mudryi National Law University emerged as the winner of the competition, and the National Law School of India won second place in the final round, judged by Sophie Nappert, Franco Ferrari and Loukas Mistelis. The former was awarded a prize equivalent to USD 3,000, and the latter was awarded a prize equivalent to USD 2,000, both jointly sponsored by Maxwell Chambers and the Center for Arbitration and Mediation of the Chamber of Commerce Brazil and Canada (CAM-CCBC). The best cross-examiner of the competition, Charlotte Lee Parker of The Hague University of Applied Sciences, was granted an internship with Compass Lexecon. A special distinction was awarded to Rinreda Sakiyalak of Chulalongkorn University and Maite Aguirre Quiñonero of BPP University Law School for their performance. Despite not being able to meet in person, share a coffee, or exchange business cards, the moot week was still full of adrenaline, camaraderie, and fun for all those who were up to the challenge. After a triumphant inaugural edition, the organizing committee is eager to build on its momentum. Preparations for the second edition are well underway, and the organizers aim to impress.

For more information, please visit www.crossmoot.com

References[+]

References ↑1 See, ICC Commission Report, “The Accuracy of Fact Witness Memory in International Arbitration”, 2020, para 1.8. ↑2 Rachel D. Kent, “An Introduction to Cross-Examining Witnesses in International Arbitration”, 2006. ↑3 Iain Morley, “The Devil’s Advocate”, Chapter XIII, 2015, p. 158. ↑4 Rachel Kent, p. 5. ↑5 Rachel Kent, p. 7. function footnote_expand_reference_container_41209_30() { jQuery('#footnote_references_container_41209_30').show(); jQuery('#footnote_reference_container_collapse_button_41209_30').text('−'); } function footnote_collapse_reference_container_41209_30() { jQuery('#footnote_references_container_41209_30').hide(); jQuery('#footnote_reference_container_collapse_button_41209_30').text('+'); } function footnote_expand_collapse_reference_container_41209_30() { if (jQuery('#footnote_references_container_41209_30').is(':hidden')) { footnote_expand_reference_container_41209_30(); } else { footnote_collapse_reference_container_41209_30(); } } function footnote_moveToReference_41209_30(p_str_TargetID) { footnote_expand_reference_container_41209_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_41209_30(p_str_TargetID) { footnote_expand_reference_container_41209_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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Should Arbitral Tribunals Apply Sanctions Against Russia as Overriding Mandatory Rules?

Sat, 2022-04-09 01:25

When and how arbitral tribunals should give effect to international sanctions is a long-standing question in international arbitration. Unilateral economic sanctions have been traditionally characterised as factual impediments that could trigger force majeure or frustration of purpose defences. However, a growing number of scholars and practitioners have criticised this factual approach and have advocated for a legal one.1)Mercedeh Azeredo Da Silveira, Trade Sanctions and International Sales: An Inquiry into International Arbitration and Commercial Litigation, Kluwer Law International, 2014. jQuery('#footnote_plugin_tooltip_41196_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41196_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Under this legal approach, sanctions regimes are regarded as laws that apply to the dispute as part of the governing law of the contract or as overriding mandatory rules, rather than facts that frustrate the contract’s performance. The issue here is that unless sanctions are applied as overriding mandatory rules, parties to a dispute can easily circumvent them by making a clever choice of law. Therefore, this approach is hard to apply since the enforcement of foreign mandatory rules in international arbitration is an issue far from settled and limited only to a narrow interpretation of public policy.

The Limits of the Force Majeure Approach

If international sanctions are considered as a fact, the party to a dispute has to prove that the relevant sanctions meet the requirements necessary to qualify as a factual impediment. This approach entails two considerations. First, the sanctions’ effect must fall within force majeure definition under the applicable law. Second, once the force majeure threshold is met, it does not matter whether the sanctions intended to have such an effect upon the agreement or the parties.

However, characterising sanctions as force majeure events is a difficult task. There is no consistency as to whether sanctions fall within this contractual defence. Even parties to a contract show conflicting approaches in assessing the international sanctions’ consequences.  For instance, after concluding a supply agreement with a Russian company, Petroecuador declared force majeure because the payment was affected by sanctions against Russia. The next day Petroecuador lifted the force majeure declaration after reaching a different payment arrangement with the Russian company.

To what extent parties to a contract can rely on a force majeure defence amid international sanctions is unpredictable. How far do sanctions prevent parties from performing a contract? As showcased by the award in National Oil Corporation v Libyan Sun Oil Company (ICC Case No. 4462), if the sanctions do not entirely preclude a sanctioned party from performing the contract, there is no force majeure event. Conversely, in an award from the Milan Chamber of National and International Arbitration2)Final Award, CAM Case No. 1491, 20 July 1992, Yearbook Commercial Arbitration – Volume XVIII. jQuery('#footnote_plugin_tooltip_41196_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41196_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, the defendant successfully raised a force majeure defence due to an embargo against Iraq.

In order to avoid unexpected outcomes, it is more common to find clauses aiming at directly addressing the consequences of international sanctions. Nevertheless, as shown by Mamancochet Mining Ltd v Aegis Managing Agency Ltd & Ors and Lamesa Investments Ltd v Cynergy Bank Ltd, how these clauses are enforced varies depending on the wording.

A Shift Towards Rules Rather Than Facts

Some recent discussions suggest that the characterisation of international sanctions is shifting from a force majeure approach towards a legal one. Under this approach, sanctions can be construed as overriding mandatory rules which means that they could apply to the dispute regardless of the parties’ choice of law.

For example, in Banco San Juan Internacional Inc v Petroleos De Venezuela SA, PDVSA unsuccessfully argued that US sanctions against Venezuela were applicable as overriding mandatory rules and, therefore, rendered the underlying contract unlawful.

Arguably, the enactment of blocking statutes implies that States are also considering international sanctions as rules. These statutes limit international sanctions’ effects within a jurisdiction, render the application of international sanctions ineffective and bar the enforcement of such sanctions in court or arbitration.

If sanctions were an event that automatically triggered a force majeure defence, it would be unnecessary to pass a regulation precluding the “acknowledgement” of that event. Blocking statutes emphasise the legal nature of international sanctions and constitute a legal defence against them.

Certainly, the application of overriding mandatory rules in international arbitration is complex. At the outset, it is tricky to claim that arbitral tribunals should disregard a voluntary choice of law and instead apply a different law. This is even more challenging as international arbitration is firmly based on party autonomy. A case from the Stockholm Chamber of Commerce in 2011 offers an example of the application of overriding mandatory rules in international arbitration.3)SCC Case No. 158/2011, Yearbook Commercial Arbitration – Volume XXXVIII. jQuery('#footnote_plugin_tooltip_41196_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41196_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Therefore, a party can argue that characterising international sanctions as overriding mandatory rules does not lead to a more consistent application of sanctions. If the enforcement of foreign mandatory rules is uncommon and limited only to a narrow interpretation of public policy, how could sanctions ever be applied? Moreover, some arbitral tribunals have insisted that they: “do not need to apply foreign mandatory rules which merely serve to enforce national economic or political interests, however, close the connection of the case to that country may be”.4)Case 15972, ICC Dispute Resolution Bulletin 2016 No. 1. jQuery('#footnote_plugin_tooltip_41196_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41196_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

International Sanctions Against Russia as International Public Policy

International sanctions largely depend on the sanctioning States’ political interests and foreign policy strategies. Therefore, sanctions can come and go, quickly and quite frequently. Arguably, a policy that changes several times over a couple of years cannot be part of that State’s public policy. However, endorsing this approach implies that parties to a contract can circumvent international sanctions by making a clever choice of law or signing an arbitration agreement rendering sanctions regimes ineffective.

Despite a new wave of coordinated sanctions against Russia, the question of whether they can be considered as part of the international public policy of the sanctioning State is a complex one. One decision of the Ukrainian Supreme Court underscores these obstacles. In 2020, the Ukrainian Supreme Court ruled that sanctions enacted by Ukraine against a Russian party cannot affect the enforcement of an arbitral award on public policy grounds.

Admittedly, the circumstances in 2022 are quite different from those in 2020. There is now an unprecedented international consensus in adopting sweeping and comprehensive sanctions against Russia for Ukraine’s invasion. Since Russia can block any decision in the Security Council, States are coordinating unilateral sanctions daily. Even private companies are leaving Russia as a protest. Could these new sanctions be considered international public policy and, therefore, be compelling enough to be applied as overriding mandatory rules?

A decision of the Paris Court of Appeal in 2020 offers some guidance. In this case, one party applied to set aside the award because it failed to take into account US sanctions imposed against Iran. The court ruled that unilateral sanctions cannot be regarded as a manifestation of an international consensus. Furthermore, both France and the EU disputed the lawfulness of those US sanctions. Consequently, they were not part of French international public policy.

One door is left open, though. As stated by the Paris Court of Appeal, international public policy seeks to preserve certain fundamental values. Some international consensus is also relevant in this assessment. The fact that western countries are coherently enacting sanctions against Russia suggests that this consensus has been reached. Even States once reluctant are seeking to keep up with the international community. One could even argue that these sanctions are trying to condemn a violation of the fundamental values of liberal democracies.

From this perspective, arbitral tribunals should not ignore the consensus reached by several States imposing sanctions as a consequence of the invasion of Ukraine by Russia. An award failing to take sanctions into account could end up being unenforceable. Disputes arising out of the sanctions against Russia will test courts and arbitrators again. This might be an opportunity to encourage arbitrators to adopt the legal approach when assessing international sanctions’ enforcement.

References[+]

References ↑1 Mercedeh Azeredo Da Silveira, Trade Sanctions and International Sales: An Inquiry into International Arbitration and Commercial Litigation, Kluwer Law International, 2014. ↑2 Final Award, CAM Case No. 1491, 20 July 1992, Yearbook Commercial Arbitration – Volume XVIII. ↑3 SCC Case No. 158/2011, Yearbook Commercial Arbitration – Volume XXXVIII. ↑4 Case 15972, ICC Dispute Resolution Bulletin 2016 No. 1. function footnote_expand_reference_container_41196_30() { jQuery('#footnote_references_container_41196_30').show(); jQuery('#footnote_reference_container_collapse_button_41196_30').text('−'); } function footnote_collapse_reference_container_41196_30() { jQuery('#footnote_references_container_41196_30').hide(); jQuery('#footnote_reference_container_collapse_button_41196_30').text('+'); } function footnote_expand_collapse_reference_container_41196_30() { if (jQuery('#footnote_references_container_41196_30').is(':hidden')) { footnote_expand_reference_container_41196_30(); } else { footnote_collapse_reference_container_41196_30(); } } function footnote_moveToReference_41196_30(p_str_TargetID) { footnote_expand_reference_container_41196_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_41196_30(p_str_TargetID) { footnote_expand_reference_container_41196_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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Brussels Court Sets Aside Investment Treaty Award for Wrongfully Finding Poland Breached its FET Obligation through Denial of Justice

Fri, 2022-04-08 01:26

On 18 February 2022, the Brussels court of first instance set aside an UNCITRAL award regarding a claim brought against the Republic of Poland under the US-Poland bilateral investment treaty (US-Poland BIT).  This is the first time we see a Belgian court set aside an investment treaty award.  The court decided that the arbitral tribunal violated Belgian international public policy in finding that Poland failed to guarantee a fair and equitable treatment (FET) to an investor because the Polish Supreme Court denied justice through its arbitrary and discriminatory decision.

 

  1. Factual background

In 2006, a US investor, Manchester Securities Corp. (MSC), acquired bonds issued by a Polish real estate developer to finance residential building projects in Krakow.  The bonds were secured by mortgages.  The developer also contracted other secured loans with Polish state banks.  When the developer failed to meet its repayment obligations in 2007, all outstanding amounts became immediately due.  Before the real estate developer went bankrupt in 2009, the regional tribunal of Krakow had already ordered it to a pay MSC the outstanding debt.  However, trouble started for MSC when it tried to enforce this judgment by enforcing the mortgages.

Ultimately, in 2012, the Polish Supreme Court awarded a challenge of the validity of MSC’s mortgage brought by purchasers of one property.  The Supreme Court held that MSC’s mortgage conflicts with the principle of “social co-existence” and that MSC – being aware of the economic risks of the real estate project – behaved dishonestly and should not be allowed to benefit from its mortgage entitlements.

In response, MSC brought a claim to invalidate the mortgage on another property held by a Polish bank involved in the real estate project.  Although MSC relied on the same arguments as upheld in the 2012 Supreme Court decision, MSC’s claim was found inadmissible.

In the same period, MSC tried to enforce its mortgage rights on two specific apartments in this same property.  The Polish Supreme Court decided in 2012 that the enforcement for the first apartment violated the principles of social co-existence, but it decided for the other apartment in 2014 that MSC’s enforcement claim did not violate these principles.

In short, the Polish Supreme Court decisions on the validity and enforcement of the mortgages on various properties of the real estate project have led to very different conclusions.

In 2015, MSC brought arbitration proceedings against Poland under the US-Poland BIT.  On 7 December 2018, the arbitral tribunal decided that MSC was denied justice by the Polish Supreme Court and that Poland had breached the FET clause and must pay damages of +/- EUR 10,000,000 and interest.  As the seat of the arbitration proceedings was Brussels, Poland brought set aside proceedings in the Brussels first instance court in March 2019.

 

  1. Set aside proceedings before the Brussels court

After extensive written submissions, three merit hearings were scheduled in January 2022, suggesting that the first instance court considered the case to be a complex one.

 

2.1 Set aside was not excluded

The parties did not exclude set aside proceedings, even though article 1718 of the Belgian Judicial Code foresees this possibility for arbitrations with a seat in Belgium between parties who have no connection with Belgium (as is the case for MSC and Poland), even for awards that are contrary to Belgian international public policy (see, C. Verbruggen, article 1718, in Arbitration in Belgium, N. Bassiri and M. Draye, Kluwer, 2016, p. 492, § 19.  The fact that an award is contrary to international public policy will however be a ground for objecting to the enforcement of the award in Belgium).

 

2.2 The court’s power to assess the arbitral tribunal’s finding of denial of justice

The court only examined Poland’s argument that the arbitral tribunal acted as an appeal court to the Polish Supreme Court, which is contrary to Belgian international public policy and which, under article 1717, §3, b), ii) of the Judicial Code, constitutes a ground for setting aside an award.

First, the court confirms that only the international public policy and not Belgium’s internal public policy rules can serve as set aside ground.  The court then acknowledges the different definitions for international public policy, including the definition developed by the Belgian Supreme Court (Cass., 15 March 1968, Pas., 1968, I, p. 884) and the definition set out in the International Law Association report of 2002 (ILA, Committee on international commercial arbitration, Final Report on public policy as a bar to enforcement of international arbitral awards, New Delhi, 2002, Recommendation 1, (d)).

Next, after having described the decision of the arbitral tribunal, the court explains that (i) international arbitration proceedings may not serve as appeal proceedings to reverse decisions of domestic judiciary courts; (ii) the bar for showing denial of justice is high and requires the proof of a generalised breakdown of an entire national judicial system; and (iii) proof of a factual or legal error by an individual judge is not sufficient to show denial of justice, which at its core contains bad faith rather than a judiciary mistake.

Then the court explains that the prohibition to deny justice as a principle of international law forms part of Belgium’s international public policy and that this is illustrated by the recognition of fundamental due process rights in article 6 of the European Convention on Human Rights.

The court goes on to clarify that, whilst the Belgian Supreme Court held that article 1717, § 3, b), ii) of the Judicial Code does not require that the set aside judge re-examines the dispute with regard to public policy rules, it does require the judge to verify whether the award is contrary to public policy (Cass., 28 November 2014, Pas., 2014, I, n° 736).  The set aside judge must control the application by the arbitrator of the public policy laws (B. Hanotiau and O. Caprasse, “L’annulation des sentences arbitrales”, J.T., 2004, p. 419, § 41).  The restrictive interpretation of set aside grounds under the favor arbitrandum principle, does not prevent the effective control of the effect of an award on international public policy.  This means that there needs to be a causation between the violation of the international public policy rule and the result of the award.  The court concludes that it may therefore verify whether the arbitral tribunal could reasonably consider that there was a denial of justice by the Polish courts.

 

2.3 The investment treaty award violates Belgian international public order

The court notes that the arbitral tribunal found the Polish Supreme Court’s position was arbitrary and discriminatory because it had reached different decisions in related proceedings, but it did not establish a structural breakdown of the Polish judiciary system or fraudulent behaviour or bad faith by the Polish Supreme Court.  Further, the fact that the Polish Supreme Court had reached these different decisions should not have allowed the arbitral tribunal to make findings of discrimination by the Polish court system, which has no binding precedents.  Also, by examining the Polish Supreme Court’s interpretation of the principles of social co-existence, the arbitral tribunal had exceeded its marginal appreciation powers.  As a consequence, the arbitral tribunal in reality acted as an appeal judge to the Polish Supreme Court.  As the imperfect or erroneous nature of one single judicial decision is insufficient to demonstrate the failure of an entire judicial system, the arbitral tribunal was wrong to consider that the Polish Supreme Court had denied justice by adopting a discriminatory attitude towards MSC.  Hence, the court finds that the arbitral award breaches the Belgian international public policy and it sets aside the award.

 

  1. Original reasoning

The court’s decision that denial of justice requires proof of a deeper court system dysfunction than one single court decision, appears uncontroversial, as is the principle that international arbitration is not an appeal instance to domestic judicial decisions.

More original is the court’s reasoning that the arbitral tribunal’s finding of denial of justice by the Polish courts breaches Belgium’s international public policy:

  • The definition of the Belgian international public policy refers to the interests of Belgium as jurisdiction of the set aside court (see ILA report, Recommendations 1, (c), 2(a)), whereas the court projects these interests on the Polish State. This could imply that, for example, an arbitral tribunal’s finding of fraud or corruption in an investment protection case, can be questioned on matters such as standard of proof or on due process rights in later set aside proceedings, to the extent these would be viewed as “transnational public policy” rules (see ILA report, Recommendation 2, (b) and 3(b)).
  • International public policy rules in relation to due process concern procedural guarantees and remedies against unfair proceedings. In this case, the court inverted this principle and found that the award breached Belgian international public policy because the arbitral tribunal wrongfully considered that the Polish proceedings were unfair.  The issue in this case is indeed not “did the arbitral tribunal fail to guarantee due process” but rather “did the arbitral tribunal properly verify whether the Polish courts guaranteed due process”.

Some commentators questioned if the court did not exceed the limits of its competence by assessing if the decision of the Polish Supreme Court constituted a denial of justice.  Presumably, the court foresaw this concern and expressly set out the extent of its competence with reference to guidance of the Belgian Supreme Court (see above).  It might be debated whether the court correctly applied this guidance and did not do more than merely verifying if the arbitral award is not in violation with public policy.

Others have queried the tension between Belgium’s obligation (i) as EU Member State to recognise judgments of other Member States as part of the principle of mutual trust and (ii) as Contracting State under the New York Convention to recognise and enforce arbitral awards.  However, it seems that both obligations require Belgium to apply the same test: recognise and enforce the judgment or arbitral award, unless that is manifestly contrary to public policy in Belgium (see Article 45 juncto 46 of the Brussels Recast Regulation and Article V.2(b) of the New York Convention).

MSC has announced that it bring an appeal in the Belgian Supreme Court, so further updates are to be expected.

 

This contribution does not express the views of the firm of the authors or any of its clients

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Singapore’s New Conditional Fee Agreement Regime: An Uplifting Reform?

Thu, 2022-04-07 01:23

In Singapore, lawyers and their clients will soon be able to enter into conditional fee agreements (“CFAs”) for arbitrations and certain court proceedings. CFAs provide parties with an alternative to traditional fee arrangements and third-party funding (“TPF”) by enabling part or all of their lawyers’ fees and costs, as well as an uplift fee, to be conditioned on the outcome of the dispute.

This post considers whether Singapore’s status as a leading international dispute resolution hub will be enhanced by these reforms before comparing them to similar reforms that Hong Kong has recently announced.

 

Background to Singapore’s Reforms

Singapore, like Hong Kong, has traditionally banned outcome related fee structures, such as CFAs and damages-based agreements (“DBAs”) (i.e., agreements where a lawyer receives a proportion of the damages awarded to the client if the case succeeds) due to prohibitions against maintenance and champerty and concerns that such agreements can create conflicts of interest between lawyers and their clients.1)See Second Reading Speech by Second Minister for Law, Mr. Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 13. Maintenance refers to the provision of assistance (such as financial assistance) to one of the parties to the litigation by a third party with no interest in the proceedings, whereas champerty is a particular form of maintenance where the third party pays some or all of the litigation costs in return for a share of the proceeds. With the enactment of the Civil Law (Amendment) Act 2017 permitting TPF, Singapore abolished the tort of maintenance and champerty and implemented a ‘carve out’ confirming that TPF agreements were not contrary to public policy for maintenance or champerty reasons. See Sections 5A and 5B of the Civil Law Act 1909. jQuery('#footnote_plugin_tooltip_41187_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In August 2019, however, Singapore’s Ministry of Law launched a public consultation on reforms to permit CFAs (as previously covered in this blog). This move recognised the potential for CFAs to enhance access to justice for impecunious parties, the increasing demand from sophisticated dispute resolution users for alternative funding arrangements to manage the costs and risks of disputes, and the importance of Singapore maintaining its status as an international dispute resolution hub by levelling the playing field with other jurisdictions where CFAs and/or DBAs have increasingly been allowed.

Following positive feedback to the public consultation, the Ministry of Law introduced the Legal Profession (Amendment) Bill on 1 November 2021. The bill detailed amendments to the Legal Profession Act 1966 to establish a framework for CFAs.2)See Legal Profession (Amendment) Bill, Bill No. 40/2021. The bill also includes a proposed refinement to the scope of representation of foreign lawyers in SICC proceedings. jQuery('#footnote_plugin_tooltip_41187_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The bill was passed by the Singapore Parliament on 12 January 2022 and received Presidential assent on 8 February 2022 to be enacted as the Legal Profession (Amendment) Act 2022 (the “Act”).

 

Singapore’s New CFA Regime

The Act defines a CFA as an agreement between lawyers (including Singapore qualified and registered foreign lawyers3)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115A(2); see also Legal Profession Act 1966, Parts 4A and 8. jQuery('#footnote_plugin_tooltip_41187_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });) and their client providing for the whole or part of the remuneration (e.g., legal fees) and costs (e.g., disbursements) incurred in respect of dispute resolution proceedings (whether in Singapore or elsewhere) to be payable only upon the occurrence of the specified circumstances set out in the CFA.4)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115A(1). jQuery('#footnote_plugin_tooltip_41187_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); For example, a CFA could define the specified circumstances as the success, in full or part, of the client’s claim or defence.5)See Legal Profession (Amendment) Bill, Bill No. 40/2021, Explanatory Statement, p. 14. It will be up to the lawyer and the client to define in the CFA what constitutes a successful outcome. jQuery('#footnote_plugin_tooltip_41187_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The CFA can also provide for an ‘uplift fee’, being an amount that is higher than the legal fees or costs that would otherwise be payable if there were no CFA, to be payable only upon the occurrence of the specified circumstances.6)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115A(1). jQuery('#footnote_plugin_tooltip_41187_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Although not yet formally confirmed by subsidiary legislation, Singapore’s Second Minister for Law, Mr Edwin Tong, has indicated that parties will be permitted to use CFAs in the same categories of dispute resolution proceedings that allow TPF, namely:7)Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 29. jQuery('#footnote_plugin_tooltip_41187_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

  • international and domestic arbitrations;
  • certain Singapore International Commercial Court (“SICC”) proceedings; and
  • related court and mediation proceedings.

To take a couple of examples of how Singapore’s CFA regime could operate in practice:

  • a ‘No-Win, No-Fee’ CFA could provide for the client to pay 100% of their lawyer’s legal fees (e.g., based on hourly rates) and costs incurred for SICC proceedings, as well as an uplift fee of a further 100% of those fees and costs, if their claim succeeds or nothing if their claim fails. The lawyer could therefore receive either 0% or 200% of the legal fees and costs; and
  • a ‘No-Win, Low-Fee’ CFA could provide for the client to pay 50% of their lawyer’s legal fees and costs in international arbitration proceedings regardless of the outcome of the case, with the remaining 50% plus an uplift fee comprising 25% of those legal fees and costs being payable if their defence succeeded. The lawyer could therefore receive either 50% or 125% of the legal fees and costs.

Unlike England’s CFA regime, uplift fees will not, initially at least, be subject to any maximum limits or caps.8)While the present intention is not to impose limits or caps, the Act reserves the possibility of such limitations being introduced in the future. See Official Report of Parliamentary Debates of the Fourteenth Parliament First Session on 12 January 2022, Vol. 95 No. 46, Legal Profession (Amendment) Bill, Mr Edwin Tong’s speech at 1:43 pm; Legal Professional (Amendment) Act, No. 8 of 2022, Clause 115B(7)(d). jQuery('#footnote_plugin_tooltip_41187_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Singapore’s laissez-faire approach in this regard arguably reflects the commercial reality that: (1) CFAs will primarily be used by sophisticated parties who are capable of negotiating a mutually beneficial CFA; and (2) it would be arbitrary to set limits or caps upfront given the range of circumstances in which a CFA could legitimately be used.

However, the Act does prohibit uplift fees from being calculated as a percentage or proportion of the amount awarded to a client in damages or recovered in a dispute.9)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115B(4); Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37. jQuery('#footnote_plugin_tooltip_41187_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); DBAs will therefore continue to be banned in Singapore. This reflects the Ministry of Law’s concern that DBAs provide a monetary benefit to lawyers that has “no direct correlation with the work done” and “may give rise to added risks of conflicts of interests for the lawyer”.10)Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37(i). jQuery('#footnote_plugin_tooltip_41187_30_10').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Whether such concerns are justified is questionable since DBAs have been successfully used in other jurisdictions. This prohibition may also prove unpopular in some quarters, with the Law Society of Singapore having suggested during the reform’s public consultation process that DBAs should be allowed in order to “provide equal opportunities for Singapore lawyers to compete” with lawyers from other jurisdictions that allow DBAs.11)Law Society of Singapore, Feedback to the Public Consultation on Conditional Fee Agreements in Singapore, 8 October 2019, page 5. jQuery('#footnote_plugin_tooltip_41187_30_11').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_11', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Such calls may grow louder following Hong Kong’s proposal to permit DBAs, which is described further below.

In terms of other restrictions in the Act, parties will not be permitted to recover uplift fees from the losing party to the dispute (e.g., the uplift fee cannot form part of an adverse costs order).12)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115C; Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 44. jQuery('#footnote_plugin_tooltip_41187_30_12').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_12', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This should serve the positive function of incentivizing clients to negotiate reasonable uplift fees when entering into CFAs while also preventing costs from becoming unduly onerous for losing parties. Lawyers will also remain subject to their professional obligations to not overcharge their clients.13)Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 38. jQuery('#footnote_plugin_tooltip_41187_30_13').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_13', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Additional client safeguards are likely to be implemented by subsidiary legislation over the coming months, including mandatory terms and conditions (e.g., a ‘cooling-off’ period after a CFA is signed during which the client or lawyer may terminate the CFA) and prescribed information that lawyers must provide to clients before a CFA is agreed.14)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Sections 115B(7)(c) and (e); Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37. jQuery('#footnote_plugin_tooltip_41187_30_14').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_14', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Singapore’s CFA regime will presumably enter into force once this subsidiary legislation has been issued.

Finally, the Singapore courts will retain ultimate oversight over the enforcement of CFAs to help prevent abuse. Accordingly, while CFAs will not be voided on maintenance or champerty grounds, the courts will be able to examine the validity of a CFA taking into account the requirements of the Act and subsidiary legislation, general contractual principles, as well as the circumstances in which the CFA was made.15)Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115D; Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 45. jQuery('#footnote_plugin_tooltip_41187_30_15').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_15', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

An Uplifting Reform?

Singapore’s nascent CFA regime looks set to enhance its status as a leading international dispute resolution hub. Rather than implementing a rigid one-size-fits-all approach, Singapore has wisely decided to allow disputing parties and their lawyers the freedom to negotiate mutually beneficial ‘No-Win, No-Fee’ and ‘No-Win, Low-Fee’ CFAs that reflect the particular circumstances of the dispute.

The reforms should therefore provide sophisticated dispute resolution users with an attractive alternative to traditional fee arrangements and TPF to fund their disputes while also potentially enhancing access to justice in Singapore. Indeed, it is conceivable that CFAs and TPF could be used alongside each other to create novel funding solutions for clients.

While the Act creates a positive framework for CFAs, the devil is in the detail and it is to be hoped that the subsidiary legislation and Law Society of Singapore guidelines to be issued over the coming months do not impose unduly onerous restrictions and requirements that could inhibit the uptake of CFAs in Singapore. Excessive red tape, for example, could deter law firms from offering CFAs to their clients.

 

Hong Kong’s Reforms: CFAs, DBAs and Hybrid DBAs

In December 2021, following a rigorous consultation process (as covered in this blog), the Hong Kong Law Reform Commission Sub-committee on Outcome Related Fee Structures for Arbitration (the “Sub-committee”) released its final report with recommendations on allowing CFAs, DBAs and Hybrid DBAs to be used for arbitrations and arbitration-related court proceedings (as covered in this blog).

In March 2022, Hong Kong’s Government publicly confirmed that it agrees with the Sub-committee that users of arbitration in Hong Kong and their lawyers should be permitted to enter into such fee arrangements if they so wish. Accordingly, Hong Kong’s Legislative Council introduced the Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 (the “Bill”), which substantially follows the recommendations in the Sub-committee’s final report. The Bill is expected to pass into law later this year along with subsidiary legislation enacting more detailed rules and safeguards.16)Hong Kong’s Legislative Council Panel on Administration of Justice and Legal Services: Paper on Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 dated 28 March 2022. jQuery('#footnote_plugin_tooltip_41187_30_16').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_16', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

While Hong Kong’s and Singapore’s reforms have more similarities than differences, one notable point of difference is that Hong Kong will permit not only CFAs but also DBAs (i.e., ‘No-Win, No-Fee’ DBAs) and Hybrid DBAs (i.e., ‘No-Win, Low-Fee’ DBAs). This is consistent with the compelling argument in the Sub-committee’s final report that concerns around DBAs are largely unfounded in practice and, in any event, outweighed by the considerable benefits of providing access to justice for parties who could not otherwise afford to pursue their claims.17)The Law Reform Commission of Hong Kong, Consultation Paper, Outcome Related Fee Structures for Arbitration, December 2020, paragraphs 4.37-4.49; The Law Reform Commission of Hong Kong, Report, Outcome Related Fee Structures for Arbitration, December 2021, paragraphs 2.16-2.25, 5.10-5.13. jQuery('#footnote_plugin_tooltip_41187_30_17').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_17', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); From a practical perspective, by allowing CFAs, DBAs and Hybrid DBAs, Hong Kong will enable arbitration users to benefit from the flexibility to select the type of fee arrangement that best suits their funding needs. Such fee arrangements could also potentially be combined with TPF, which is already permitted in Hong Kong.

Another point of difference is that, unlike Singapore’s uncapped CFA regime, Hong Kong plans to cap the maximum CFA uplift fee at 100% of the usual hourly fees (and cap the maximum DBA payments at 50% of the financial benefit obtained by the client) to safeguard clients from unfair arrangements.18)See Hong Kong’s Legislative Council Panel on Administration of Justice and Legal Services: Annex to the Paper on Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 dated 28 March 2022; The Law Reform Commission of Hong Kong, Report, Outcome Related Fee Structures for Arbitration, December 2021, Chapters 4 and 8. jQuery('#footnote_plugin_tooltip_41187_30_18').tooltip({ tip: '#footnote_plugin_tooltip_text_41187_30_18', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In circumstances where these caps are set at similar levels to those in other jurisdictions, such as England, it is unlikely that they would unduly restrict the situations in which CFAs and DBAs could be used, although this risk cannot be entirely ruled out.

 

Conclusion

Singapore’s new CFA regime appears primed for success. By allowing dispute resolution users to enter into CFAs, Singapore has ensured that it remains competitive with other jurisdictions, such as London, Paris, Geneva and New York, that have allowed outcome related fee structures for some time.

Hong Kong’s reforms are equally promising and, once entered into force, will leave dispute resolution users in Asia Pacific spoilt for choice when it comes to funding their disputes. It will be interesting to see whether Singapore’s uncapped CFA regime or Hong Kong’s capped CFA and DBA regime ultimately proves to be the more successful.

References[+]

References ↑1 See Second Reading Speech by Second Minister for Law, Mr. Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 13. Maintenance refers to the provision of assistance (such as financial assistance) to one of the parties to the litigation by a third party with no interest in the proceedings, whereas champerty is a particular form of maintenance where the third party pays some or all of the litigation costs in return for a share of the proceeds. With the enactment of the Civil Law (Amendment) Act 2017 permitting TPF, Singapore abolished the tort of maintenance and champerty and implemented a ‘carve out’ confirming that TPF agreements were not contrary to public policy for maintenance or champerty reasons. See Sections 5A and 5B of the Civil Law Act 1909. ↑2 See Legal Profession (Amendment) Bill, Bill No. 40/2021. The bill also includes a proposed refinement to the scope of representation of foreign lawyers in SICC proceedings. ↑3 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115A(2); see also Legal Profession Act 1966, Parts 4A and 8. ↑4, ↑6 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115A(1). ↑5 See Legal Profession (Amendment) Bill, Bill No. 40/2021, Explanatory Statement, p. 14. It will be up to the lawyer and the client to define in the CFA what constitutes a successful outcome. ↑7 Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 29. ↑8 While the present intention is not to impose limits or caps, the Act reserves the possibility of such limitations being introduced in the future. See Official Report of Parliamentary Debates of the Fourteenth Parliament First Session on 12 January 2022, Vol. 95 No. 46, Legal Profession (Amendment) Bill, Mr Edwin Tong’s speech at 1:43 pm; Legal Professional (Amendment) Act, No. 8 of 2022, Clause 115B(7)(d). ↑9 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115B(4); Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37. ↑10 Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37(i). ↑11 Law Society of Singapore, Feedback to the Public Consultation on Conditional Fee Agreements in Singapore, 8 October 2019, page 5. ↑12 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115C; Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 44. ↑13 Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 38. ↑14 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Sections 115B(7)(c) and (e); Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 37. ↑15 Legal Professional (Amendment) Act, No. 8 of 2022, Clause 6, Section 115D; Second Reading Speech by Second Minister for Law, Mr Edwin Tong, on the Legal Profession (Amendment) Bill, 12 January 2022, paragraph 45. ↑16 Hong Kong’s Legislative Council Panel on Administration of Justice and Legal Services: Paper on Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 dated 28 March 2022. ↑17 The Law Reform Commission of Hong Kong, Consultation Paper, Outcome Related Fee Structures for Arbitration, December 2020, paragraphs 4.37-4.49; The Law Reform Commission of Hong Kong, Report, Outcome Related Fee Structures for Arbitration, December 2021, paragraphs 2.16-2.25, 5.10-5.13. ↑18 See Hong Kong’s Legislative Council Panel on Administration of Justice and Legal Services: Annex to the Paper on Arbitration and Legal Practitioners Legislation (Outcome Related Fee Structures for Arbitration) (Amendment) Bill 2022 dated 28 March 2022; The Law Reform Commission of Hong Kong, Report, Outcome Related Fee Structures for Arbitration, December 2021, Chapters 4 and 8. function footnote_expand_reference_container_41187_30() { jQuery('#footnote_references_container_41187_30').show(); jQuery('#footnote_reference_container_collapse_button_41187_30').text('−'); } function footnote_collapse_reference_container_41187_30() { jQuery('#footnote_references_container_41187_30').hide(); jQuery('#footnote_reference_container_collapse_button_41187_30').text('+'); } function footnote_expand_collapse_reference_container_41187_30() { if (jQuery('#footnote_references_container_41187_30').is(':hidden')) { footnote_expand_reference_container_41187_30(); } else { footnote_collapse_reference_container_41187_30(); } } function footnote_moveToReference_41187_30(p_str_TargetID) { footnote_expand_reference_container_41187_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_41187_30(p_str_TargetID) { footnote_expand_reference_container_41187_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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Inaugural California International Arbitration Week: Surfing the Rising Waves of Arbitration in Japan and California

Wed, 2022-04-06 01:56

On 14 March 2022, the first day of the inaugural California International Arbitration Week, the Japan Commercial Arbitration Association (“JCAA”) hosted a webinar on the rising waves of arbitration in Japan and California. The session was moderated by Kazuhiko Nishihara (Secretary General, Japan International Mediation Center in Kyoto), and featured speakers Yoshinori Tatsuno (Partner, Mori Hamada & Matsumoto and Speaker, Japan International Dispute Resolution Center (“JIDRC”)), Miriam Rose Ivan L. Pereira (Counsel, Oh-Ebashi LPC & Partners and Public Relations Officer, The Japan Commercial Arbitration Association (“JCAA”)), and Yoshihiro Takatori, (Executive Director, Japan Association of Arbitrators (“JAA”)). The webinar primarily focused on arbitration developments in Japan, along with some noteworthy references to similarities with California and possible areas of collaboration between the two jurisdictions.

A Brief Introduction to International Arbitration in Japan

Yoshinori Tatsuno opened the webinar with an introduction to the rise of arbitration in Japan. He said that, historically, there was a relatively high level of public trust in the Japanese domestic justice system and a low level of familiarity with arbitration. In the past, institutional arbitration rules were not sufficient to facilitate modern international arbitration cases.

In recent years, however, an increasing number of Japanese companies resorted to international arbitration for dispute resolution needs. These companies have accumulated some experiences in international arbitration. Japanese companies’ increasing exposures to arbitration have led to an uprising caseload of the JCAA. Among the arbitration cases filed with the JCAA from 2016 to 2020, 86% were international cases involving a non-Japanese companies or Japan-based foreign subsidiaries. In 2019, the JCAA also drastically amended its Arbitration Rules to conform with global standards concerning provisions for emergency arbitration, multi-party and/or multi-contract arbitrations, use of tribunal secretaries, and expedited procedures (further expanded in 2021). Overall, the JCAA offers three sets of Rules, one of which is the Interactive Arbitration Rules, where the arbitrators are encouraged to actively administer the communications of the parties and the arbitrators. The JIDRC was also established in 2018 to provide latest and sufficient facilities and equipment for international arbitration cases, including those for virtual hearings.

In terms of similarities between international arbitration in Japan and in California, Mr. Tatsuno believes that international arbitration in Japan is not so different from California. One notable difference, at least according to Mr. Tatsuno, is that compared to arbitrators trained in California, arbitrators trained in Japan might take a more active adjudicative role in sorting out legal issues and the parties’ arguments and may even administer the settlement discussion. Another difference is that there is no formal discovery procedure in Japan, and the extent of document production is more limited compared to other common law jurisdictions.

California lawyers are also able to act as counsel in international arbitration cases taking place in Japan. Japan’s Act on Special Measures Concerning the Handling of Legal Services by Foreign Lawyers (Foreign Lawyers Act) allows foreign attorneys to represent their client for international arbitration cases held in Japan if: 1) the foreign attorney is registered as “registered foreign lawyer” in Japan; or 2) the foreign attorney is engaged in the work based on the qualification in a foreign jurisdiction and has been requested to undertake the international arbitration case in that jurisdiction. However, it should be noted that a foreign lawyer may only represent a client in international arbitration cases in Japan (i.e. cases involving at least one party that is non-Japanese).

Recent Developments with the JCAA

Next, Miriam Rose Ivan L. Pereira covered some recent developments in the JCAA arbitration rules and how some of those rules may be applied in practice.

As part of the development measures to make JCAA arbitration more in line with international practices, JCAA’s pool of international arbitrators has grown and become more diverse. Now, the JCAA hosts over 400 panel arbitrators from more than 50 countries and regions. Parties can also nominate arbitrators not listed in the JCAA’s panel. In 2019, JCAA launched its Interactive Arbitration Rules, which were recently amended in 2021. One of the key features of the Rules is to facilitate the Tribunal’s active communication with parties. For example, the Rules encourage the Tribunal to identify the parties’ positions and key disputed issues early in the proceedings, as well as allow the Tribunal to present non-binding and preliminary views to the parties on important issues (see Rule 48(1), Interactive Arbitration Rules 2021).

There have also been developments in the JCAA’s mediation rules. In 2020, the JCAA promulgated new Commercial Mediation Rules applicable to domestic arbitration and mediation. The new mediation rules focus on protecting privilege and the confidentiality of the mediation process. They also enhance party autonomy and set a time limit for mediators to conclude the mediation. Very importantly, the new Rules ensure that resulting mediated settlement agreements will be enforceable under the Singapore Convention.

Ms. Pereira concluded by covering the new Appointing Authority Rules (2021), and the recent use of emergency arbitration procedures. Under the JCAA’s emergency arbitration procedures, a sole arbitrator will be appointed within two business days of a request, and a final order on emergency measures can usually be issued within two weeks from the appointment of the emergency arbitrator. The arbitrator’s remuneration is also fixed to reduce uncertainties in the process.

Recent Developments with the JAA

Yoshihiro Takatori covered recent developments at the JAA, focusing on the collaboration between the JAA and the JIDRC. In the midst of COVID-19, the JCAA and the JIDRC developed and facilitated an online platform for joint operation. The JIDRC has released a Protocol to provide guidance for online/web-based hearing, which emphasizes on due process issues during online hearings. In addition, the JIDRC Protocol tries to facilitate online proceedings by providing standards to address practical issues, such as preventing coaching, facilitating efficient translation, and better protecting the opportunity to defend.

In addition to collaboration on the online platform, there is also a strong incentive to collaborate among Japanese institutions to facilitate the arb-med-arb process. The Singapore International Mediation Center has developed a Joint Protocol with the Japanese International Mediation Center (Kyoto) to facilitate the transition of international arbitration and international mediation conducted in Japan. Full virtual operation of international mediation is also allowed as part of the arb-med-arb process. Mr. Takatori covered some main operational obstacles of cross-border dispute resolution, such as difficulties in scheduling hearings, but was overall confident in the better suitability of the development of technology to facilitate resolving these issues.

Arbitration Development in the Post COVID-19 Era

At the end of the webinar, the panelists provided a preview of post COVID-19 development of arbitration and how that might impact Californian/Japanese arbitration. The panelists thought that Japan should learn from California’s experiences on encouraging collaboration between arbitral institutions and the judiciary. Japanese arbitral institutions could also learn from JAMS’s example by including more retired judges in their rosters of arbitrators and mediators. The panelists expressed their views on how some high technology despite resolution initiatives might encourage additional uses of arbitration and mediation in Japan.

In terms of selecting Japan or California as a venue for arbitration, the panelists mentioned that because both jurisdictions have adopted the New York Convention, the ultimate enforcement steps should be the same regardless of the seat. The panelists believed that Japan now has an arbitration friendly legal framework and seasoned English-speaking lawyers, and could provide Californian parties with an additional viable option to conduct their arbitration. However, ultimately the choice of arbitration venue might be determined by the location of witnesses, counsels and arbitration parties.

Concluding Remarks

On the whole, the webinar on the increasing waves of arbitration in Japan and California offered numerous perspectives that many international arbitrators overlook. This webinar presented new development trends of international arbitration in Japan and gave us comparative visions on arbitration practices in Japan and California. The fruitful discussions of Panelists offered new inspirations for people looking for arbitration venues outside more traditional choices of seat.

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Inaugural California International Arbitration Week: The Pacific Shift: Has International Arbitration’s Centre of Gravity Moved?

Tue, 2022-04-05 01:38

On the third day of the Inaugural California International Arbitration Week, Silicon Valley Arbitration & Mediation Center (“SVAMC”) held a webinar on the locus of international disputes. The focus of the session was the shifting seat of international disputes, as arbitration’s centre of gravity is steadily advancing to the Pacific. This westward (from a United States perspective) movement has coincided with an increase in technology businesses’ participation in alternative dispute resolution. Will this herald a decade of conflict settlement within and among the Pacific Rim’s tech-centric businesses, and what does this mean for California’s involvement in international arbitration? The session sought to address some of these issues. The panel was comprised of distinguished arbitrators and counsels involved with the SVAMC. It was moderated by Paul Cohen (President, SVAMC) and featured speakers Chiann Bao (International Arbitrator and Mediator, Arbitration Chambers), Sandra Jeskie (Arbitrator, Duane Morris LLP), Eric Chang (Principal, Chang Law), and Les Schiefelbein (Founder and CEO, Schiefelbein Global Dispute Resolution).

 

The Panelists’ Views on the Meaning of the Pacific Shift

The Panelists agreed that the robust Asian economy, established dispute resolution hubs in the Asia-Pacific (particularly Hong Kong and Singapore), and the region’s quickly innovating arbitration practices are together shaping the future of arbitration in the Pacific. Due to California’s cultural and geographical proximity to the Pacific and a shared tech medium, the rapid development of arbitration in the Pacific could also have certain implications for California. The Panelists noted that the New York Convention is already widely accepted in the Pacific, making enforceability of arbitral awards a global possibility. Chiann Bao mentioned that there had been some real change in Asia’s dispute resolution industry. Asia is no longer one of the blackwater for dispute. More than half the world’s population resides in Asia, which naturally leads to more caseloads for local arbitral institutions. It is foreseeable that Hong Kong and Singapore will get a fair share of the tech disputes. There are already many innovations in institutional rules in the Pacific – for example, the Guangzhou Arbitration Commission has made some recent innovations in its online dispute resolution rules. Eric Chang also mentioned that the current Russia-Ukraine conflict has actually strengthened U.S.-Asia economic ties.

 

The Pacific Shift’s Implication on California

The Panelists agreed that California is a centre for technology disputes and a rising number of disputes involving the entertainment industry. Les Schiefelbein pointed out that in the early 1990s, California was the place for the aerospace sphere. That industry relies upon international contracts, which leads to a large number of international disputes being resolved in California. In recent decades, Silicon Valley’s development is seen as a unique phenomenon in the world. California law is universally considered commercially capable. Les Schiefelbein believes that California will be the ‘place’ for choice of law and choice of seat, as the reality is that international arbitration is a fusion of making things work. Due to the development of arbitration practices in the Asia Pacific and particularly Hong Kong, for example, it makes sense for California arbitrators and counsel to be used frequently to resolve technology disputes.

Chiann Bao mentioned that California is a diverse place – 15% of California’s population is Asian-American, and more than half of them were actually born in Asia- which shows close cultural ties between Asia and California. Within California’s booming technology sector more than 60% are employees are of Asian origin. The connection between California and the Pacific is real. With that connection, California also has the unique opportunity to maximize its potential as an international dispute resolution hub. Californian arbitrators and counsels are likely to have greater relevant know-how, which makes it easier for parties to not only draw on this pool of legal practitioners but also, before a dispute ever arises, to agree to California as the seat and agree to resolve disputes under California substantive law. Take the gaming industry as an example, the next generation Asian youth is already a quarter of the world’s gaming market consumers, and this must be a draw for California’s technology industry. California infrastructure also stands out for it to attract more disputes.

According to Sandra Jeskie, California is a top seat for resolving technology-related disputes as every company in California is a technology company in some way. Ten years ago, most of the arbitrations in California were patent-related. However, in recent years cases in California have become a lot more diverse. For example, cases involving Fintech and Medtech are starting to pick up. There is no doubt that California is always a global leader in tech dispute resolution, and it has also become a lot more accessible that it is used to be.

In addition, Eric Chang mentioned that even though there is much talk about the U.S.-China decoupling, it is undeniable that economies of the two countries are very interconnected. He noted that a handful of Chinese technology companies are currently subject to U.S sanctions, but it is still a very small pie of technology companies in China. Eric Chang stated that Los Angeles has always been a vast investment hub for Asian investors, which inevitably lead to more cases being resolved there. There is also a growing recognition of California law as the governing substantive law in international transactions, and thus this creates the possibility for California to be used as a seat for arbitration. He recognized that there are established dispute resolution venues in the Pacific, such as Singapore. However, international arbitration is not a zero-sum game, and with the growing pie, both California and the Asia-Pacific, will benefit from the growth.

 

Concluding Remarks

The webinar’s overall theme was the shifting seat of international disputes, with arbitration’s center of gravity increasingly migrating to the Pacific. The webinar primarily concentrated on California’s involvement in international arbitration, particularly in disputes involving technology. Nonetheless, the Panelists were not able to spend much time talking on the relevance of emerging technologies, such as blockchain, NFT, and other decentralized technologies that are rapidly adopted by arbitration parties to save costs, improve security, and increase transparency. Despite this minor missing link, the Panelists were able to shed light on California’s concerted effort to entice international arbitration businesses. Strong tech talents, uprising arbitration infrastructure, viable commercial laws, and geographical and cultural proximity to the Pacific will together make California a strong arbitration hub unlike any predecessor in the field.

 

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Inaugural California International Arbitration Week: A Discussion on the Recent Developments and Trends in the Film and Entertainment Industry

Mon, 2022-04-04 01:37

The inaugural California International Arbitration Week (“CIAW”) took place on March 14 through 18, 2022 and highlighted the attractive features of arbitrating international commercial disputes in California. What better way to begin CIAW than in Hollywood, with a discussion on recent international dispute developments and trends in the film and entertainment industry. The panel featured legal experts from California in the film and entertainment industry and was hosted by the American Arbitration Association – International Center of Dispute Resolution (“AAA-ICDR”). The presentation comprised Eric Tuchmann (Senior Vice President, General Counsel, and Corporate Secretary of the AAA), Susan Cleary (Vice President and General Counsel of the Independent Film & Television Alliance (“IFTA”) in Los Angeles), Dimiter Nikolov (Senior Vice President, Business and Legal Affairs of IM Global in Los Angeles), and Howard Frumes (partner of Alexander, Lawrence, Frumes & Labowitz LLP in Los Angeles). This blog highlights aspects of the discussion and offers some further comments on the topic.

 

The AAA-ICDR’s Partnership With IFTA Is A Welcome Addition to International Arbitration

Ms. Cleary and Mr. Tuchmann discussed the brand new partnership between IFTA and the AAA-ICDR, effective January 4, 2022. According to a January 2022 press release, “IFTA and the ICDR worked together to promulgate new Rules for IFTA Arbitrations, tailored to resolve international disputes in the independent film and television industry and to allow a seamless transition for all industry stakeholders.” Ms. Cleary stated that the new rules will integrate the best and most current international arbitration procedures and entertainment industry practice from the AAA-ICDR and IFTA to deliver efficient, economic, and fair arbitration proceedings. Mr. Tuchmann added that he is excited about the new partnership with IFTA, especially given the need to resolve film and entertainment disputes expeditiously and a desire to tap into people who have subject matter knowledge and expertise relevant to the film and entertainment industry.

As an introduction to those who do not know IFTA, Ms. Cleary explained that IFTA started its arbitration services in 1984 to resolve international production, distribution, financing, sales agency, and other related disputes in the motion picture industry. Over the years, IFTA has established a roster of arbitrators with extensive experience in entertainment, intellectual property, copyright, and transaction law from jurisdictions worldwide. Since its inception in 1984, Ms. Cleary stated that IFTA has administered 3,050 cases. She informed the audience that the types of cases administered run the gamut, including breach of contract, fraud, and specific performance. The parties involved range from producers, distributors, sales agents, financiers, banks/lenders, and completion guarantors, whose role is to ensure a program will be completed and ready for delivery for those who license the film. Given the nature of Hollywood’s reach to jurisdictions outside of the United States and the growing stature of international films, IFTA’s administration of arbitral disputes in the international context has expanded over the years.

The AAA-ICDR’s partnership with IFTA is a welcome addition to international arbitration. Many international arbitration practitioners may not consider the great expanse of international transactions that occur in the film and entertainment industry, which has a knock on effect on disputes and likely business for attorneys. The AAA-ICDR likely sees the growing number of international disputes as an important reason to enter into its partnership with IFTA. Notably, Mr. Tuchmann noted that 360 international arbitrations were filed in California during 2021. San Francisco and Los Angeles saw the largest number of arbitrations, with San Diego hosting some arbitrations as well. The figure was quite stunning. Overall, he noted that California ranked in the top three of states in the United States where international arbitrations were seated. Such numbers indicate that California is truly on the rise as an international arbitration hub, including in the film and entertainment industry.

 

The History of Arbitration in the Film and Entertainment Industry

After discussing this exciting new partnership, Mr. Frumes discussed the history of arbitration in the industry, which tracks the increased use of arbitration in other business sectors. In particular, Mr. Frumes explained the International Alliance of Theatrical Stage Employees (“IATSE”) attempted to include an arbitration provision in its 1926 collective bargaining agreement with studios, but this effort unfortunately failed. However, in 1947, IATSE succeeded in adding an arbitration provision to its collective bargaining agreement with studios. Other guilds soon followed, including the Screen Actors Guild (“SAG”), which Mr. Frumes added made sense in the context of that fact that most guilds are unions that require a cost-effective, efficient, and confidential process of resolving employer-employee disputes. Seeing the beneficial use of arbitration in collective bargaining agreements, the Motion Picture Association of America (“MPAA”), now the Motion Picture Association (“MPA”), began to advocate for the inclusion of arbitration agreements in its contracts starting in the 1980s. With the advent of IFTA’s panel of highly respected arbitrators in the industry around the same time and the fact that today arbitration provisions are regularly included in film and entertainment contracts, foreign investors, including for example those from China, have greater comfort with their agreements, knowing that any future disputes would be adjudicated by arbitrators who are experts in entertainment-related disputes.

 

The Practical Advantages of Arbitration Agreements in the Film and Entertainment Industry

It was in this light that Mr. Nikolov then discussed the practical advantages of arbitrating disputes in the film and entertainment industry, including from the perspective of independent film and foreign sales of Hollywood films. In this respect, disputes often can arise after a film has been delivered or made. Mr. Nikolov stated that administering arbitrations through IFTA has made settling disputes very practical, in particular, parties in the film industry prefer to use IFTA because it is much more time-efficient as compared to litigation. This is an important feature because as he noted, the value of a film may drop if legal disputes are not settled quickly. Moreover, Mr. Nikolov underscored the general idea that international disputes are more often better resolved in arbitration, and disputes in this industry benefit for the same reasons.

Mr. Nikolov further explained that Los Angeles is the most common seat for such arbitrations. This makes sense, given that most of the film and entertainment industry hails from Hollywood. However, when cross-border contracts are entered into, studios in Hollywood may be amenable to arbitrations seated in the United Kingdom, Germany, or France, where parties negotiating contracts with Hollywood from these countries view U.S. law as not favorable in the context of post-license payment. To remedy this, Mr. Nikolov has seen contracts drafted with applying U.S. law pre-license payment and then German or U.K. law for example post-license payment.

 

Pandemic Struggles and Post-Pandemic Outlook in the Film and Entertainment Industry

As many will know, the entertainment industry has been affected by the COVID-19 pandemic and has raised new legal issues. Mr. Frumes explained that force majeure clauses have been used more often than in the past, as has been seen in other industries. Mr. Frumes also noted that the pandemic came at a very interesting time in the entertainment industry. Streaming has changed people’s habits and there is greater desire to stay at home to enjoy entertainment rather than going to the theaters. Mr. Nikolov added that the pandemic caused issues with distributors, who paid a lot of money for films that were supposed to be released in theaters and never were, but noted that it has been difficult to address these issues since it was clearly no parties fault that the pandemic caused such delays. In addition, Ms. Cleary discussed the impact on trade groups. She noted that the cancellation of megaevents, such as Cannes Film Festival and Sundance Film Festival, caused a gap whereby buyers and sellers of films were unable to meet in person to negotiate the terms of specific contractual arrangements. Ms. Cleary is hopeful that within the post-pandemic entertainment and film industry it will be possible to rekindle the warm industry relationships that were previously often built over dinner.

 

Concluding Remarks

Overall, the presentation on the developments and trends related to disputes in the film and television industry was interesting, as it provided insight into an industry that many international arbitration practitioners do not consider. The AAA-ICDR’s partnership with IFTA is a welcome addition to the international arbitration field of law, and there may be a newfound interest in the role that international arbitration practitioners may play in this burgeoning field.

 

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Declining Professional Diversity in International Arbitration

Sun, 2022-04-03 00:38

In her blog post on 27 February 2022, Kiran Nasir Gore expressed measured optimism regarding the international arbitration (IA) community’s collective progress towards greater diversity especially over the last few years. She highlighted various recent initiatives and developments including Racial Equality for Arbitration Lawyers (REAL), the Rising Arbitrators Initiative (RAI) and the appointment of first woman President of the ICC International Court of Arbitration. We should certainly celebrate this advancement of equality in race, age and gender although Gore pointed out that the main beneficiaries of the closing gender gap are white women based in Europe or North America.

In addition, we should be aware that the burgeoning debate seems to leave out discussion of a further area where diversity is lacking in the IA community – an analysis of professional diversity. While the key groups and publication outlets for IA are dominated nowadays by those practising primarily as full-time lawyers, there is hardly any awareness or sustained discussion about the limitations of overlooking diversity of professional backgrounds, perhaps partly because arbitration rules usually do not require arbitrators to have any specific experience, training or qualifications.

However, involving more non-lawyer practitioners (NLPs, such as engineers, architects, accountants) or those who are primarily academics could significantly reduce the persistent formalisation in IA. Expanding professional diversity could also lead to other benefits, including indeed more gender diversity, given that academia does not have the same non-linear remuneration structures for lawyers that disadvantage career progression for many women. These and other issues associated with professional diversity are outlined in our recent research article entitled “Lawyers and Non-Lawyers in International Arbitration: Discovering Diminishing Diversity”. That research article also empirically analyses the ways legal practitioners have come to prevail across the key nodes of influence within the IA sector. The rest of this blog post introduces our key empirical findings.1)As elaborated in the research article, including the methodological Appendix, we basically categorised all individuals in accordance with their primary profession at the time they were a member of the relevant arbitral organisation, the relevant publication was written, or the relevant presentation was given. jQuery('#footnote_plugin_tooltip_41035_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41035_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Associations and Institutions Promoting Arbitration

First, we examined key groups that promote IA but do not themselves administer arbitration cases. The influential groups examined were the International Council for Commercial Arbitration (ICCA), the Chartered Institute of Arbitrators (CIArb) and the International Bar Association (IBA).

The ICCA Board as of September 2021 largely comprised individuals falling primarily in the category of practising “Lawyer” (84%), executives of “International or Arbitral Organisations” (IAOs, typically leaders within arbitral institutions) (5%), “Mixed” (typically those having multiple professional engagements) (5%) and “Academic” (4%, essentially full-time). We also examined the composition of ICCA Taskforces for all years: Lawyer (61%), IAOs (18%), lawyers and NLPs working in Litigation Finance (7%), Mixed (7%) and Academic (6%). Authors of entries in the Young ICCA Blog between 19 October 2010 and 17 February 2021 fell into the categories of Lawyer (86%), Academic (10%) and Mixed (2%). Analysis of presentations in ICCA Congresses and related chapters in the ICCA Congress Series over the last 30 years also indicated the growing prevalence of Lawyers (60% over the entire period) within ICCA publications, and in parallel reflecting only small proportions of IAOs (14%), Academic (12%) and Mixed (9%).

The lack of diversity in professional backgrounds was also salient in the other groups. For example, the vast majority of CIArb Board Members in 2021 were from the Lawyer category (78%), in contrast to NLPs making up 15% of the Board (despite the earlier influence of NLPs in CIArb until around the 1990s) and no members falling into the Academic category. Speakers in CIArb Webinars from July 2020 to March 2021 comprised Lawyers (75%), Academic (12%), NLPs (9%) and IAOs (2%).

Meanwhile, the data is comparable at the IBA. As for the committee membership for proliferating IBA instruments, such as the Evidence-Taking Rules, there was an even heavier prevalence of Lawyers (95%) although this was less surprising given that the IBA is essentially a global federation of lawyers’ associations. Similarly, for IBA webinars, mostly from 2020 but also some from 2021, 94% of the key participants were Lawyer; only 4% could be coded as IAOs, while 2% were Academic.

 

Arbitration Institutions and Their Leaders

Next, we analysed the international and regional arbitration institutions having high caseloads and/or those deemed reasonably representative of civil or common law traditions and geographical diversity. These were the International Chamber of Commerce (ICC), London Court of International Arbitration (LCIA), the Swiss Arbitration Centre, the International Centre for Dispute Resolution (ICDR), the Singapore International Arbitration Centre (SIAC), the Hong Kong International Arbitration Centre (HKAIC), the China International Economic and Trade Arbitration Commission (CIETAC), the Australian Centre for International Arbitration (ACICA), the Asian International Arbitration Centre (AIAC), the Japan Commercial Arbitration Association (JCAA), the Korean Commercial Arbitration Board (KCAB), the Thai Arbitration Institute (TAI) and the newer Thai Arbitration Centre (THAC).

To discern professional diversity within the leadership of these arbitration centres, we looked overall at the membership of various Boards, Councils, Committees, Taskforces and Courts as of 2021. The combined analysis confirmed Lawyers’ predominance (76%), as well as the comparatively small ratios of NLPs (11%), Academics (6%) and IAOs (1%). We further investigated speakers and moderators at webinars and conferences organised by those arbitration centres in 2020 and the first half of 2021: Lawyers (80% in 2020 and 83% in 2021), IAOs (8% and 4% respectively), Academics (5% and 6%) and NLPs (4% and 5%).

 

Indicative Journals, Books and Blogs

We also considered major journals for international arbitration, complementing an earlier analysis of periodicals and other publications. These were Arbitration International (associated with the LCIA), Arbitration: The International Journal of Arbitration, Mediation and Dispute Management (CIArb), Asian International Arbitration Journal (SIAC) and the Journal of International Arbitration (published by Wolters Kluwer). Again, the overall extent of Lawyer involvement was striking. Editors of these four journals as of September 2021 were mostly Lawyer (75%), although there were somewhat more Academic (22%) than say for the leadership of the arbitration institutions as examined above. Then, we examined all the discernible articles (other than book reviews) published in the four journals from the late 1980s, when three were being published and some debate emerged about the role of NLPs in arbitration.2)Asian International Arbitration Journal was published from 2005. jQuery('#footnote_plugin_tooltip_41035_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_41035_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Sampling the journals essentially at five-yearly intervals (in 1989, 1994, 1999, 2004, 2009, 2014 and 2019-21) gave the following proportions for authors: Lawyer (71%), Academic (19%), IAOs (2%), NLPs (4%) and Mixed (3%). Analysing authorship categories over time found that absolute numbers and proportions of articles written by Lawyers had grown, especially over 2000-2010.

We further studied editors and authors of influential books and blogs. For books, for example, we investigated the International Arbitration Law Library Series published by Wolters Kluwer, with 59 titles since 1993 when the first volume of the Series was published. Coding editors and authors of these volumes and individual chapters demonstrated the dominance of Lawyer (50%) although a significant minority were from Academic (39%). Other professions such as IAOs, NLPs and Mixed occupied relatively small proportions (3%, 2% and 6%, respectively). On blogs, our analysis concentrated on Kluwer Arbitration Blog (KAB), as one of the most well established and widely read arbitration-related blogs. Comparing the KAB’s editorial team for August 2021 and 2018 (the latest year for which the Wayback Machine online allowed us to access a snapshot of the list of all editors), 80% were Lawyers and 20% were Academics. In addition, we studied backgrounds of blog authors in February, June and November of 2009, 2014 and 2019-21. The sampling found a similar prevalence of postings by Lawyer (79%), some by Academic (16%) and very occasionally by authors from an IAO (2%).

 

Concluding Remarks

The phenomena confirmed by our empirical research are clear: the entrenchment of lawyers through the world of IA, and the corresponding decline in involvement and influence of full-time academics and especially other NLPs. This growing lack of diversity in professional backgrounds contrasts with gender diversity, which has experienced some statistical improvements in appointments of arbitrators or other leadership positions in some arbitration centres. One response to that ongoing “diversity deficit” might be to encourage more involvement of academics and NLPs in the leadership and activities of the significant arbitration associations and centres, as well as leading publication venues. Such a response will help the IA sector develop diversity of perspectives because, as Joshua Karton suggests, such diversity may be enhanced by arbitrators with varied experiences who may think differently from the arbitration mainstream. At least, we need more discussion and ongoing debate about the remarkable and continuing decline in professional diversity within IA.

References[+]

References ↑1 As elaborated in the research article, including the methodological Appendix, we basically categorised all individuals in accordance with their primary profession at the time they were a member of the relevant arbitral organisation, the relevant publication was written, or the relevant presentation was given. ↑2 Asian International Arbitration Journal was published from 2005. function footnote_expand_reference_container_41035_27() { jQuery('#footnote_references_container_41035_27').show(); jQuery('#footnote_reference_container_collapse_button_41035_27').text('−'); } function footnote_collapse_reference_container_41035_27() { jQuery('#footnote_references_container_41035_27').hide(); jQuery('#footnote_reference_container_collapse_button_41035_27').text('+'); } function footnote_expand_collapse_reference_container_41035_27() { if (jQuery('#footnote_references_container_41035_27').is(':hidden')) { footnote_expand_reference_container_41035_27(); } else { footnote_collapse_reference_container_41035_27(); } } function footnote_moveToReference_41035_27(p_str_TargetID) { footnote_expand_reference_container_41035_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_41035_27(p_str_TargetID) { footnote_expand_reference_container_41035_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Deciding by Numbers: How Do Legal Indicators Impact State Responsibility in Investment Arbitration

Sat, 2022-04-02 01:42

Modern society is amazed by empirical analysis, and the legal world is no exception. Indicators, rankings, and reports have been widely used to compare the independence and efficiency of legal systems with very different cultural and historical backgrounds. They are often regularly published and updated by think tanks and international organizations, both governmental and non-governmental. Examples include the Corruption Perceptions Index (CPI) by Transparency International, the Rule of Law Index by the World Justice Project, the Index of Economic Freedom by the Heritage Foundation, the Economic Freedom of the World Report by the Fraser Institute, as well as the Doing Business Reports, which used to be published by the World Bank Group.

While scholars have discussed the implications of legal indicators for global governance in recent years, there is no literature on the potential impacts of these indicators in investment arbitration.

 

The Relevance of Legal Indicators in Investment Arbitration

In fact, legal indicators have been widely cited in practice to support a range of arguments. They are most often invoked in the context of claims of denial of justice within the analysis of State responsibility for failing to accord fair and equitable treatment. After all, the primary goal of legal indicators is to compare the efficiency and independence of legal systems across the world. In Merck v. Ecuador, for instance, the investors sought to establish that an underlying litigation was influenced by judicial corruption. Before the factual allegations of corruption, the investors set out some authorities demonstrating the extent of judicial corruption in the respondent State. In support of their argument, the investors referred to various legal indicators and reports, including the World Justice Project Rule of Law Index and Transparency International’s Corruption Perceptions Index (paras. 161-165). Similarly, the claimant in Manolium Processing v. Belarus sought to argue that the respondent’s judicial system “does not satisfy international standards of justice.” They did so by citing four different legal indicators and noting that the respondent State did poorly in all of them (paras. 700-703).

Relatedly, legal indicators have been cited to support arguments of futility in the context of exhaustion of local remedies. In Kılıç v. Turkmenistan, for instance, the claimant argued that any attempt to settle dispute in the respondent’s court would be futile, as no remedy is available. It supported this claim by relying on, inter alia, respondent’s poor performance in the Transparency International’s Corruption Perception Index (para. 4.3.6).

Beyond claims related to defects in judicial systems, some investors have tried to use legal indicators (creatively) in support of other arguments, such as those relating to the requirement to seek approval of investment under respondent’s investment code (e.g., the Lighthouse case) and attribution of the actions of a bank to a State (e.g., the Stati case). In the first example, the claimant in Lighthouse v. Timor-Leste sought to justify its failure to acquire “formal” governmental approval for its investment on the basis that the respondent’s judicial system was “nascent and still developing”. To support this argument, it noted that that the judicial system of the respondent is ranked poorly in the World Bank’s Doing Business Report (para. 305). The argument, however, was rejected by the tribunal, who found that the requirement to get approval is clearly provided in Timorese law (para. 330). In the second example, the claimants in Stati v. Kazakhstan argued before the Svea Court of Appeal that actions of a bank should be attributable to the respondent, as the absence of rule of law in the country has allowed the president to control the bank de facto. To demonstrate this, the claimants cited to a report by the Swedish Ministry for Foreign Affairs, which in turn relies on data provided in the Rule of law index by the World Justice Project (para. 39).

Beyond supporting individual claims, legal indicators have also been invoked by investors to demonstrate a significant deterioration of investment environment within a period of time. This is the case, for example, in Alicia Grace and others v. Mexico, in which the investors emphasized the significant drop of the respondent in the ranking of Corruptions Perceptions Index between the time of investment and the time of the alleged violations (paras. 36-37).

Empirical indicators have been cited not only by investors, but also by respondent States, demonstrating its relevance as a Claimant and Respondent in investment treaty arbitration. For example, countries that performed well in these indicators tend to use them in mounting their defense. In Beijing Shougang v. Mongolia, for instance, the respondent argued that it has “remained a democratic country, committed to transparency” by emphasizing that it has outperformed China, the home State of the investors, in the Heritage Foundation’s Index of Economic Freedom (para. 14). Similarly, in Philip Morris v. Uruguay, the respondent cited to the World Justice Project’s Rule of Law Index for the point that “Uruguayan judiciary is recognized as one of the best in the world” (paras. 11.45-11.46).

 

Arbitral Case Law on the Role of Legal Indicators

Little is known about the actual impact of legal indicators on arbitral decisions as far as the State responsibility is concerned. A preliminary observation is that, while tribunals do take them into account, these indicators generally do not play a decisive role as they do not necessarily reflect the standard of treatment that investors received in the case at hand. As stated by the tribunal in Niko Resources v. Petrobangla and Bapex, in relation to an argument partly based on the Transparency International’s Corruption Perceptions Index, it is not the role of investment tribunals to pass judgements of general allegations on the legal regime of the respondent State during a certain period. Tribunals can, nevertheless, “take account of these allegations and the supporting material” surrounding a particular claim (paras. 1455-1456).

In this light, tribunals have held that the poor performance of a State with respect to legal indicators cannot lead to a finding of denial of justice per se. In the Manolium Processing case referenced above, the tribunal apparently considered the ranking of the respondent host-State in different indicators and found that “the judicial system in Belarus has significant room for improvement, especially as regards the independence of judges from the executive branch.” However, it dismissed the claim on the basis that “a claim for denial of justice must rest on the specific treatment given by the courts of the host State to the alien, rather than on the general assessment of the host State’s judicial system.” (paras. 551-553). Similarly, in the Kılıç case, cited above, the tribunal rejected the claimant’s argument as futility cannot be justified by “generalised allegations about the insufficiency of a state’s legal system” (para. 8.1.10). On the contrary, it can only be established by “probative evidence that goes to the specificity of the issue in dispute” (para. 8.1.10), which is an element that legal indicators generally cannot provide.

 

Advantages and Pitfalls of Using Legal Indicators in Investment Arbitration

Empirical data, such as legal indicators, will continue to be cited – and conversely, debated – by parties in investment disputes. Indeed, the research underlying these indicators is generally published by renowned and well-reputed organizations and indeed carried out with scientifically well-established methodologies. In contrast to costly forensic, expert evidence, such indicators are generally free.

However, beyond the issue of the indicators being too general, several reasons caution against the over reliance of such data. Firstly, however objective they may be, these indicators are not free from ethical concerns.

Secondly, the methodology of these indicators can always be disputed. Some of these indicators (such as World Justice Project’s Rule of Law Index) reply on questionnaires to “experts”, which, in the view of one author, simply reinforces “powerful and misleading elite bias”. Their evidential value is left for parties to debate, and ultimately for the tribunal to decide in accordance with its inherent powers.

Lastly, some criteria in these indicators are inevitably influenced by the fiscal capacity of the State concerned. Examples include certain elements of transparency (e.g., the publication of documents and judgments) and the efficiency of the judiciary as well as that of the law enforcement. Developing States should not be unduly prejudiced for performing poorly in legal indicators. As Professor Paulsson stated in Pantechniki v. Albania, “international responsibility does not relate to physical infrastructure; states are not liable for denial of justice because they cannot afford to put at the public’s disposal spacious buildings or computerised information banks. What matters is rather the human factor of obedience to the rule of law” (para. 76).

 

 

 

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Is Non-Payment of Advance on Costs a Waiver of an Agreement to Arbitrate in the UAE?

Fri, 2022-04-01 01:46

A topic that has been hugely debated in the arbitration world is whether non-payment of the advance on arbitration costs constitutes waiver of the arbitration clause. The answer to this debate does not only differ from one jurisdiction to another but may differ in the same jurisdiction. This blog post examines how the courts in the United Arab Emirates (“UAE”) treat non-payment of the advance on arbitration costs.

 

The Problem

Non-payment by respondents of the advance costs and expenses in arbitrations is not an infrequent occurrence and often leaves claimants in arbitration proceedings in a difficult situation. One way to deal with such an occurrence would be for the claimant to pay the respondent’s share of the advance on costs so that the arbitration can proceed. When the claimant choses this path, it is likely to find itself in a situation that is financially cumbersome. The claimant may, on the contrary, decide not to pay the advance on costs and instead bring the claim before the courts. Doing so raises other issues for the claimant, such as finding itself litigating before courts although it had intended to avoid their jurisdiction by agreeing to arbitration. Equally problematic for the claimant would be the case where the courts have already decided that they have no jurisdiction on the basis of the arbitration clause in which case, the claimant is left with no forum to hear its claim.

 

What is the Position in the UAE?

There are very few decisions issued by UAE courts, which shed light on this question. One such decision is by the Dubai Court of Cassation (“Court of Cassation”) No. 215/2019 (Commercial). In this case, the Court of Cassation dealt with a claim that was initially filed before the Dubai International Arbitration Center (“DIAC”). The respondent had also filed a counterclaim in this case. Neither party paid the advance on costs for their respective claim and counterclaim. As a result, the DIAC closed the casefile and considered both parties’ claims as withdrawn. When the case was filed before the courts, the Court of Cassation decided that the arbitration clause was considered as non-existent and therefore, the claimant could only have recourse to the courts as they have the “original jurisdiction” to hear disputes.

The term “original jurisdiction”, that is often used by the courts in the UAE, reflects the courts’ view that they are the default forum for hearing disputes and that arbitration is a deviation from the norm. Other routes of resolving disputes, such as arbitration, are considered to be exceptional and therefore when arbitrating a dispute is no longer possible, the jurisdiction of the courts to hear the dispute is automatically restored.

In its reasoning, the Court of Cassation took into consideration that after the closure of the casefile by the DIAC, the respondent had not objected to the decision that the case was considered as withdrawn and there was also no action taken by the claimant to resubmit the case to arbitration in line with the applicable rules (i.e., the DIAC 2007 Rules Appendix Cost of Arbitration). The Court of Cassation concluded that, as a result, it was not possible to hear the claim that was previously the subject of the arbitration proceeding.

Although the Court of Cassation did not provide an analysis of whether there had been a waiver of the arbitration clause by the parties, it is possible to conclude that there had indeed been such a waiver on the basis that each party declined to pay the advance on costs with respect to its own claims and none of the parties had objected to the decision of the DIAC to close the casefile and consider the claims and counterclaims withdrawn.

In a recent case which ended up before the Dubai courts, a sub-contractor had filed arbitration proceedings against the contractor but had not paid its share of the advance on costs due to lack of funding. The respondent (contractor) was invited to pay the share of both parties but declined to do so. As a result, the tribunal issued a decision declaring the proceedings as terminated. The sub-contractor then filed proceedings before the Dubai Court of First Instance (“CFI”) (See Case No 678/2020 (Commercial)). The contractor challenged the jurisdiction of the courts on the basis of the arbitration clause but its challenge was rejected. The CFI explained that when the arbitration clause is not capable of being performed for whatsoever reasons and grounds, the jurisdiction goes back to the court as the judiciary has “general jurisdiction” to decide disputes. It further explained that when the arbitral award is invalidated1)The CFI erred in its decision with respect to this specific point as under Article 54(4) of the UAE Federal Arbitration Law No. 6 of 2018, when an arbitral award is invalidated by the courts, the arbitration agreement remains in force unless the parties agree otherwise and unless the invalidity is due to the non-existence of the arbitration agreement, its lapse, its invalidity or it being incapable of execution. However, this error does not affect the CFI’s findings with respect to the subject under examination. jQuery('#footnote_plugin_tooltip_41135_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_41135_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); or the arbitration clause is no longer applicable, the purpose behind arbitration is extinguished. As a result, either party may approach the courts and is under no obligation to refer the case to arbitration unless there is a new arbitration agreement. According to the CFI, the arbitral tribunal had decided to end the arbitral proceedings for non-payment of the arbitration fees and as a result, the arbitration clause became inoperable. . The case was then heard by the Court of Appeal, which upheld the decision of the CFI. Subsequently, the case was appealed to the Court of Cassation which upheld the decision of the lower courts and adopted the same analysis. In this case as well, the claimant had failed to pay the advance on costs. Although the court did not mention that the claimant had waived the arbitration, one could conclude that waiver has taken place on the basis that the claimant did not pay the advance on costs, which it is responsible to.

Contrary to the above two decisions, in Dubai Court of Cassation 379/2013 (Real Estate), it was not the claimant who had not paid the advance on costs, but the respondent, which prompted the DIAC to declare the casefile as closed. The claimant then brought its claims to the courts. The Court of Cassation, again, relied on the basis that when the arbitration agreement is not possible of being executed, the jurisdiction goes back to the courts as they have the “general jurisdiction”. It further explained that the DIAC’s decision to close the casefile renders the arbitration clause non-existent as the purpose behind arbitration is extinguished given that it has not been possible to proceed with the arbitration. This then gives the claimant the right to file its claim before the courts. The court added that the claimant is not under an obligation to pay the respondent’s fees as Article 2(4) of the Appendix-Cost of Arbitration of DIAC’s 2007 Rules states that the advance is to be paid equally. The reference in the decision to Article 2(4) raises the question of whether the Court of Cassation would have reached a different conclusion if there was no such provision under the DIAC 2007 Rules. On the one hand, it may not be wise to reach any conclusion on this point in the absence of sufficient court decisions which would provide insight on this point. On the other hand, given the well-established concept that the UAE courts have general jurisdiction and that arbitration is an exceptional route, it is likely that the Court of Cassation’s conclusion would not have been any different in the absence of Article 2(4).

 

Final Observations

One may conclude from the above decisions that when the parties’ conduct can be interpreted as waiver of the arbitration clause, the UAE courts would exercise jurisdiction if and when the claim is filed before them. Doing so does not raise any concerns because it is only legitimate for the dispute to be resolved through the courts when the parties no longer wish to resolve it through arbitration. Parties are at liberty to opt for arbitration and are equally at liberty to opt out of arbitration.

When there is no indication that the parties have waived the arbitration clause and the claimant seizes the court’s jurisdiction as a result of the respondent’s non-payment of the costs, it appears that the courts would consider the arbitration agreement as having become inoperable and would exercise jurisdiction. Such approach ensures, on the one hand, that the claimant is not deprived of a forum and not forced to shoulder the full advance on costs. On the other hand, this approach encourages frustration of the arbitration agreement by respondents intending to hinder the arbitration process.

There are not yet enough decisions dealing with this question and given how rapidly the arbitration landscape is evolving in recent years, it would be very interesting to see how UAE courts will deal with this thorny issue in the coming years.

 

(The author of this Blog post has been involved in one of the cases reviewed as counsel for a defendant before the courts.)

References[+]

References ↑1 The CFI erred in its decision with respect to this specific point as under Article 54(4) of the UAE Federal Arbitration Law No. 6 of 2018, when an arbitral award is invalidated by the courts, the arbitration agreement remains in force unless the parties agree otherwise and unless the invalidity is due to the non-existence of the arbitration agreement, its lapse, its invalidity or it being incapable of execution. However, this error does not affect the CFI’s findings with respect to the subject under examination. function footnote_expand_reference_container_41135_30() { jQuery('#footnote_references_container_41135_30').show(); jQuery('#footnote_reference_container_collapse_button_41135_30').text('−'); } function footnote_collapse_reference_container_41135_30() { jQuery('#footnote_references_container_41135_30').hide(); jQuery('#footnote_reference_container_collapse_button_41135_30').text('+'); } function footnote_expand_collapse_reference_container_41135_30() { if (jQuery('#footnote_references_container_41135_30').is(':hidden')) { footnote_expand_reference_container_41135_30(); } else { footnote_collapse_reference_container_41135_30(); } } function footnote_moveToReference_41135_30(p_str_TargetID) { footnote_expand_reference_container_41135_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_41135_30(p_str_TargetID) { footnote_expand_reference_container_41135_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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Nigeria’s $10 Billion Article V(1)(e) Off-Ramp and the Niggling Issue of Set-Aside or Annulled Awards

Thu, 2022-03-31 02:45

The permissive language of Article V(1)(e) of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) continues to tease parties challenging recognition and enforcement of arbitral awards with the prospects of success.  That is the case for Nigeria in its latest efforts to fend off the confirmation of a $10 billion arbitral award that has spurred parallel litigations in the United States and England, and criminal investigation proceedings in Nigeria. As discussed below, Nigeria has had some success invoking Article V(1)(e) when resisting the confirmation of an arbitral award, but it remains to be seen what vagaries lie ahead for it this time.

On March 11, 2022, the D.C. Circuit affirmed a 2020 ruling of the United States District Court for the District of Columbia permitting the confirmation of a $10 billion arbitral award against Nigeria to proceed over Nigeria’s jurisdictional objections. The action against Nigeria was filed in the district court by Process and Industrial Developments, Ltd (“P&ID”) following an arbitration held in London. Process & Indus. Developments Ltd. v. Fed. Republic of Nigeria, 18-CV-594 (CRC), 2020 WL 7122896 (D.D.C. Dec. 4, 2020), aff’d on other grounds, 21-7003, 2022 WL 727292 (D.C. Cir. Mar. 11, 2022).  Nigeria moved to dismiss, arguing that it was immune from the jurisdiction of U.S. courts under the Foreign Sovereign Immunities Act (“FSIA”). In response, P&ID argued that the case fell under the FSIA’s arbitration exception and its waiver exception to sovereign immunity.

 

The FSIA’s Waiver and Arbitration Exceptions

The waiver exception applies to any action “in which the foreign state has waived its immunity either explicitly or by implication, notwithstanding any withdrawal of the waiver which the foreign state may purport to effect except in accordance with the terms of the waiver.” 28 U.S.C. § 1605(a)(1).

The FSIA’s arbitration exception provides that “a foreign state shall not be immune from the jurisdiction of the courts of the United States or of the States in any case … in which the action is brought … to confirm an award made pursuant to … an agreement to arbitrate, if … the agreement or award is or may be governed by a treaty or other international agreement in force … calling for the recognition and enforcement of arbitral awards.” 28 U.S.C. § 1605(a)(6).

 

The District Court’s Ruling

The district court agreed with P&ID that the waiver exception applied, holding that Nigeria impliedly waived sovereign immunity by joining the New York Convention.  In so holding, the district court relied on the Second Circuit’s decision in  Seetransport Wiking Trader Schiffarhtsgesellschaft MBH & Co., Kommanditgesellschaft v. Navimpex Centrala Navala, 989 F.2d 572 (2d Cir. 1993). In Seetransport, the Second Circuit held that the FSIA’s waiver exception applies if the foreign sovereign is a party to the New York Convention and has agreed to arbitrate in a Convention state. The district court declined to resolve whether the arbitration exception applied given the plausible argument by Nigeria that the arbitration exception did not apply because P&ID lacked a valid and enforceable arbitral award. Nigeria argued that the award was not valid and enforceable because a Federal High Court of Nigeria (a first instance court) set aside the award.

 

The D.C. Circuit’s Ruling

On appeal, the D.C. Circuit affirmed the district court’s ruling based on the arbitration exception instead of the waiver exception. In response to Nigeria’s argument that the arbitration exception could not apply because the award had been set aside, the D.C. Circuit held that the validity or enforceability of an arbitral award was a merits question that did not affect the district court’s subject matter jurisdiction under the FSIA.

 

Commentary

The D.C. Circuit’s ruling that the validity or enforceability of an arbitral award is a merits question that does not affect the district court’s subject matter jurisdiction under the FSIA potentially improves the speed of adjudication of confirmation proceedings.

Under the New York Convention, recognition and enforcement of an award may be refused if the award “has been set aside or suspended by a competent authority of the country in which, or under the law of which, that award was made.” Article V (1)(e) of the New York Convention.  While the arbitration took place in London, the agreement between Nigeria and P&ID provided that the Nigerian Arbitration and Conciliation Act would apply to any dispute between the parties. Nigeria’s arguments against the application of the arbitration exception were predicated on the premise that Nigerian courts had the power to set aside the award (as the award was “made” under the Nigerian Arbitration and Conciliation Act) and that an award validly set aside at the seat of arbitration ceases to have legal effect and could not be confirmed. (It is probable that Nigeria will also raise this as a defense to the merits of the enforcement action by P&ID under Article V(1)(e).)

P&ID’s counterargument was that England, not Nigeria, was the seat of the arbitration, and thus only English courts may set aside the award. On this point, P&ID relied on Nigeria’s prior admission, in a previous application to an English High Court, that an action challenging the arbitration award would have to be before the English courts. In addition, P&ID relied on the fact that the tribunal that handed down the award had previously recognized England as the arbitral seat. The award has neither been confirmed nor set aside in England because Nigeria secured an unprecedented extension of time to challenge the award on grounds that the arbitration agreement and the underlying agreement were procured by fraud.  Federal Republic of Nigeria v. Process & Industrial Development Ltd. [2020] EWHC 2379 (Comm) [¶¶274–77] (Eng.).

 

Would Crystal-Gazing the Outcome of the Merits Stage be Misleading?

Now that the confirmation action is set to proceed to the merits stage, it is worth considering what, if any, chances exist for Nigeria to successfully resist confirmation on the grounds that the award has been set aside in Nigeria.  While neither the D.C. Circuit nor the district court has ruled on the merits of P&ID’s confirmation action, it is notable that the D.C. Circuit has remarked, in a separate but related proceeding, that Nigerian courts were probably competent to set aside the award.  Process & Indus. Developments Ltd. v. Fed. Republic of Nigeria, 962 F.3d 576, 584 (D.C. Cir. 2020). And the district court has noted that “it appears likely that both English and Nigerian courts had the power to set aside the award.” Process & Indus. Developments Ltd. v. Fed. Republic of Nigeria (District Court, District of Columbia 1:18-cv-00594).

In any case, the D.C. Circuit has dealt with a similar question of whether to confirm an award that had been set aside at the seat.  In 2007, the D.C. Circuit issued its opinion in TermoRio v. Electranta, holding that the New York Convention “does not endorse a regime in which secondary States (in determining whether to enforce an award) routinely second-guess the judgment of a court in a primary State, when the court in the primary.” TermoRio S.A. E.S.P. v. Electranta S.P., 487 F.3d 928, 937 (D.C. Cir. 2007). Although the D.C. Circuit is “very careful in weighing notions of ‘public policy’ in determining whether to credit the judgment of a court in the primary State vacating an arbitration award,” it declined to confirm an award that had been set aside in Colombia, because nothing in the record indicated that the Colombian proceedings were fatally flawed or unauthentic. Id. at 937, 941.

Similarly, Nigeria has had some success in other courts arguing against the confirmation of an award set aside by a court in Nigeria. In Esso Exploration, the Southern District of New York refused to confirm an award that had been set aside in Nigeria because a final judgment obtained through sound procedures in a foreign country is generally conclusive, and the public policy exception is narrow. The standard is high, and infrequently met. Esso Expl. & Prod. Nigeria Ltd. v. Nigerian Nat’l Petroleum Corp., 397 F. Supp. 3d 323, 355 (S.D.N.Y. 2019). This case is currently on appeal to the Second Circuit.

 

Conclusion

Both TermoRio and Esso Exploration might be indicative of how the courts would treat Nigeria’s set-aside arguments at the merits stage. However, it remains to be seen how P&ID’s counterargument – that England is the seat of the arbitration – impacts the district court’s analysis. Therefore, it is unclear whether Article V(1)(e) will provide Nigeria with the off-ramp from enforcement of the award that it is seeking.

Regardless of the outcome, a decision on Nigeria’s set-aside arguments will likely rekindle the debates about comity (or the lack thereof) in the review of set-aside awards and the lack of uniformity in the approach towards set-aside awards among parties to the New York Convention.

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Highlights from the ICSID-ADGM Joint-Conference on Investment Arbitration in the Middle-East

Mon, 2022-03-28 01:43

On 17 March 2022, Abu Dhabi witnessed an event which was five years in the making: a joint-conference by ICSID and the Abu Dhabi Global Market (ADGM) titled “Investment Arbitration in the Middle East”. This post recaps some highlights from the event, as well as offering further views and commentary.

 

Event Kick-off and Its Interplay with Broader Developments

The event kicked-off with an opening address by Linda Fitz-Alan (Registrar and Chief Executive of the ADGM Courts) in which she announced the creation by the ADGM Arbitration Centre of a Panel of Investor-State Mediators. Meg Kinnear (Secretary General of ICSID) noted that the ADGM’s initiative perfectly complements ICSID’s own initiative in introducing Investor-State Mediation Rules, which have been approved by Member States along with the proposed amendments to the ICSID Rules, and which will enter into effect from 1 July 2022.

Later in the day, Ms. Kinnear announced the signature of a Cooperation Agreement between ICSID and the ADGM allowing for increased collaboration and knowledge-sharing between the institutions as well as for ICSID proceedings to be held at the ADGM’s world-class facilities. Practitioners in the region will doubtless welcome this news and hope that this will mean that more MENA-focused investment arbitrations can be handled within the region.

 

The Past, Present and Future of Investment Arbitration

The first item on the agenda was a Ted-style talk by Alain Farhad (Mayer Brown) who focused on the “yesterday, today and tomorrow of investment arbitration”. Mr. Farhad spoke of gunboat diplomacy, which was for a long time the prevailing approach for the settlement of investment disputes, and which included two key events in the Middle-East which significantly influenced the creation of ICSID to ensure a peaceful alternative: Iran’s nationalization of the Anglo-Iranian Oil Company and the ensuing coup, and Abdel Nasser’s nationalization of the Suez Canal Company.

Regarding the present, Mr. Farhad underlined the shifting dynamics in the investment arbitration scene which had historically been branded as favouring the Global North and West to the detriment of the South and East: Masdar v. Spain, DP World v. Belgium, and Dayyani v. Korea were cited as examples of cases brought by MENA investors against developed states, demonstrating the viability of the system for the protection of investments irrespective of the home and host state.

Finally, contemplating the future and considering the increasing criticisms levied against investment arbitration, Mr. Farhad warned critics that the alternative could very well be a return to gunboat diplomacy, which would hardly be preferable.

 

The Notion of Investment: Definition, Legality, Corruption

The first panel of the day was moderated by Yehia Shahine (Alieldean Weshahi & Partners), who, in discussing the definition of an investment, highlighted the comprehensive one provided in the Egypt-Mauritius BIT: commitment of capital, expectation of gain, assumption of risk and contribution to development of the host state. This definition closely follows the one set-out in Salini v. Morocco, another major contribution by the MENA region to the investment arbitration landscape.

Floriane Lavaud (Debevoise & Plimpton) spoke of the time-sensitive nature of the legality defence: only an illegality which affected the investment at its outset can viably constitute a basis for a ratione materiae jurisdictional objection. Subsequent illegal acts during the life of the investment are more likely to be viewed under the lens of admissibility or in relation to the merits of the case (by way of contributory fault). Bank Melli v. Bahrain was cited as a notable MENA case which illustrated this point.

In addressing the issue of corruption, Ziya Akinci (Akinci Law) noted that it takes two to tango: corruption can (usually via the FET standard) form the basis of a claim by an investor, just as much as it can be used as a shield by the state in a legality defence. Al Warraq v. Indonesia, a case brought by a Saudi investor under the OIC Agreement, acknowledges the dual nature of this issue. Mr. Akinci underlined the contributions of other MENA cases to this issue: Dogan vs. Oman which found that the alleged corruption must be relevant to the investment, as well as the Wena Hotels and Union Fenosa cases against Egypt, which did not uphold a legality defence given the absence of payments to a decision-maker, and the absence of prosecution in Egypt.

Sabrina Aïnouz (Squire Patton Boggs), stressed that a State contemplating a corruption defence must present such defence as early as possible in the proceedings in order for it to be credible and viable and that consideration be given to the proportionality between the seriousness of the corruption and the gravity of the violation alleged by the investor.

 

Stated-Owned Entities in Investment Arbitration

The second panel explored a topic which is of particular relevance in the Middle East: the participation of SOEs, both as claimants and respondents, in investment arbitration including State corporations, Sovereign Wealth Funds (SWFs) and territorial subdivisions. Jennifer Younan (Shearman & Sterling), who moderated the discussion, made reference to the IMF’s estimate that SOE assets totalled USD 45 trillion, or nearly 50% of global GDP. She anticipated that the number of disputes involving SOEs would significantly rise in the coming years.

Andrea Menaker (White & Case) presented the issue from the angle of the Sovereign Investor, setting out the Broches test conceived by the namesake architect of the ICSID system: an SOE can resort to ICSID arbitration only in circumstances where it is acting in a similar manner to a private enterprise and not as a government entity. This question was central in two MENA-related cases: Beijing Construction v. Yemen and the aforementioned Masdar v. Spain. Ms. Menaker later noted that there are no known cases in which a tribunal declined jurisdiction on the basis of claimant being an SOE.

Lara Hammoud (ADNOC) laid out statistics regarding BIT treatment of SOEs: 84% made no mention of them whatsoever, while less than a handful expressly excluded them from bringing claims. Reference to SOEs, and particularly SWFs, are however notably common in BITs concluded by Kuwait, Qatar, Saudi Arabia and the UAE, with the Saudi-Czech BIT even making reference to the Saudi public financial institutions, funds and monetary agency as potential investors.

Ms. Younan then sparked a debate by positing whether the involvement of SOEs as claimants was not repoliticising disputes and thereby straying away from the original intention behind the creation of the ICSID system. Sami Tannous (Freshfields Bruckhaus Deringer) advocated the pragmatic view that SOEs are a large part of the world economy and there should therefore be no reason to exclude them from this system: if the UK Government decided to expropriate Newcastle United, would the Saudi PIF not have as legitimate an investment claim as any other club owner in similar circumstances? This later drew an intervention from Alain Farhad who considered Qatar’s ownership of Paris Saint-Germain in light of the Broches test: if a State makes an investment with no realistic aim to turn a profit, possibly with the purpose of serving political aims, is it actually acting as a private enterprise or in its governmental capacity?

The conversation then shifted to the respondent-side of things: Hussein Haeri (Withers) explored the question of whether and when a state can be held liable for actions of SOEs. Mr. Haeri noted that, contrary to the Broches test which appears to do little to filter out claims brought by SOEs, the attribution test has produced varying results when determining whether a respondent State should be liable for an SOE’s actions. Mr. Haeri pointed to the Ampal v. Egypt and Union Fenosa v. Egypt cases, which although involving the same SOE reached different conclusions as to attribution.

The question of designation of SOEs to ICSID under Article 25(1) of the ICSID Convention was then explored by Sami Tannous: does an ICSID arbitration clause entered into by an SOE constitute a valid basis for arbitration in the absence of the designation by the host State of that SOE to ICSID? Aaron Broches’ view that designation should have no bearing on jurisdiction appears to have been rejected by some tribunals in favour of Christoph Schreuer’s view that there must have been some communication to the Centre by the host state. The other approach has been to distinguish designation, by which a host state endorses an SOE’s signature of an ICSID arbitration clause, from notification, which brings such endorsement to ICSID’s attention: the State’s approval should be sufficient, regardless of ICSID’s awareness of it.

 

Advocacy Insights

The final panel, moderated by Mohamed Abdel Wahab (Zulficar & Partners) provided insights into the investor-state arbitration process from various perspectives: Nada Sader (Derains & Gharavi) presented the investor perspective, Fatma Khalifa (Egyptian Lawsuits Authority) spoke from the state viewpoint, Reza Mohtashami QC (Three Crowns) provided the arbitrator’s angle and Meg Kinnear rounded it out with the view from within ICSID.

On the question of the tribunal selection, Ms. Sader and Ms. Khalifa both agreed that the selection of the right tribunal was primordial. Mr. Mohtashami and Ms. Kinnear stressed the importance of a collegial atmosphere within the tribunal as a whole. Mr. Mohtashami advised that it may be counterproductive for state to appoint arbitrators with staunchly pro-state records whose dogmatic and academic views may alienate their co-arbitrators. Ms. Khalifa however underlined the importance of the arbitrators having some exposure to and appreciation of public law, to which Ms. Kinnear added Public International Law experience and political and cultural sensitivity as key considerations in the appointment process.

With regard to the presentation of the investor’s case, Mr. Mohtashami advised claimants to do their due diligence before filing an RFA and get all facts right as arbitrators will appreciate a good narrative which withstands scrutiny. Mr. Abdel Wahab proceeded to inquire whether Ms. Sader would opt for an upfront strategy, fully revealing her cards before the identity of opposing counsel is known. Ms. Sader responded that she would, considering the stakes and dynamics of an investment arbitration, although she might take a different approach in a commercial dispute.

Regarding respondents’ preparedness for investment arbitrations, Ms. Kinnear advised that States regularly conduct procurements and have law firms on standby should the need arise as ICSID cannot pause the proceedings to allow a state the time to go through such a process. Ms. Khalifa added that prior experience in state representation is important in retaining counsel as is sector expertise, and that state representatives from different countries should exchange feedback on counsel performance.

Finally, an interesting disagreement arose with regard to the question of bifurcation: Mr. Mohtashami suggested that when unsure whether or not bifurcation is necessary, it is better not to bifurcate, Ms. Khalifa took the opposite view, stressing the importance of limiting any unnecessary expenditure of public funds.

 

Concluding Remarks

The event concluded with an intervention by John Gaffney (Al Tamimi & Co.) who spoke about the importance of ESG (environment, society and governance) considerations, and their growing relevance in the evaluation by corporations of their investments, a topic which is quickly gaining traction as has been discussed in similar arbitration events recently held in Washington D.C. and Shanghai.

This conference set the stage for what appears to be a promising year for dispute resolution in the MENA region: 2022 will not only be the year in which new ICSID Arbitration Rules enter into force, but also new DIAC and QICCA rules. Developments are also awaited regarding a potential ruling from the French Court of Cassation on the validity of PCA nominations of arbitrators in OIC Treaty arbitrations, an increasingly popular instrument for investment arbitrations in the Middle-East, after the Paris Court of Appeal dealt investors a blow in its March 2021 ruling.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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