Kluwer Arbitration Blog

Syndicate content
Updated: 10 hours 39 min ago

ECT Reform: The Final Countdown

Wed, 2022-08-03 01:40

Negotiations towards a modernized Energy Charter Treaty (ECT, Treaty) ended on 24 June 2022, with the States Parties reaching an agreement in principle following discussions towards reform that began in November 2017. While the final text of the modernized Treaty has not yet been published, the Secretariat of the ECT in June issued a public communication summarizing the main proposed changes to the Treaty. The final text will be released in August 2022, and the proposal will be voted on by the Conference in November 2022. If approved by three-quarters of the Contracting Parties, the modernized ECT will enter into force 90 days after its ratification. At KAB, we have been closely monitoring the ECT reform and modernization process. Building on the Blog’s prior coverage of the ECT modernization process, this post highlights a few of the most noteworthy modifications to the ECT proposed through the agreement in principle and considers their implications for investment disputes moving forward.

 

1. Investment Protection

Some of the core changes brought about in the proposed amendments relate to the substantive standards of protection afforded to investors and their investments under the ECT. The agreement in principle targets changes for several such standards. This section discusses the key changes proposed related to the fair and equitable treatment (FET) obligation in the ECT, the States Parties’ right to regulate, and the most-favoured-nation treatment clause.

Fair And Equitable Treatment (FET)

FET is the most frequently invoked protection in ECT claims and the most frequent standard under which tribunals have found ECT breaches. As of June 2022, investors have filed FET claims in 24.7% of the 83 ECT publicly available awards. Further, of the 43 cases in which ECT tribunals found Treaty breaches, 65% were for FET violations. Hence, any change to this standard will have important impacts in future ECT cases.

Prior to the modernization of the ECT, commentators and tribunals noted that the language of Article 10(1) of the ECT was unclear, producing debates as to the scope of protection provided to investors and their investments under this clause. For some commentators, the current language of Article 10(1) may be interpreted as a catch-all provision that encompasses legitimate expectations and non-discrimination, among others, thus, trumping a State’s right to regulate and causing regulatory chill. Tribunals on the other hand, have discussed whether Article 10(1) sets forth an objective and self-contained FET standard or refers instead to a narrower protection corresponding to the minimum standard of treatment under customary international law (see Belenergia v. Italia, ¶¶567-69).

As a response to the lack of clarity of the FET protection, the modernized ECT proposes to refine the FET standard by providing a list of specific measures that infringe this protection. The proposed amendments would also clarify the situations in which legitimate expectations can be protected under the FET clause, thus potentially restricting the grounds under which investors can bring claims for the breach of this standard. Such adjustments are consistent with reforms being undertaken by States outside of the ECT context, which have seen States increasingly specify more clearly what exactly FET clauses will apply to including through similar list approaches.

Right to Regulate

States commonly invoke their right to regulate to justify changes to their internal legal framework. Some commentators, such as Ortino, describe the interpretation of the right to regulate under FET – including the ECT’s current Article 10(1) – as “muddy” (p.33). He argues that tribunals have failed: (a) to take a clear position on whether the FET requires regulatory stability in the strict sense; (b) to address the precise conditions from which the obligation to provide a stable legal framework arises; and (c) to clarify the kind of regulatory change that would qualify as a breach of the FET provision (p.33).

This is exemplified by the 51 ECT cases in which Spain has been a respondent, which have seemingly adopted different interpretations of the scope of the right to regulate under circumstances that involve similar facts. While some tribunals have ruled that an investor is not entitled to have a legitimate expectation to a stable regulatory framework (see e.g. Charanne v. Spain, at ¶499), other tribunals have noted that certain actions and assurances by the government create legitimate expectations, that if infringed, imply FET breaches. (see e.g. Masdar v. Spain at ¶¶494, 521)

The modernized ECT aims to clarify the Contracting Parties’ right to regulate by including a stand-alone article that refers to a state’s power to regulate vis-à-vis investors in the interest of legitimate public policy objectives, including climate change, protection of public health, safety, public morals, and the maintenance of peace and security. While the vast majority of treaties refer to the right to regulate as a regulatory carveout (see e.g., TPP at art. 9.16, Netherlands Model BIT at art.2 ), very few investment agreements – like the modernized ECT – directly affirm the parties’ right to regulate (though see also, EU- Vietnam FTA at art. 13.2). Under the second category, States have broader regulatory space that will likely limit future investment disputes related to regulatory measures similar to those filed against Spain. Arguably, the language of the modernized ECT asserting the host State’s right to regulate will also limit arbitral discretion to interpret am investors’ legitimate expectations vis-à-vis the stability of the State’s legal framework, thus again reaffirming domestic regulatory power and autonomy.

Most Favoured Nation (MFN) Clause

The MFN clause has been invoked in several ECT cases to import more favourable investment or substantive standards from other treaties. The proposed revisions to the ECT narrow the scope for such arguments by clarifying that the MFN standard does not extend to dispute settlement procedures and that substantive provisions in other international agreements do not constitute “treatment” to be accorded under the modernized ECT. Hence, the revised MFN protection would allow states to retain the capacity to make distinctions between investors for legitimate purposes (see MNSS v. Montenegro, at ¶362) and will further limit the use of comparator treaties to import either substantive protections (see Accession Mezzanine v. Hungary, at ¶73-4) or dispute settlement procedures (Plama v. Bulgaria at ¶223), and will only apply where there is proven discriminatory treatment.

 

2. Exceptions for Regional Economic Integration Organizations

In the last decade, the European Union (EU) has taken steps to regulate investment law between EU Member States. From the mandatory termination of all intra – EU BITs, to the complete ban of ad hoc investment agreements among EU Member States, the relationship between EU law and investment arbitration has been controversial.

The modernized ECT proposes to address this fragmentation by expressly modifying the application of certain provisions of the ECT in relation to Regional Economic Integration Organizations (REIO) such as the EU and/or their members.

First, a proposed exception to the application of Article 7 (freedom of transit of energy materials) prevents further clashes between EU Law and the ECT. In principle, this article of the ECT would collide with the principles of the EU single market enshrined in article 26 of the TFEU; hence, this exception would apparently overcome such friction. Similarly, Article 29 of the ECT on trade with non-WTO members does not apply in the mutual relations among parties that are members of the same REIO, thus again, respecting the EU internal single market.

Second, a proposed exception to the application of articles 26 (investment dispute settlement) and 27 (disputes between Contracting Parties) would allow the EU to carve out arbitration among its members under the ECT, thus, in principle, rendering ECT ISDS consistent with the intra-EU ISDS ban set forth by the Court of Justice of the European Union (CJEU) in Slovakia v. Achmea,  Moldova v. Komstroy and Poland v. PL Holdings (coverage here, here, here and here).

 

3. Transparency in Dispute Settlement

The modernized ECT intends to provide for enhanced transparency in the conduct and outcome of proceedings. It incorporates the 2014 UNCITRAL Rules on Transparency as part of the Treaty and adds supplementary measures to enhance disclosure of proceeding documents and full access to hearings of investment proceedings. Moreover, as with the amended ICSID rules, the modernized ECT will require mandatory disclosure of third-party funding.

 

4. Towards Greener Investment

The ECT has been criticized for allegedly protecting fossil fuels investments (coverage here). Interestingly, of the 150 cases brought under the ECT, 60% refer to protection of renewable energies and only 33% concern fossil fuels. Of the fossil fuel cases, in 50% tribunals have found ECT breaches, while the rest have been either dismissed or settled. Whether or not the criticisms are valid, the modernized ECT is intended to further advance environmental objectives in the following ways.

First, the modernized ECT proposes to protect new energy materials through its investment protection provisions, including among others, materials such as hydrogen, biomass, biogas, and synthetic fuels.

Second, the modernized Treaty will establish a “flexibility mechanism” that allows the Contracting Parties to exclude the protection of fossil fuel investment within their territories. This exclusion does not operate ipso lege, but depends on the will of Contracting Parties, which may opt to carve out fossil fuel protection depending on their energy and climate goals, with the UK and the EU being the first contracting parties to exercise this right.

Third, the modernized ECT will introduce a review mechanism that will allow Contracting Parties to review the flexibility mechanism and the list of protected investments every five years to react to technological and policy developments in the energy sector.

Fourth, the modernized ECT will introduce additional treaty language that reaffirms the obligations of the Contracting Parties under the UNFCCC and the Paris Agreement.

Fifth, it will introduce a particular dispute settlement mechanism applicable to disputes between the Contracting Parties regarding the interpretation and application of the provisions on sustainable development, with the possibility of referring this matter to a conciliator.

The addition of sustainable development provisions in the modernized ECT is a unique feature that separates the Treaty from other multiparty agreements and addresses civil society’s criticisms of the existing approach to ISDS in the instrument, with some commentators even arguing that the modernized ECT is the “greenest investment treaty of them all”. 

 

Conclusion

With countries from Africa and Asia joining, the ECT is turning into a global charter. The modernized ECT aims to redefine some of the most common investment protection standards in ISDS and narrow the circumstances in which investors can seek protection under the Treaty, in order to address the Contracting Parties’ concerns and civil society’s resistance against ISDS. The modernized Treaty also will encourage transparency and sustainable development, arguably granting higher legitimacy to ISDS under the ECT. Yet, it is still to be seen whether the Contracting Parties will approve the modernized version and how investment disputes develop under these new rules.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


NYIAC Grand Central Forum: Double-Hatting and the ICSID-UNCITRAL Draft Code of Conduct for Adjudicators in International Investment Disputes

Tue, 2022-08-02 01:51

The New York International Arbitration Center’s (“NYIAC”) annual Grand Central Forum took place on 13 July 2022. The event coincided with the 55th session of the United Nations Commission on International Trade Law (“UNCITRAL”) held in New York which, among other topics, focused on the recent fourth draft of the joint ICSID-UNCITRAL Code of Conduct for Adjudicators in International Investment Disputes (“Code”) issued for informal consultation in June 2022 and currently under discussion in UNCITRAL Working Group III (“WGIII”).

Under the guidance of Donald Donovan (Arbitration Chambers, New York), the panel composed of Andrea Bjorklund (McGill University, Montreal), Lauren Mandell (WilmerHale, Washington D.C.), Kate Brown de Vejar (DLA Piper, Mexico City), and Andrés Jana (Jana y Gil, Santiago) discussed how the Code attempts to regulate the issue of so-called “double-hatting,” i.e., where an arbitrator concurrently has a role as counsel or expert in a related proceeding. In particular, the panelists addressed the relationship between double-hatting and the concepts of independence and impartiality, the prohibited multiple roles and temporal scope of the ban, the proposed three-year tail and disclosure as a solution to the double-hatting challenge.

 

The Regulation of Double-Hatting in the Current Draft of the Code of Conduct

The conference opened with words by Louis B. Kimmelman (Independent Arbitrator, New York), Anna Joubin-Bret (UNCITRAL, Vienna), and Martina Polasek (ICSID, Washington D.C.) on the ongoing efforts of UNCITRAL Working Group III in drafting the Code and the significant innovations it offers to address concerns surrounding arbitrators in international investment disputes (“IID”).

The limits on an arbitrator acting in multiple roles are set by Article 4 of the draft Code (“Limit on Multiple Roles”). Article 4(1) requires an arbitrator to refrain from acting concurrently (and potentially for a period of three years “following the conclusion” of the proceeding) as a legal representative or an expert witness in another investment dispute involving the same measures, the same or related parties, or the same provisions of the same treaty; while Article 4(2) contains a prohibition on serving as arbitrator where she/he is acting as a legal representative or an expert in another case involving “legal issues which are substantially so similar” that accepting such a role would be in breach of the independence and impartiality obligations regulated in Article 3. Under the current draft, the disputing parties may exclude the application of Article 4(1), but not Article 4(2).

 

Independence and Impartiality  

In his introductory remarks, Donald Donovan posited that the discussion of double-hatting is most properly framed in terms of independence and impartiality; that is, whether and to what extent taking on multiple roles compromises an adjudicator’s ability to decide a case in an independent and impartial manner. Viewed that way, the Code’s goal should be to achieve a practical consensus on how those fundamental principles apply in the particular context of double-hatting.

Andrea Bjorklund addressed the interplay between these principles and double-hatting in the draft Code, an issue that was further commented on by Lauren Mandell and Kate Brown. Article 3 tries to bypass the discussion of whether the independence and impartiality standards should be objective or subjective and instead seeks to find non-exhaustive proxies of situations the community might perceive as problematic, such as nationality bias. The current version of Article 4 attempts to do the same in the specific case of double-hatting, proposing a list of circumstances in which double-hatting by an arbitrator can be a potential source of concern.

The draft raises three important questions. First, whose perception is the Code trying to address? If it is the parties’, then the possibility of waiver under Article 4(1) is sensible; however, if the Code seeks to address the legitimacy of the IID system, then the rule may be inadequate. Second, if concerns with double-hatting are in essence related to predispositions an adjudicator might have, then why can an arbitrator take on multiple cases involving the same issue as long as they only act as an arbitrator and not take other roles (i.e., as counsel or an expert)? Third, is the list in Article 4 exhaustive or exclusive? Further discussion might be required to ensure the provision properly addresses the concerns raised by double-hatting.

 

Multiple Roles and Time Limitations

The panel then discussed the “tailor-made” ban the Code attempts to create, in a discussion headed by Lauren Mandell, with interventions by Kate Brown and Andrés Jana. Some delegations of WGIII have raised concerns that an outright ban of double-hatting would limit party autonomy, decrease the pool of available arbitrators, and adversely affect diversity. The Code attempts to minimize such effects by tailoring the ban to address only the conflicts of interest that are of greatest concern. But the current draft creates at least two issues in this regard.

First, it is unclear how the obligations in Article 4 can be adhered to in practice. It might not be possible for an adjudicator – or, for that matter, for counsel – to fully comprehend all the contours and minutiae of the dispute at the time of appointment. As a result, it will be difficult to assess, at the outset, whether a case will involve issues under Article 4(2) that are substantially similar with another case in which the adjudicator is involved.

The second concern deals with the duration of the ban under Article 4. If an adjudicator cannot act concurrently in multiple roles (and potentially for three years “following the conclusion” of the dispute), then when is the proceeding “concluded” and when does the three-year-tail commence? Many alternatives are arguably possible: when the time to petition for annulment elapses, when enforcement proceedings end, when an arbitrator resigns or is successfully challenged, among others.

If the Code is to provide a practical test, further work is required to bring certainty in relation to these issues, either by modifying the language of Article 4, by providing further commentary, or by leaving the issue to be developed by tribunals in the light of the obligations of independence and impartiality under Article 3.

 

The Three-Year Tail Under Article 4 of the Draft Code

Kate Brown then headed a discussion on the three-year tail, with interventions by Andrés Jana and Andrea Bjorklund. The likely goal of establishing a three-year tail introduced into Article 4 of the Code is to address the concern of whether counsel can advocate for a particular issue and then, within a short period of time, advance an independent position on that same issue as an arbitrator. But enforcement of Article 4 would be problematic. First, for the reasons already mentioned surrounding when the proceeding “concludes.” Second, although double-hatting by an arbitrator candidate can be controlled by way of a challenge, control over an arbitrator who subsequently takes a role as counsel or expert is more problematic. In the latter case, Article 4 seems to be self-enforcing and the consequences for breaching the rule are unclear.

A helpful comparison can be made with current treaties. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), the United States–Mexico–Canada Agreement (USMCA), the 2019 Netherlands Model Investment Agreement, the 2019 Slovakia Model BIT, and the 2012 South-African Development Community Model BIT support prohibiting an arbitrator’s concurrent role as counsel when the disputes involve the same agreement or any other international agreement. However, these instruments do not show a consensus among the States on whether an arbitrator can concurrently take a role as counsel in a non-IID proceeding, nor do any of these contain a three-year tail. The panel agreed that the rationale for, and utility of, the three-year extension of the prohibition is unclear.

 

Disclosure as a Solution to the Double-Hatting Challenge

Finally, the last portion of the debate, led by Andrés Jana and with primary interventions by Andrea Bjorklund and Lauren Mandell, focused on the shift from the disclosure requirement in earlier drafts of Article 4 toward the narrower prohibition in the current version. The current draft represents a compromise between, on one hand, states that support a full prohibition as double-hatting creates an appearance of bias that affects the legitimacy of the system and, on the other, states that advocate for full disclosure because double-hatting creates a problem of independence and impartiality.

A portion of the panel welcomed the departure from disclosure as a solution to the double-hatting challenge while others stressed that disclosure, captured in Article 10 of the draft Code, still has a role to play in the issue. Although the current draft shows a compromise between states, one must bear in mind that the drafting process was conducted entirely remotely, which led to fewer interventions than typically seen at in-person debates. One can hope that the in-person meeting of WGIII scheduled for September 2022 will help assess whether there is a consensus on the role of disclosure. In any event, the Code would benefit from clearer links between Articles 4 and 10, especially Article 4(2) which is (for now) not subject to party autonomy.

 

What Comes Next for the Code of Conduct

The current draft was released for public consultation and will be further discussed in the next Working Group III session, tentatively scheduled for 19 to 23 September 2022 in Vienna. The panelists anticipate preparing a submission to WGIII capturing the night’s discussions in an effort to drive consensus. The Code is expected to be finalized in 2023.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Are Investment Treaties “Zombies”, Unfit for Decarbonization Purpose?

Mon, 2022-08-01 01:02

States’ international obligations to reduce emissions, on the one hand, and to protect foreign investment, on the other, suggest a collision course between climate activists’ desires and foreign investors who rely on treaty protection to safeguard their investments.

Recent investment treaties, especially bilateral investment treaties (BITs) have tended to expand the rights of States to police environmental and labor harms. Whether they have kept up with the Environmental Social Governance (ESG) movement, the Paris Agreement, and post-Conference of Parties (COP) 26 developments raises considerable questions. Specifically, to what extent are past treaties themselves Zombies, unfit to accomplish the Paris Agreement’s Objectives of reducing emissions to reduce climate change to less than 2° Celsius?

Background

The 2022 agreed-upon-in-principle modernization of the Energy Charter Treaty (ECT) has attempted to address this costly dilemma. Two key elements stand out:

One, a “flexibility mechanism” whereby Contracting Parties – based on an ECT Conference’s decision – could “exclude investment protection for fossil fuels in their territories, considering their individual energy security and climate goals”. Two, a stand-alone clause reiterating and strengthening “the right of Contracting Parties to regulate within their territories (…) in the interest of legitimate public policy objectives (which) may include the protection of the environment, including climate change mitigation and adaptation”, etc. It is not clear whether this right to regulate will exonerate a host State from liability. Absent an express exclusion of liability, clauses reiterating the State’s power to regulate in certain areas may not carry such effect.

This starkly raises questions as to whether numerous existing BITs and other Treaties with Investment Provisions (TIPs) should be assessed for perceived structural defects or extant conflicts. Such exercise could create conflict or tensions with foreign investment protection, given the Paris Agreement and related laws, as well as climate and ESG movement awareness and related events.

Importantly, recent treaties (and model treaties) already appear to be more inclusive of States’ concerns regarding protecting the environment and mitigating climate change, although the two aspects may not be identical concepts. Earlier investment protection treaties (or rules), however, typically impose no or few environment or climate change-related obligations on foreign investors. Climate change mitigation and adaptation laws and norms may therefore clash with protected rights of foreign investors. This could raise two potentially central issues for arbitral tribunals to potentially contend with, i.e.,  jurisdictional maneuvering and applicable law positioning.

Lastly, it highlights the fact that the discussion on the supremacy of international law over domestic law or, generally, the interaction of these two systems, is an ongoing one, and of strong potential relevance.

From Old to Modern

The interrelated law and public policy aspects point to two questions: How will investment treaties hold up as an instrument under the scrutiny of climate activists? Are these treaties indeed fit for purpose in a world in which social costs are argued to require recalibration to include climate protection?

Prior treaties, with a range of generations and language choices within each reflect more consideration of climate-related aspects over time. How this plays out in individual cases depends, and is likely to become more contentious as climate costs loom larger.

Reformed treaty drafts, given varying bargaining and costs, could also default to the middle path of constructive ambiguity to position themselves between alignment and arbitrage. This may accommodate various interests in architecture, but also potentially leave troubling gaps for arbitral tribunals to fill. This may even apply to the ECT modernization reform, depending on language and interpretative rules used.

In ISDS practice, notions of economic harm are impacted by evolving understandings of the environmental and climate interplay, and laws regarding the scope and definition of what is considered materially relevant.

Alignment, Ambiguity, Arbitrage in Treaty Architecture

Treaties are structured as compromises between competing interests. Earlier generation BITs typically focused more on safeguarding legal certainty so that capital flows of foreign investment could thrive in the host State. The assumption was that the host State’s judicial institutions could treat foreign investors in an unfavorable manner and was also based on concerns about various expropriation types and fair and equitable treatment over the life of an investment. Recent investment treaties (i) expand the host State’s regulatory powers, in order “to achieve legitimate policy objectives”, which expressly includes regulations “addressing climate change and (ii) dissuade States from relaxing domestic health, safety or environmental measures in order to attract foreign investment. Some model BITs, such as the Colombia Model BIT 2017, go further, by expressly designating as mandatory rules all “prohibitions established in international instruments, to which any Contracting Party is or becomes a party, pertaining to human rights and the environment”.

Still, this challenges the evolving concerns of climate activists as harm is typically foreseeable in the future, but – it is argued – may not have been contemplated in past “deals”. On the other hand, a narrower concern of the host State’s right to regulate could restrict State action to varying degrees, causing regulatory chill.

Public Policy: Interpretations, and the End Game

Much of the climate agenda is about how society absorbs the social costs of paying for decarbonization (Who pays?). At present and for many years, ISDS has increasingly come under scrutiny as a legal and economic institution that may not produce just societal outcomes. If treaties are viewed only or primarily as vehicles for compensation to corporations, it becomes open to the view that it is structurally speaking, a protection racket for MNC’s or a creature of dependent development. On the other hand, host States’ arbitrary and harmful conduct against foreign investment has been proven time after time, and MNCs may consequently draw inward toward friendlier locales, ignoring jurisdictions with too high a financial cost, if perceived as too geopolitically risky.

The persistent tension between foreign investment protection and a costly decarbonization is likely to expand. The challenge for decision-makers is how to maintain the relevance of the former as a remedy to facilitate investment that serves both States’ interests and those of foreign private investors. Absent specific rules/guidelines concerning interpretation and application of  BITs, such as interpretative protocols signed by the parties to a BIT, for example, or “subsequent practice” between two given States, as per Article 31.3(b), Vienna Convention on the Law of Treaties (VCLT), a “gap” seems presented.

Treaty architects and arbitrators must consider the risks of this evolving situation from their own perspectives. Issues such as sunk costs, rents/corruption, foreseeable harm and treaty language, the scope of ESG, parent-subsidiary relationships and liability, and evolving concepts of attribution science, and of legal, accounting, and sustainability components of material economic harm are implicated here.

The 1969 VCLT, which favors harmonization and systemic integration of applicable international rules, may offer a way out. This is provided arbitrators adopt an expanded notion of public international law, by applying treaties and sources of international law other than the BIT at hand.

Such sources, together with other agreements and practices between the State parties on the interpretation of the BIT in question, form part of “the relevant rules of international law applicable in the relations between the parties” to which Article 31.3(c) of the VCLT refers when it provides such rules must be taken into account when interpreting a treaty.

In practice, however, arbitrators tend to adopt a narrower, more conservative, approach, to avoid overstretching their jurisdiction under the applicable BIT. Indeed, to promote legal certainty, arbitral panel decisions should be narrowly tailored; otherwise, the bargained-for interests and expectations of the corporations investing in foreign, especially developing countries, for example, can be violated.

Public policy considerations may pose important consequences for investors. Climate change mitigation / adaptation obligations undertaken by States may be deemed to be part of the host State’s international public policy, or even transnational public policy. As such, could  it be ignored by arbitrators, with increased risk that their awards are set aside or not enforced against the host State? This can create genuine legitimacy dilemmas between traditional strict constructionists and those arguing legitimacy is threatened if public policy is not even considered.

In addition, States’ counterclaims, as allowed by Article 46 of the ICSID Convention, are tools that may be used to restore some balance in ISDS, by enforcing investors’ sustainability obligations, as some cases show. Pending any possible reform of ISDS, systemic integration of international investment law by arbitrators could help achieve this goal.

Exit, Voice, or Loyalty     

States are grappling more with climate change. The arbitration community and policy makers must strongly consider investments and capital flows that are incentivized and balanced, given legacy agreements, and reconcile them with greater awareness and demands for climate and environmental protection.

Consideration of alternate remedies and limits therein may be crucial, including litigation for various stakeholders who may have interests allied with climate but may not have standing or interests that can best, or indeed at all, be pursued through investment arbitration.

This increasingly poses the question whether litigation, which was once the alternative to avoid which arbitration was established for, becomes an inescapable route to redress. The arbitration community should ask itself whether it wishes that investment arbitration becomes more relevant or continues to be perceived by some as an asymmetrical tool that is useful for MNCs, but perhaps less so for the population.

Sum  

Our objective has been to show that investment treaties can pose “Zombie risk” as to ongoing decarbonization concerns. Arbitrators, together with party counsel, corporate foreign investors and climate activists should consider the implications of this, including the ECT modernization law reform approach.

Foreign investment protection should not be demonized, nor should it be foregone at the expense of climate change mitigation/ adaptation policy.

Key investment and climate law actors must also consider how climate has already and will in future impact treaties and ongoing disputes, so that each set of legitimate interests, i.e., those of foreign investors and those of respective affected population groups, as well as collective actors, have a voice to better resolve sometimes diverging energy investor and climate policymaker concerns.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


The Contents of the Yearbook Commercial Arbitration, Volume XLVII (2022), Upload 2

Fri, 2022-07-29 01:00

Subscribers to KluwerArbitration.com enjoy access to the ICCA Yearbook Commercial Arbitration.

The second upload of materials for the 2022 volume of ICCA’s Yearbook Commercial Arbitration is now available on the KluwerArbitration website. It consists of 33 court decisions from 14 countries and includes, among others, 11 decisions rendered by the courts of the People’s Republic of China on the 1958 New York Convention. Here are some of the highlights.

In an extensively reasoned decision, the Constitutional Court of Colombia scrutinized the constitutionality of the 2014 Bilateral Investment Treaty (BIT) between Colombia and France. It found the BIT to be constitutional on the condition that a joint interpretative declaration be adopted to ensure that the BIT complies with the principles of equality, legal certainty, and maintenance of the State’s regulatory power contained in the Colombian Constitution. The Court also indicated that it would monitor continuously whether the BIT’s interpretation by arbitral tribunals remained within constitutional limits.

Six decisions in four countries concern the enforcement of the SCC award in Stati v Kazakhstan, in which the tribunal, almost 10 years ago, had found Kazakhstan to have breached the Energy Charter Treaty. Kazakhstan since then is opposing enforcement, arguing that the award was obtained through fraud. In Belgium, the Brussels Cour d’appel found in favour of Kazakhstan. In Luxembourg, the Supreme Court reversed the Court of Appeal, which had affirmed the grant of exequatur for the award, finding that certain evidence should have been discussed in adversarial proceedings. The Court of Appeal subsequently decided to stay the proceedings pending a criminal action on the falsity or authenticity of certain documents used. In Italy, by contrast, the Corte di cassazione found that the SCC award could be enforced and was not contrary to Italy’s public policy. Similarly, in the Netherlands, the Hoge Raad allowed enforcement of the award, setting aside the decisions of the Amsterdam Court of Appeal, which had first stayed enforcement proceedings in order to await the outcome of parallel proceedings pending in England.

Finally, a decision of the Supreme Court of the Czech Republic is of note. In it, the Court found that arbitration agreements could be concluded in an exchange of emails even without qualified electronic signature. Emails, the Court explained, fulfilled the requirement that the agreement be in writing within the meaning of Art. II(2) of the New York Convention. The reference to “letters” and “telegrams” in Art. II(2) was illustrative rather than exhaustive and included other forms of communication.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Can a Legacy Investment Claim Be Made under the USMCA for Measures that Were Adopted after the Termination of NAFTA?

Thu, 2022-07-28 01:01

This question of first impression under the United States-Mexico-Canada Agreement (USMCA) has been brought to the fore with the spring 2022 publication of the Request for Arbitration (“Request”) submitted by TC Energy Corporation and TransCanada PipeLines Limited against United States (dated November 22, 2021) and the Notice of Intent (“Notice”) submitted by Alberta Petroleum Marketing Commission against the United States (dated February 9, 2022). These claims relate to the revocation, on January 20, 2021, of the presidential permit for the building of the Keystone XL pipeline, a measure adopted after the termination of the North American Free Trade Agreement (NAFTA) on June 30, 2020.

Whether an investor-State arbitration tribunal has jurisdiction to hear a “legacy investment claim” brought by investors under these circumstances has particular significance in relation to claims made by Canadian investors against the United States and claims made by U.S. investors against Canada. Indeed, after a transition period of three years such claims will no longer be permitted.1)The issues raised by legacy investment claims are somewhat different with regard to the United States-Mexico relationship, as new provisions apply to investor-State arbitration brought by their respective investors under the USMCA going forward, in some cases during as well as beyond the three-year transition. The Canada-Mexico relationship has yet different implications, as investor-State claims are covered under the CPTTP. jQuery('#footnote_plugin_tooltip_42240_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42240_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Annex 14-C of the USMCA providing for “legacy investment claims and pending claims” addresses some aspects of temporal application, but it does not explicitly address its coverage of measures adopted only before or also after NAFTA’s termination. Paragraph 1 of Annex 14-C provides that:

“1. Each Party consents, with respect to a legacy investment, to the submission of a claim to arbitration in accordance with Section B of Chapter 11 (Investment) of NAFTA 1994 and this Annex alleging breach of an obligation under: (a) Section A of Chapter 11 (Investment) of NAFTA 1994; (…)” (footnotes omitted)

In turn, the term “legacy investment” is defined at paragraph 6 of Annex-C as follows: “means an investment of an investor of another Party in the territory of the Party established or acquired between January 1, 1994, and the date of termination of NAFTA 1994, and in existence on the date of entry into force of this Agreement”.

The time limitation to the States’ consent is provided at paragraph 3 of Annex-C: “A Party’s consent under paragraph 1 shall expire three years after the termination of NAFTA 1994.” In other words, for claims submitted up to June 30, 2023.

As such, the Claimants in relation to the Keystone XL project, for instance, have emphasised in their respective Request and Notice the existence of their investments at the relevant times (to meet the definition of legacy investment claim) and the timing of the claims themselves. Nothing is said on the time of adoption of the measures.

Yet, a tribunal’s jurisdiction over such a legacy investment claim would depend on a determination of this question.

In this case, one might say that the “silence” is in the eye of the beholder. Indeed, much can be brought to bear on the issue, as a matter of treaty interpretation and in reliance on general principles of international law.

First, the USMCA Parties were clearly mindful of the principle of non-retroactivity of treaties (see Article 28 of the Vienna Convention on the Law of Treaties (VCLT)), when they provided the temporal scope of application of Chapter 14 (Investment) at Article 14.2(3) as follows: “For greater certainty, this Chapter, except as provided for in Annex 14-C (Legacy Investment Claims and Pending Claims) does not bind a Party in relation to an act or fact that took place or a situation that ceased to exist before the date of entry into force of this Agreement.” (emphasis added)

This provision indeed clarifies the extent to which the Parties consented to be bound for acts (in this context for measures adopted) before the entry into force of the USMCA (e.g. Koch v. Canada would fall under this category of claims).

The principle of intertemporal law also finds application as a matter of State responsibility, as reflected in Article 13 of the Draft articles on Responsibility of States for Internationally Wrongful Acts (ILC Articles), which provides that: “An act of a State does not constitute a breach of an international obligation unless the State is bound by the obligation in question at the time the act occurs.” For our purposes, however, the issue is not whether the State Parties were bound to respect the provisions of Chapter 14 in relation to measures adopted after the entry into force of the USMCA (they are),2)Indeed, the United States or Canada could have recourse to Chapter 31 (State-State) Dispute Settlement in relation to such measures. jQuery('#footnote_plugin_tooltip_42240_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_42240_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); but whether the United States and Canada provided their consent to have investors from the other State bring claims against them under the terms of Annex-C for legacy investment claims. (For recent discussions at the International Court of Justice regarding jurisdiction ratione temporis and lapses in instruments of consent, see the case of Alleged Violations of Sovereign Rights and Maritime Spaces in the Caribbean Sea (Nicaragua v. Colombia), in particular the dissenting opinions of Judge Nolte, and Judge ad hoc McRae).

Second, if the USMCA Parties had wanted to minimise discussion regarding measures adopted after the termination of NAFTA, they could have made their intentions more explicit, as was done in the Canada-European Union Comprehensive Economic and Trade Agreement (CETA) in relation to bilateral investment treaties (BITs) applicable between Canada and Member States of the European Union after the entry into force of CETA. Chapter 30 (final provisions) provides as follows:

Article 30.8 – Termination, suspension or incorporation of other existing agreements

  1. The agreements listed in Annex 30-A [i.e. the BITs] shall cease to have effect, and shall be replaced and superseded by this Agreement. Termination of the agreements listed in Annex 30-A shall take effect from the date of entry into force of this Agreement.

  2. Notwithstanding paragraph 1, a claim may be submitted under an agreement listed in Annex 30-A in accordance with the rules and procedures established in the agreement if:

      • the treatment that is object of the claim was accorded when the agreement was not terminated; and

      • no more than three years have elapsed since the date of termination of the agreement. (emphasis added)

While this text might not prevent all debates (as one can imagine arguments related to continuing or composite acts playing out), it has the benefit of addressing the issue explicitly.

In our case, tribunals facing the question of temporal application would rely on principles of treaty interpretation to ascertain the intentions of the USMCA Parties, considering “the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose” (under Article 31 VCLT).

Potential considerations for tribunals when interpreting Annex 14-C:

  • In relation to the definition of “legacy investment” provided at para. 6 (cited above):
    • What should be read into the fact that the Parties focused on investments made between the entry into force of NAFTA on January 1, 1994 and its termination on June 30, 2020 and in existence as of July 1, 2020? Presumably, the Parties wanted to respect the expectations created in NAFTA investors that their investments would benefit from protection for the duration of the agreement, including access to ISDS (while limiting the protection to current as compared to past investments).
  • In relation to the Parties’ consent with respect to legacy investment claims provided at para. 1 (cited above):
    • What should be the import of footnote 21 providing that: “Mexico and the United States do not consent under paragraph 1 with respect to an investor of the other Party that is eligible to submit claims to arbitration under paragraph 2 of Annex 14-E (Mexico-United States Investment Disputes Related to Covered Government Contracts).” Consistent with the Article 14.2 scope provision at paragraph 3 (cited above), for an investor to be “eligible” to submit a claim under Annex-E, the challenged measures would have to be adopted after the entry into force of the USMCA. This text would seem to imply that such challenges can be made also under Annex-C, otherwise there would be no need for the exclusion in the footnote. However, this interpretation puts into question why investors under Annex-D (Mexico-United States Investment Disputes) would have a choice of recourse (between Annex-C and D) for three years, while those under Annex-E do not? Put differently, since Annex-E provides broader and fuller protection to admissible investors than Annex D, why would those falling under the latter have access to the preferable mechanism of Annex-C (i.e. NAFTA) in the transition period?
  • In relation to the three years time limitation to the States’ consent provided at paragraph 3 (cited above):
    • What should be read into the fact that the three years time-bar mirrors the architecture for claims provided under NAFTA Chapter 11? One reading is that the Parties wanted to reproduce the same mechanism as operated under NAFTA Articles 1116 & 1117. In other words, whether an investor became aware of the breach and damages arising from it on June 30, 2017 or June 30, 2020, it would have the same period of three years to submit its claim. This would seem internally consistent with the objective of the provision. However, if the provision is read to allow claims for legacy investments to be made for measures adopted after the termination of NAFTA for a period of three years, this would mean that an investor would have less time to make its claim with every passing day. For example, an investor could complain of a measure that has yet to be adopted, say in late 2022, and as long as it respects the deadlines under NAFTA Articles 1119 (90 days) & 1120 (6 months), it could still validly submit a legacy claim.
    • Contrary to the point made above in relation to the (legitimate) expectations of existing investors, in the case of United States-Canada claims, the effect of such an interpretation would be to provide investors protections for measures adopted after ISDS was no longer supposed to apply between the Parties, i.e., after the termination of NAFTA.

 

Conclusion

The tribunal or tribunals constituted to hear the legacy investment claims related to the Keystone XL pipeline may be the first to have to rule on a ratione temporis jurisdictional objection based on the fact that the revocation of the presidential permit at issue occurred after the termination of NAFTA. As discussed, recourse to applicable rules of international law, including the VCLT, will help the tribunal(s) interpret the silence left by the Parties. As needed, recourse could be had to supplementary means of interpretation under VCLT Article 32, including consideration of the circumstances of the USMCA’s conclusion. The USMCA Parties could also adopt a binding interpretation of Annex-C via the Free Trade Commission (FTC). Such a prospect raises politically and legally sensitive issues, as the NAFTA Parties found out with the FTC’s 2001 Interpretation of NAFTA Article 1105.

So much for the wish expressed by the USMCA Parties in their transitional provision from NAFTA 1994 at Article 34.1 that: “The Parties recognize the importance of a smooth transition from NAFTA 1994 to this Agreement.”

 

* The author would like to thank Christian Schmid for his research assistance and the LLM students in her 2022 International Economic Law Case Studies Course for lively discussions of this topic.

References[+]

References ↑1 The issues raised by legacy investment claims are somewhat different with regard to the United States-Mexico relationship, as new provisions apply to investor-State arbitration brought by their respective investors under the USMCA going forward, in some cases during as well as beyond the three-year transition. The Canada-Mexico relationship has yet different implications, as investor-State claims are covered under the CPTTP. ↑2 Indeed, the United States or Canada could have recourse to Chapter 31 (State-State) Dispute Settlement in relation to such measures. function footnote_expand_reference_container_42240_30() { jQuery('#footnote_references_container_42240_30').show(); jQuery('#footnote_reference_container_collapse_button_42240_30').text('−'); } function footnote_collapse_reference_container_42240_30() { jQuery('#footnote_references_container_42240_30').hide(); jQuery('#footnote_reference_container_collapse_button_42240_30').text('+'); } function footnote_expand_collapse_reference_container_42240_30() { if (jQuery('#footnote_references_container_42240_30').is(':hidden')) { footnote_expand_reference_container_42240_30(); } else { footnote_collapse_reference_container_42240_30(); } } function footnote_moveToReference_42240_30(p_str_TargetID) { footnote_expand_reference_container_42240_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_42240_30(p_str_TargetID) { footnote_expand_reference_container_42240_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
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


The Pechstein Saga Continues: The German Federal Constitutional Court Grants Another Round on the Rink

Wed, 2022-07-27 01:05

The arbitration world’s most famous ice skater, Claudia Pechstein, has won a stage victory in her long-lasting and widely discussed struggle against the international sports arbitration system. On June 3, the German Federal Constitutional Court (Bundesverfassungsgericht (BVerfG), Beschluss vom 3.6.2022, 1 BvR 2103/16) sided with Pechstein in her constitutional complaint against a ruling of the German Federal High Court of Justice. In essence, the BVerfG ended up reviving a more than ten-year-long legal dispute that so far was already heard by the Court of Arbitration for Sport (CAS), six state courts in Switzerland and Germany and the European Court of Human Rights (ECtHR). This post offers a brief background to this protracted legal saga, diving first into the history of the dispute (I), then turning to her ECtHR and BVerfG actions (II) before commenting the BVerfG decision (III).

 

I) A Brief History

Claudia Pechstein is a well-known German speed skater and a five-time Olympic champion. Following a doping test at the 2009 World Allround Speed Skating Championship in Hamar (Norway), the International Skating Union (ISU) suspended her for two years from international competitions. The test had revealed an elevated reticulocyte count in her blood, which can point to blood doping with EPO. Pechstein contested her suspension at the CAS, claiming that the count was elevated due to an inherited blood disease. The CAS first dismissed Ms Pechstein’s request for a public hearing (the CAS procedure did not provide for that at the time), and then it dismissed her claim. Pechstein’s attempts to have the CAS award set aside by Swiss courts were unsuccessful. She then sued the ISU for damages before German courts, claiming that the ISU had abused its monopoly for major ice-skating competitions by making her sign an arbitration clause in favour of the CAS, which, as she claimed, was not independent.

The case got interesting when the German District Court of Munich (LG München I) declared a part of Pechstein’s action admissible instead of rejecting it on the spot, as art. 1032 para. 1 of the German Code of Civil Procedure (ZPO) would so require if the parties have signed a valid arbitration agreement. In the eyes of the court, the agreement was void for violating competition law (Sec. 19 GWB, German Restriction of Competition Act) as Pechstein had to sign it in order to participate in Hamar, putting the ISU in a dominant market (or rather monopoly) position. The court found that the ISU had abused this position by requiring athletes to sign an arbitration agreement in favour of the CAS, stating that this was not a neutral forum because the appointment procedure for CAS arbitrators put athletes at disadvantage over their opponent, the ISU. It therefore threw out the arbitration agreement and allowed Pechstein to pursue her case in state court. The court did, however, reject Pechstein’s damage claim on the merits, leading her to appeal to the Higher Regional Court of Munich (OLG München), where the judgment (including its controversial part on the arbitration agreement) was confirmed.

The OLG München decision set off alarm bells in the arbitration community, with some voices (especially her lawyer) even predicting the demise of international sports arbitration. Relief came when the German Federal Court of Justice (Bundesgerichtshof) (BGH) decided on final appeal to quash the earlier judgment, to enforce the arbitration agreement and thus to declare Pechstein’s claim inadmissible. The court did criticise a certain imbalance in the rules of the CAS. It, however, held that the CAS was neutral enough to be deemed an arbitral tribunal in the sense of Sec. 1032 (1) ZPO and that its award therefore had to be respected. Pechstein’s journey into the foundations of international sports arbitration seemed to be over at this point.

 

II) First the ECtHR Had Its Say, 4 Years Later the BVerfG

Setbacks did not stop Pechstein, being every bit as competitive as she probably must be, from taking the case to the BVerfG and to the ECtHR. The ECtHR ruled first and, on the one hand, awarded Pechstein a minor compensation for not having been granted a public hearing before the CAS (in violation of Art. 6 European Convention on Human Rights (ECHR)), but rejected all other claims. The BVerfG, on the other hand, took much longer to decide, with the case pending before it for more than six years. This is somewhat surprising, as the standard of scrutiny of the BVerfG is very limited. Not being an appellate court, the BVerfG only verifies whether preceding courts have violated constitutional law (i.e., the German Basic Law, Grundgesetz) while rendering their decision. For this und other reasons, constitutional complaints are rarely successful. In Pechstein’s case, it all came down to the question whether the preceding BGH had misapplied Sec. 1032 ZPO (and therefore violated its obligation to adhere to the rule of law, Art. 20 (3) Grundgesetz) and, as a consequence thereof, had denied Pechstein her access to justice guaranteed by Art. 19 (4) Grundgesetz.

In its long-awaited ruling, the BVerfG quashed the judgment of the BGH and remanded the case to the OLG München.

 

III) BVerfG’s Decision: Analysis and Implications

The linchpin of this decision is, somewhat unexpectedly, the public nature of court proceedings. The BVerfG found that the preceding court had failed to give this principle sufficient consideration when balancing freedom of contract, the autonomy of associations like the ISU and access to justice (para. 34 of the judgment). Like the ECtHR, the BVerfG found that Ms Pechstein was denied the right to a public hearing in violation of Art. 6 EChHR (para. 35). Instead of awarding a small compensation however, the BVerfG found that this throws the decision of the preceding court out of balance, necessitating its vacation.

While it emphasized that the access to (state court) justice does not preclude arbitration per se (para. 39), the BVerfG found that the specific setting of sports arbitration had to be considered, especially the imbalance of power between associations and athletes that triggers the application of competition law (para. 41). Given that under these circumstances a public hearing would have been mandatory according to Art. 6 ECHR (paras. 42-50), an arbitration clause that provided for proceedings without such a hearing was void for violating German competition law (Sec. 19 GWB) and could not be invoked in state court proceedings (Sec. 1032 (1) ZPO (para. 51)). Having declared the arbitration agreement void for this reason, the BVerfG refrained from deciding on the question of neutrality of the CAS that had concerned the preceding courts. It merely stated that neutrality is “part of the nature of judicial activity”, whether in state court or in international arbitration (para. 53).

Although the BVerfG vacated the judgment for a slightly different reason than was to be expected after the judgments of the preceding courts, it drew upon the same juxtaposition of party (and association) autonomy and access to justice, with competition law serving as a link between the two: An arbitration agreement is invalid, if it is imposed on one party in a way that constitutes an abuse of a dominant position (Art. 102 TFEU/Sec. 19 GWB). The agreement is abusive, if the arbitral proceedings do not provide for a public hearing although this would be required by Art. 6 ECHR.

Does this mean that from now on, public hearings will become mandatory in sports arbitration? Probably yes, and the CAS has already amended its rules to allow public hearings if the dispute is of a disciplinary nature (R57, CAS Rules 2021). Will public hearings also be mandatory in commercial arbitration? Rather not, given the required imbalance of powers and the narrow scope of Art. 6 ECHR. In the Pechstein case, the ECtHR considered that Pechstein was “penalised for doping”, that “the facts were disputed and the sanction imposed on the applicant carried a degree of stigma and was likely to adversely affect her professional honour and reputation” (ECtHR judgment, para. 182). A comparable situation is unlikely to present itself in commercial arbitration.

 

IV) Concluding Remarks

Whether or not the next court (OLG München again) will finally enter into the (long forgotten) merits of the case, namely the question whether Pechstein was wrongfully suspended 13 years (!) ago, there is already an important takeaway from the Pechstein saga: If arbitration proceedings are to be regarded as equal to state court proceedings, they must provide for due process. Due process requirements increase when the parties do not have the same bargaining power. The “weaker” party has to be protected, whether in state court proceedings or in arbitration proceedings. After all, such a party is just as likely to win the case as a party that brings more bargaining power to the table. A recent example for this truism is Pechstein herself: Although participating in Beijing 2022 as the oldest female athlete ever to compete at the Winter Olympics (aged 49), she still managed to outrun most of her younger competitors, finishing 9th on the Women’s Mass Start as the best German participant.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Arbitration Meets M&A Transactions in Difficult Times: 6th Edition of the “Dispute Resolution in M&A Transactions” Conference in Warsaw

Tue, 2022-07-26 01:53

On 26-27 May 2022, a record turnout of over 200 experts from around the world gathered in Warsaw for the sixth iteration of the “Dispute Resolution in M&A Transactions” Conference. It has become the world’s largest event on M&A dispute resolution – thanks to the involvement of Prof. Beata Gessel-Kalinowska vel Kalisz, the Conference chair. Over two days, legal professionals were debating complex subjects, including: recent changes in M&A landscape, consolidation and de-consolidation in M&A arbitration, the idea of procedural and substantive justice as well as M&A issues in investment arbitration. The topics were legally challenging and of considerable practical relevance, supported by interesting case law.

 

Meeting in Difficult Times

This year’s edition was exceptional for several reasons. It was one of the first in-person arbitration events after the COVID-19 pandemic. Of course, the joy of the ‘live’ meeting was dampened by the current situation in Ukraine. Welcoming remarks for the Conference participants were recorded by Olena Perepelynska, President of the Ukrainian Arbitration Association.

Claudia Salomon, the President of the ICC International Court of Arbitration, discussed the need for mutual assistance and support within society, also in crisis situations such as the war in Ukraine, in her inspirational opening speech. She reminded us that the very roots of civilization comprise of looking out for one another and talked about the values on which the ICC dispute resolution mechanism is based – inclusion of marginalised groups, such as people with disabilities, and promoting a culture of equality in all possible areas.

 

Hot Topics in M&A Arbitration

The first panel of the Conference, moderated by Prof. Dr. Kasper J. Krzemiński (NautaDutilh), provided a round-up of hot topics in M&A arbitration around the world. The panellists (Dr. Galina Zukova, ZUKOVA Legal; Edward Poulton, BakerMcKenzie; Dr. Nicolas Wiegand, CMS Hasche Sigle; and Tunde Ogowewo, King’s College London) discussed the changing M&A landscape, starting with many failed negotiations and aborted deals as the COVID outbreak wreaked havoc, proceeding into the 2021 M&A boom, which might now be followed by a wave of disputes. The audience was also provided with partial results of an interesting survey conducted by Baker McKenzie on M&A arbitration disputes. Some of the conclusions were highly surprising. For instance, the examination of arbitration awards identified no MAC clause disputes. Are MAC clauses so watertight these days? Or, maybe, we are in for a deluge of MAC disputes soon?

The speakers did not hold back from complex procedural topics, including the controversial issue of whether a tribunal should share its preliminary views with the parties and, if so, in what circumstances. It seems that any reasonable answer must include the very lawyerly phrase “it depends”.

 

To Consolidate or not to Consolidate?

The second panel, led by Justyna Szpara (Łaszczuk & Partners), focused on an issue characteristic to M&A disputes: consolidation and de-consolidation of arbitration proceedings. The panel featured Dr. Ioana Knoll-Tudor (Jeantet), Anna Guillard Sazhko (Shearman & Sterling), Nikolaus Pitkowitz, M.B.L.-HSG (Pitkowitz & Partners) and Rostislav Pekař (Squire Patton Boggs). The discussion centred around a case study involving three contracts (a guarantee agreement, an IP transfer agreement, and an SPA) with three different arbitration clauses. The case study was initially straightforward, but acquired successive layers of complexity from each speaker during the panel preparation. The panel considered inter alia situations in which: (i) the seller initiated an arbitration for payment against the target, which made a counterclaim and requested joinder of other parties; or (ii) two buyers were about to initiate arbitration against the seller, which, in turn, had a potential claim under the guarantee agreement. We were able to consider many scenarios for possible consolidation under, inter alia, ICC and VIAC Rules.

 

Do Principles of Equity Colour M&A Arbitration Jurisprudence?

Next, Prof. Beata Gessel-Kalinowska vel Kalisz (GESSEL) made a compendious introduction to the third panel, presenting differences between the notion of procedural and substantive justice and opening the way for a discussion between the panellists Prof. Ilias Bantekas (Hamad bin Khalifa University), Prof. Dr. Stefan Kröll (Bucerius Law School), and James Menz (rothorn legal). The speakers discussed how much the principles of equity colour M&A arbitration jurisprudence. This subject, seemingly theoretical, has significant practical meaning in arbitration proceedings. What is the role of substantive law in decision-making process? What are the parties’ expectations in this regard? How can arbitrators without legal training apply substantive law? During the discussion, it was even considered that, even if the arbitrators are required to apply substantive law, there are no sanctions for not complying with this requirement.

 

Multiparty Multicontract Arbitrations

The first Conference day ended with a keynote speech of a true arbitration star – Bernard Hanotiau (Hanotiau & van den Berg). The subject of the keynote perfectly reflected the complexity of M&A disputes and concerned two main issues: (i) to what extent can an individual / a company which is not a signatory to an arbitration agreement be a party to arbitration; and (ii) when arbitration is initiated under several agreements, to what extent does the tribunal have jurisdiction to decide issues arising under these various agreements? Mr Hanotiau discussed the questions by going through a selection of case law, coming to some interesting conclusions, e.g. that the determination of whether an arbitral clause should be extended to other companies of a group or to its directors / shareholders is more focused on facts than on law. The law does not necessarily play a major role in the final determination of non-signatory issues. There is also an agreement that the existence of a group of companies is not per se a sufficient element to allow the extension of an arbitration agreement to a non-signatory.

Mr Hanotiau emphasized that courts and arbitral tribunals, in the absence of an agreement between the parties, will generally refuse to join proceedings under one arbitration clause, when several proceedings contain truly incompatible dispute resolution clauses, unless it undoubtedly appears that all the disputes fall within the scope of the relevant arbitration clause.

 

Investment Arbitration: Recoverability of Reflective Loss

On the second day, the first panel kicked off with introductory remarks by Agnieszka Zarówna (White & Case) who presented the concept of reflective loss in investment treaty law. The discussion revolved around awards in Strabag SE v. Libya and Bilcon of Delaware et al v. Government of Canada. Prof. Marcin Kałduński (General Counsel to the Republic of Poland) led the panel discussing this issue with Christina Beharry (Foley Hoag) and Dr. Crina Baltag (Stockholm University). Prof. Beharry spoke about the current treaty practice in bilateral and multilateral investment protection treaties concerning the efforts to exclude and/or limit the recovery of reflective loss. She also commented on the general unavailability of recovery of reflective loss in domestic legal systems and considered remedies currently available under investment protection mechanisms and outside international law. Dr. Baltag presented the current work of the UNCITRAL Working Group III on this topic and pointed out that the multilateral investment court is a response to the perceived shortcomings of the judicial systems in many countries.

 

New Type of M&A Investment Arbitration: Emerging Energy Transition Disputes

The second panel revolved around emerging energy transition disputes. The discussion was introduced by Agnieszka Ason (Oxford Institute for Energy Studies), followed by a panel moderated by Prof. Dr. Yarik Kryvoi, LL.M. (British Institute of International and Comparative Law) with the participation of Steven Finizio (WilmerHale) and Dr. Boaz Moselle (Compas Lexecon). The panellists discussed how energy transition disputes are now considered to be the new type of cases in M&A investment arbitration. The speakers highlighted that there is a growing number of disputes related to investments in carbon reduction technologies and linked to carbon offset credits. The discussion revolved around (1) environmental taxes and regulatory changes, (2) measurement, reporting, and verification of GHG emissions, (3) emission reduction technologies such as carbon capture and storage, and (4) protection of investments linked to carbon offset credits. The panellists explained that there is growing pressure on energy players to improve their environmental performance. They highlighted the fact that stranded fossil-fuel assets translate to major losses for investors in advanced economies and made clear that, in the M&A context, the push towards decarbonization creates an incentive to make certain moves, such as divesting legacy oil and gas assets or acquiring cleaner energy business. Many of these transactions involve foreign investment and government support. Therefore, they are exposed to the risk of regulatory changes and, likely, are a breeding ground for disputes.

The discussions during the Conference were accompanied by four case studies presented by White & Case, Dentons, Quantuma and Queritius with a convincing illustration of how multi-stranded M&A disputes can be. They picked up on a variety of topics, ranging from emergency arbitrators, through the multiple roles of an expert, ending with the issue of arbitrating with sanctioned entities.

The participants seemed to agree on one thing: the event was an excellent opportunity to deepen their arbitration knowledge and hone a practical approach to M&A disputes, benefit from inspiration and invigoration by invited experts, and to network with arbitration practitioners from around the world (finally in person!).

 

The 7th edition of the Conference will be held in Warsaw on 23-24 May 2024 – mark your calendars now!

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Balancing Interests in the Renewable Energy Sector Through a Radical Change Criterion: Let the Wolf Guard the Hen House?

Mon, 2022-07-25 01:00

The Spanish Cases Saga illustrates the arduous task of balancing the host state’s right to regulate and an investor’s economic interests. This post summarizes the tribunal’s reasoning in Novenergia v. Spain and Stadtwerke nchen v. Spain regarding FET breaches in the energy sector. The post argues that the latter case adopts a clearer analysis of FET breach which should be adopted for renewable energy related cases going forward. In particular, the analysis in Stadtwerke concerning legitimate expectations and radical legislative  policy changes, offers a viable method for balancing investor and state interests regarding renewable energy investments. To develop this argument, this post first explains the difference between expected and unexpected or radical changes in a host state’s legal framework under the FET obligation. Second, it introduces the theory of efficient breach to explain how this concept assists in explaining how tribunals should balance competing interests. Third, the post exemplifies this theory in practice by reference to the reasoning of the tribunal in Stadtwerke nchen v. Spain.

 

 

I. FET Breach: Expected versus Radical or Unexpected Changes

The investment dispute in Novenergia v. Spain derives from the changes implemented by the Country in its renewable energy sector. In 2007, in reliance to Spain’s regulatory incentives, Novenergia built eight photovoltaic projects in the country. Later, in 2014, Spain rolled back on its Feed-in Tariff (FiT) incentives arguing that this measure was necessary to achieve economic sustainability of the market. Novenergia claimed that it had legitimate expectations of regulatory stability and that this sudden change to the regulatory framework violated the fair and equitable treatment (FET) standard under the Energy Charter Treaty (ECT, Treaty). (paras.153-155). The Tribunal engaged with similar cases, namely Isolux, Eiser and Charanne, and sided with Spain, concluding that Article 10(1) of the ECT does not grant investors, ipso lege, a legitimate expectation for a regulatory framework of a particular industry to remain unchanged (paras. 685-688). Despite this initial assertion, the tribunal in Novernergia ruled against Spain, arguing that the investor had legitimate expectations of stability that arose from other government actions and assurances (para.695, 697, 860)

The ruling in Novenergia v. Spain is consistent with that of Antaris v. Czech regarding the expectations of an investor to a fixed regulatory framework. In the latter case, the tribunal determined that the investors in the solar energy market in Czech Republic should have known that they were investing in a bubble market and, thus, could not have expected the regulation of the market to remain unchanged. Instead, the tribunal noted that press and industry discussions indicated that a change was likely, such that any specialist professional would have been aware that eventually the host state might withdraw their initial incentives (para 434).

In both Novenergia and Antaris, the tribunals held that a prudent investor cannot have legitimate expectations for an absolutely stable regulatory regime. Instead, investors must anticipate expected changes” in the form of regulatory measures (Antaris para. 360, Novenergia para.688)

The arbitral tribunal in Novenergia went further than that in Antaris and outlined the limits of a state’s right to regulate. It attempted to determine whether the host state measures constituted a fundamental, radical, or unexpected change. Ultimately, the tribunal held that “radical or unexpected changes” causing severe economic impacts for investors, despite not entirely obliterating the claimant’s investment, would constitute an FET breach. Nonetheless, the tribunal also noted that the economic effect on the claimant’s investment, while an important factor, is not the only factor to consider when conducting a balancing test under the FET standard (para. 694).

 

II. Efficient Breach: Balancing Interests to Assess Whether a Change is Radical, Unexpected, or Efficient

In his most recent book, Federico Ortino explains that a balancing test is often used by arbitral tribunals to clarify what constitutes a radical or unexpected change (see p. 40). Ortino draws a sharp distinction between an “unreasonable or disproportionate change versus a “strict sense regulatory change”. The author notes notes that these distinctions arise from the different notions of legal stability, where a strict notion of legal stability would entail that any regulatory change would amount to an FET breach, whereas a soft notion of regulatory stability demands the tribunal to conduct a balancing test on the merits of the regulatory reform to determine the fairness and reasonableness of the measure under review (see p.41).

At this point, it is necessary to consider why a balancing approach is even desirable. In terms of efficiency, according to the theory of efficient breach, a host State’s measure leading to an investor’s “sacrifice” must bring about a greater benefit to be considered legitimate. Even if there is no adequate compensation (which Kaldor-Hicks calls hypothetical compensation), the host State’s measure is still efficient in terms of net benefits if the benefits outweigh the costs. This efficiency approach leads to a cost-benefit analysis and encourages the consideration of implementing less intrusive measures, and thus, fosters a balancing of different competing interests. In this regard, Thorge F Leander Ketelhodt argues that the FiT framework in the renewable energy sector provides the highest incentive scheme for foreign investors by creating a low-risk regulatory environment through a market-independent fixed FiT price of long duration, commonly, for the entire life of the project. However, as the author notes, the flip side is that the initial circumstances are likely to vary fundamentally throughout the life of the investment. The contract equilibrium may decline, and the host State should have the right to modify the circumstances relevant to the contract within a reasonable limit. That limit cannot purely originate from the investor’s expectations but must be based on an overall balancing of multiple factors.

For these reasons, the Tribunal’s decision in Novenergia v. Spainregarding the need to balance competing interests- is not convincing; since it ultimately favored a test that focused on the economic impact of the measure on the investor, while ignoring the pressing needs of policy adjustment in the name of public interest in Spain at the time. The FET language in Article 10(1) of the ECT suggests that the Treaty favors a strict notion of legal stability. Nevertheless, in Novenergia, the tribunal seems to interpret the FET clause as favoring a soft notion of legal stability, requiring the tribunal to conduct a balancing test. Yet, it is still questionable the extent to which the ECT calls for a balancing test and to what extent an ECT tribunal should consider competing interests. Nevertheless, the balancing test in the ruling of Novenergia, assigned the heaviest weight to the economic impact on investor, affecting its initial intention to commit to the soft notion of legal stability.

 

III. Efficient Breach and Balancing Interests in Practice: Stadtwerke München v. Spain

The tribunal in Stadtwerke München v. Spain carried out a comprehensive balancing test to evaluate the economic impact of the regulatory measures on the foreign investor, beginning with the analysis of whether Spain had acted in bad faith when modifying its FiTs scheme. Since the investor has “asset specificity”, the host country  has a dominant position to change its regulatory framework. This may lead to a classic bait and switch” behavior. The Tribunal discussed Spain’s behavior thoroughly and ruled that Spain did not modify its FiT regime in bad faith. (para 319-323)

Further, considering the investor’s plea, Spain could have increased electricity prices to protect the renewable energy sector. In this case, the Tribunal carried out a subtest of the proportionality test to determine whether – considering the Spain’s domestic context – was there a less damaging alternative it could have adopted?

By indirectly assessing two measures – (i) increasing electricity prices or (ii) cutting off incentives (FiT) – the Tribunal rejected the investor’s argument and held that Spain’s measures were reasonable. The latter outweighed the former. Presumably, the marginal benefits generated for electricity consumers (in addition to the benefits of reducing the host country’s budget deficit) were more important than the marginal costs to foreign investors due to modifying FiT incentives.

As Ortino argues, under a soft notion of legal stability, an FET violation would not be established because of a detrimental change in the host State’s legal framework but because such legal change will be deemed “unreasonable”(p.32). The reasonableness analysis will thus examine the merits of the regulatory change. The Tribunal in Stadtwerke found that Spain’s regulations from 2010 did not radically change the legal and business environment in which investments were initially made, and that many initial incentives for foreign investors in the renewable energy sector were still maintained. Thus, the Tribunal determined that the Spanish regulatory measures were not “unreasonable” and were the only available at the time.

 

IV. Final Remarks

In renewable energy sector, due to the lack of adequate information, FiT prices may be initially set too high, creating an excess supply that will need to be adjusted sooner or later. In this regard, it is reasonable for investors to expect that they will benefit from high FiT prices only for a short-term, subject to a high probability of regulatory changes. If understood in a narrow sense, a “radical change”– such as to sustain an FET claim – would only occur when it results in severe damages to investors due to unreasonable measures taken by a host state.

The tribunals in the cited cases determined that the Spanish regulatory changes were last-resort measures; that finding, added to the reasonableness of these measures, subject to their non-retroactive application would derive in a non-breach of the FET standard. Such a comprehensive analysis in Stadtwerke v. Spain is well suited to balance competing interests in renewable energy sector.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


A Brief Comment on ALArb’s Protocol for Virtual Arbitration Hearings

Fri, 2022-07-22 01:25

While prior to the COVID-19 pandemic it was usual for international arbitration practitioners to conduct videoconferencing or telecommunications remotely for certain procedural events (i.e., initial case management conferences or witness examinations), pandemic restrictions imposed in early 2020 led to a substantial change in the way international arbitration proceedings are conducted—forcing practitioners to hold any kind of hearing exclusively on a virtual basis in order to avoid the suspension of proceedings (among countless others, the excellent articles of Maxi Scherer, Sophie Nappert and Mihaela Apostol and Sang Jin Lee and Michael van Muelken, reflect on the deep change produced by the sudden shift to virtual hearings in international arbitration).

In this context, in July 2020 the Latin American Arbitration Association (“ALArb”) chaired by Claus von Wobeser, established the Observatory on the State of Arbitration in Latin America (“Observatory”), chaired by Guido Tawil and Eduardo Zuleta Jaramillo, to monitor the development of arbitration in the region and make recommendations, propose courses of action and, in general terms, help solve pandemic-related problems related to arbitration proceedings.

Having identified a growing concern on guidance of how virtual hearings should be conducted, the Observatory launched the Protocol for Remote or Virtual Arbitration Hearings (the “Protocol”) in May 2021.

The aim of the Protocol is to serve as a guide for holding virtual hearings and to provide arbitrators, parties, arbitration centers and any other arbitration practitioner in the region, a useful tool incorporating best practices for virtual and remote hearings.

The Observatory concluded that, beyond the difficulties that may arise in a particular case, a hearing held virtually is a suitable, appropriate and safe venue for the conduct of arbitration proceedings and, to the extent organized and carried out in an orderly manner, holding a hearing virtually adequately protects the procedural rights of arbitration users — a conclusion which is consistent with the main findings of the General Report of ICCA’s project on whether the right to a physical hearing exists).

Considering the disparity of laws, provisions and regulations in the region, the Observatory sought to ensure that the Protocol contained rules capable of adjusting to the provisions and regulations in force in various jurisdictions. Since its release and a testament to its success, the Protocol has been increasingly applied in arbitration proceedings throughout Latin America.

On June 7, 2022, over a year after the release of the Protocol, ALArb held a webinar (the “Webinar”) with several leading international arbitration practitioners in the region (Guido Tawil, José Astigarraga, María del Carmen Tovar, Valeria Galíndez, Julián Bordaçahar and Sara Marzal) to review the application of the Protocol and discuss their personal experiences.

In this article, we review briefly the structure and content of the Protocol and analyze the most relevant conclusions from its practical application (as discussed in the Webinar).

 

The Protocol, its Structure and Main Provisions

The Protocol is structured in three chapters which mirror the chronological steps of any virtual hearing: (1) the preparation for the hearing and technical standards; (2) the conduct of the hearing, including the identification of the participants, rules of conduct, and examination of witnesses and experts; and (3) the post-hearing stage (mainly related to its transcription and record).

The Protocol also contains three annexes: (i) a checklist of the main issues to be considered during the different stages of a virtual hearing; (ii) a model clause to be included in agreements to prevent award challenges on the basis that the hearing was held virtually; and (iii) additional advice for successful virtual hearings.

Among its many provisions, it is worth mentioning that (i) Article I.2 (which referred to the determination of the requirements contained in the legal or conventional rules applicable to the case to held a virtual hearing) sets forth that the arbitral tribunal should discuss the possibility of holding a virtual hearing in light of the lex arbitri, the arbitration agreement and the applicable procedural rules in accordance with its obligation to issue a valid and enforceable award; (ii) Article I.3 (regarding the minimum recommended content for a procedural order or decision concerning a virtual hearing) notes, inter alia, that the arbitral tribunal should: (a) make reference to the parties’ agreement to hold the hearing virtually or to the procedural order in the absence of such agreement; (b) determine the internet connection specifications; (c) set the list of participants admitted to the hearing, their respective emails and location; and (d) make reference to the application of the Protocol; (iii) Article I.7 (related to confidentiality, privacy and security for the virtual hearing) specifies that the hearing platform shall guarantee the confidentiality of the communication, as well as the privacy and security of the information exchanged, and all the participants admitted to the hearing shall undertake, in the terms and conditions to be established by the arbitral tribunal, to keep confidential all information related to the hearing; and (iv) Articles II.2, II.3 and II.4 (regarding the moderation of the hearing, rules of etiquette and examination of witnesses and experts, respectively) provide a detailed set of rules and recommendations for the development of the virtual hearing.

While all these provisions are intended to be used as a guide and are in fact meant to be adjusted by arbitration practitioners to the particular circumstances of each case, the rules set forth in the Protocol are designed to encompass established best practices in this field.

 

Difficult Situations Posed by Virtual Hearings and Recommendations to Avoid Them

One of the first issues discussed at the Webinar related to the potential problems that different time zones may cause. Guido Tawil illustrated the problem by explaining that he was recently involved in a case in which there were more participants from more than ten different time zones. The tribunal decided to have only a few hours of hearing per day and, in some cases, to have a participant attending the hearing in very late or early hours (like at 2:00 or 3:00 am). In order to avoid these kinds of situations, it was suggested that arbitrators and parties should try to reduce their time zone differences as much as possible (for example, by having all the participants of the same party gather in a single location).

José Astigarraga pointed to another challenge of virtual hearings: The difficulties in both perceiving and expressing body language.  It was suggested that, despite the convenience of having an entire legal team gather in one place, each counsel or speaker should have his or her own camera and microphone in order to communicate as directly as possible with the arbitrators, witnesses and/or experts attending a hearing.

The matter of the location of witnesses and experts and the use of devices other than computers during virtual hearings was also addressed. Guido Tawil and Julián Bordaçahar stated that in some cases witnesses testified while driving a car or stopped at the side of a road. In one case, counsel to one of the parties shared his screen in a way that allowed all participants to see the conversations he was having through chat. With respect to these kinds of issues, it was suggested that individuals exercise additional caution when using devices other than computers during virtual hearings to ensure that all witnesses and experts are able to testify from an appropriate location if at all possible.

 

Where We Are Headed: The Future of Virtual Hearings in International Arbitration

The Webinar also addressed the future of virtual hearings. It seemed clear from all the speakers that the world will not return to the way it was before the COVID-19 pandemic and that the lifestyle changes brought by it have not sidelined legal practice. Virtual hearings are certainly here to stay, but they won’t be the rule—at least for a while.

There is no doubt that virtuality has brought many advantages to international arbitration, especially in saving travel expenses, saving time, organizing agendas, as well as being an eco-friendly option that has helped create awareness of the sheer amount of documents and resources the arbitration community uses at in-person hearings. Nevertheless, the practitioner view is still that in-person hearings and face-to-face meetings are preferred. And thus the question remains: what will international arbitration look like in the near future?

For starters, some procedural aspects that used to be in-person will probably not be held face-to-face again. This will be done with quick virtual meetings and hearings that need to be expedited such as initial procedural conferences or interim measures hearings. While expeditious, Guido Tawil noted in the Webinar that this may affect the learning process of younger practitioners in international arbitration.

However, for complex cases and hearings involving multiple testimonies and arguments, practitioners believe that in-person presence remains an advantage regarding the assessment of witness credibility and the sheer ease of human interaction. This conclusion was highlighted by Valeria Galíndez and María del Carmen Tovar, who agreed that it is reasonable to expect that in-person hearings will continue to be held principally for complex cases and for the examination of witnesses and experts.

With this scenario in mind, arbitration practitioners have learned the importance of preparation before a hearing. Today, it is necessary to anticipate the possibility of virtual hearings or at least hybrid procedures. Therefore, there is a fundamental need for the parties to discuss a protocol on the preferred conduct of any hearing.

As it was explained at the Webinar, it is a common practice in the region to have a draft prepared by the Tribunal that is submitted to the parties for their review and approval. The Protocol, as mentioned, covers most aspects of the preparation and conduct of virtual hearings. Therefore, it is strongly suggested to implement it as a set of guidelines in the initial procedural conference. Once this initial framework has been implemented, the parties will have the opportunity to tailor their arbitration and consequent virtual settings to the needs of their particular case.

 

Conclusion

Two years of online practice have left us with a variety of interesting experiences, but it has also left the international arbitration community with much-needed technological expertise. The uncertainty of knowing when a virtual hearing will be needed has become incredibly common, to the point of assuming that virtuality will be required at least once during any arbitral proceeding. Therefore, arbitrators and counsels must be prepared for the virtual environment moving forward.

As we are still learning, we can all agree that preparation is key. Practitioners are now facing tactical decisions about whether to agree to a virtual hearing and how that may impact the outcome of an arbitration. Clearly, due process, effective persuasion and cost-time efficiency are factors that come into play when tailoring the procedural aspects of both virtual and in-person hearings. As discussed in the Webinar, the Protocol has been developed to be the ‘go-to tool’ for arbitration users by providing them with guidance on the new virtual reality of legal practice. For that reason, it remains an invaluable tool for international arbitration practitioners in the region and throughout the world moving forward.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Berlin Court Finds that ICSID Arbitrations Are Immune from Achmea and Komstroy – At Least While They Are Ongoing

Thu, 2022-07-21 01:23

Germany found itself as the hotseat of the “battle” between EU law and investment arbitration in May 2016 when the Federal Court of Justice (Bundesgerichtshof) referred questions relating to the compatibility of EU law with the arbitration clause in the Slovakia-Netherlands BIT to the Court of Justice of the European Union (“ECJ”) in Slovakia v. Achmea BV. Now the Higher Regional Court Berlin has entered the ring by issuing a legally sound but politically surprising judgment finding that neither local courts in EU members states, nor the ECJ, have any supervisory authority over arbitrations administered by the International Centre for the Settlement of Investment Disputes (“ICSID”).

The court declined on 28 April 2022 Germany’s request to declare that the Respondents’ (Mainstream Renewable Power Ltd. and five of its subsidiaries, the claimants in ICSID Case No. ARB/21/26, “Mainstream et al”) claim against Germany under Article 26 of the Energy Charter Treaty (“ECT”) was inadmissible as it concerns an intra-EU dispute (KG Berlin, Decision 12 SchH 6/21 of 28 April 2022).

Germany has appealed the decision to the Bundesgerichtshof (BGH I ZB 43/22), the highest court in Germany. A decision can be expected in the spring or summer of 2023.

 

1. Basis of the Application

Mainstream et al submitted their Request for Arbitration with ICSID on 30 April 2021 after having invested in wind and solar energy in Germany. Mainstream itself and two of its subsidiaries are incorporated in Ireland. One of these subsidiaries holds 100% of the shares in the other three claimants, which all have their seats in Berlin.

Germany invoked Section 1032 para. 2 of the German Code of Civil Procedure (“ZPO”), which allows a request to be filed in court to determine the admissibility of arbitral proceedings.

Section 1032 is part of Book 10 of the ZPO governing arbitral proceedings. Book 10 applies if the place of arbitration is located in Germany according to Section 1025 para. 1 ZPO. Section 1032 ZPO is included in a sub-chapter on the arbitration agreement.

Germany argued that it should be allowed to exhaust all legal remedies in order to avoid an initiation of infringement proceedings by the European Commission. A request under Section 1032 para. 2 ZPO is not barred by the ICSID Convention, Germany submitted (for a fuller account of the findings of the court as a matter of German law see here).

 

2. Decision of the Higher Regional Court of Berlin

The court first established its competence to decide requests under Section 1032 para. 2 ZPO in general. The link of the case to Berlin was established by three of the claimants in the arbitration having their seat in Berlin, and a fourth one owning them (KG decision, p. 5, para. 2).

The court then turned to consider the relevance of the ICSID framework and whether Germany’s request was admissible. The court found that Section 1032 para. 2 ZPO is not applicable in an ICSID arbitration.

 

a. The ICSID Convention Sets Up a Closed System of Procedural Rules Precluding Other Legal Remedies

The court first established that the ICSID Convention was applicable to the arbitration, as both Germany and Ireland are contracting states. The court then considered the particular features of the ICSID system, citing Articles 25, 26, 41, 53 and 54 of the ICSID Convention (KG decision, p. 6, para. 3 a).

The court further considered the InvStreitÜbkG, the law implementing the obligations arising from the ICSID Convention in Germany, which only references the German ZPO regarding requests for declarations of enforceability. According to the court, the special character of ICSID arbitrations also manifests itself in the lack of court decisions on ICSID arbitral awards and arbitrations in Germany. In the only decisions cited, German courts had refused to intervene procedurally in ICSID arbitrations (KG decision, p. 8, para. 3 a).

The Higher Regional Court of Berlin concluded that, as the ICSID Convention itself provides in Article 41 that the tribunal has the “Kompetenz-Kompetenz” to decide on its jurisdiction, Section 1032 para. 2 ZPO is not applicable to ICSID arbitrations (KG decision, p. 11, para. 3 c).

 

b. Prior Decisions of the ECJ or Domestic Courts Do Not Influence the Question of Admissibility of A Request Under Sec. 1032 para. 2 ZPO

After re-iterating the ECJ’s decisions in Achmea and Komstroy, the court also referenced the ECJ’s decision in Micula from January 2022. Yet the court held that these decisions do not deal with the procedural rules of the ZPO and their applicability in ICSID arbitrations. The question whether the expressions of consent are valid in an intra-EU investment dispute are to be determined by the arbitral tribunal according to Article 41 of the ICSID Convention.

The court further found that the non-application of Section 1032 para. 2 ZPO to an ICSID arbitration does not violate EU law as the decision on the admissibility of Germany’s request does not require an appraisal of the ECJ’s case law. Section 1032 para. 2 ZPO is exclusive to German law. Section 1040 ZPO, giving German courts the power to overrule an arbitral tribunal’s decision on its jurisdiction, does not apply to ICSID arbitrations (KG decision, p. 11).

The Court did not address the question of whether EU case law could be sufficiently considered in potential annulment proceedings if an ICSID tribunal fails to correctly take into account EU case law as part of the law binding both parties to the arbitration.

Finally, the court declared recent domestic court rulings based on the ECJ decisions in Achmea and Komstroy irrelevant, as they did not concern ICSID arbitrations and were thus subject to the supervisory jurisdiction of the court of the seat (KG decision, p. 11, para. 3 c). First, two decisions of the Cour d’Appel de Paris of 19 April 2022, setting aside arbitral awards obtained by (a) Cec Praha and Slot Group; and (b) Strabag and Raiffeisen Centrobank against Poland. Secondly, the Bundesgerichtshof’s decision on 17 November 2021 in an investment case between Raiffeisen Bank and Croatia under Section 1032 para. 2 ZPO (commented on here).

 

3. Conclusion

The Higher Regional Court of Berlin will not have the last word on this issue. The Bundesgerichtshof may refer the matter to the ECJ, which is likely to disagree with the findings of the Berlin court. Not because there is anything legally unsound with that court’s analysis, but because of precedent: German courts in Achmea (discussed in more detail here), French courts in Komstroy (discussed in more detail here) and Swedish courts in PL Holdings (discussed in more detail here) all found investment law and EU law to be compatible until they were told by the ECJ that they were wrong.

The most interesting comparison with the present case is provided by Micula. As an ICSID arbitration, the case had proceeded without judicial oversight. Because Romania had set off the damages awarded to the claimants against the tax debt some of them owed to the state treasury, the matter ended up before EU courts once the European Commission ruled this to be illegal state aid and ordered Romania to recover it. The ECJ had no hesitation in finding that Achmea applied to the case and appeared to consider the fact that the arbitration had been conducted within the ICSID system irrelevant or worse: the ICSID award not being subject to oversight of (EU member state) domestic courts was given as an additional reason for the court to find that Achmea applied to it (paragraph 142). The Higher Regional Court of Berlin focused on German procedural law to ground its decision, but it will not be difficult for the ECJ (or indeed the Bundesgerichtshof) to ignore or dismiss this, if it so wishes. The distinction did not appear to be relevant for the Bundesgerichtshof in Raiffeisen Bank when it approved Croatia’s application under Section 1032 para. 2 ZPO.

The Berlin court’s decision finds itself in the middle of a Venn diagram where on the one side is a circle in which reside decisions on procedural issues relating to the supervision of arbitration proceedings. On the other side is a circle for ICSID arbitrations. Only where these two circles overlap does an investor have a chance of escaping the impact of Achmea and Komstroy before an EU member state court.

Where decisions on enforcement of ICSID awards fall in this diagram is open to debate. The UK Supreme Court’s decision on the Micula claimants’ application to enforce the ICSID award (discussed here) suggests that the question may be determined by the date on which the enforcement state became party to the ICSID Convention – creating yet another fine distinction to make this area of law more complex.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Fit for Print: the “El Clarín” Saga Leads to US$ 550 Million Enforcement Order by Spanish Courts

Wed, 2022-07-20 01:30

The case involving Mr. Víctor Pey Casado, the President Allende Foundation, the 1960s Chilean newspaper “El Clarín” and the Republic of Chile – once the longest-running dispute in ICSID history – is certainly a complex one. The dispute has spanned more than twenty years, encompassing three different arbitration proceedings with three separate arbitral awards issued in 2008, 2016 and 2019, court proceedings in Chile and Spain, multiple requests for annulment and also an ongoing effort by a persistent group of claimants to obtain compensation.

This post will provide an overview of the background to the dispute and the multiple arbitration proceedings, the history of the dispute before the Spanish courts including the most recent enforcement order made against Chile and finally, possible outcomes and considerations in light of Spanish procedural law.

 

Background to the Pey Casado Proceedings

The dispute concerns the newspaper “El Clarín”, a publication established in Chile in 1960. After the newspaper became an outspoken supporter of President Salvador Allende during his mandate, it was seized on 11 September 1973 as part of Augusto Pinochet’s coup d’état in the country. “El Clarín” was shut down, its assets were transferred to the State by a 1975 decree; and its owner, Mr. Victor Pey Casado, was exiled from the country and returned to his native Spain, where he founded the President Allende Foundation.

Upon his return to Chile in the 1980s, Mr. Pey Casado sought compensation from the Chilean courts for his loss suffered as a result of the expropriation of the newspaper. When this was unsuccessful, he turned to the 1991 Spain-Chile bilateral investment treaty (“BIT“), commencing what would become a more than twenty-year long and complex battle to obtain compensation for his investment that has recently culminated in a Spanish judge’s order against Chile for US$ 430 million plus interest of US$ 122 million.

 

First arbitration

Mr. Pey Casado and the President Allende Foundation initiated the first arbitration in 1997 under the BIT seeking compensation for the expropriation of the newspaper in 1973.

In its 2008 award, the tribunal found it lacked jurisdiction over most of the claims, including the expropriation claim as the alleged measures took place before the BIT entered into force. However, it awarded US$ 10 million in damages as it found that Chile had breached its fair and equitable treatment (“FET”) obligation by refusing to compensate the Claimants after shutting down “El Clarín.”

After the decision, both parties sought to annul the award and, in December 2012, an ICSID ad hoc committee annulled parts of the award relating to damages, including the US$ 10 million estimation, holding that Chile had been denied the opportunity to present arguments on the issue of damages.

 

Second arbitration

The Claimants resubmitted the dispute to a new ICSID tribunal seeking US$ 150 million in damages for Chile’s alleged breaches of the BIT. However, the tribunal rejected the claims and issued an award in September 2016, finding that the Claimants had failed to prove that Chile’s FET breach caused damages. In 2017 the Claimant applied for annulment of the 2016 award. Nevertheless, in January 2020, the ad hoc committee rejected the Claimants’ application noting that the circumstances alleged were insufficient to succeed in the annulment of the award.

 

Third arbitration

The Claimants did not give up. In 2017—while the annulment proceedings of the 2016 award were taking place—they initiated a third arbitration, this time administered by the Permanent Court of Arbitration under the UNCITRAL Arbitration Rules. The Claimants argued that this proceeding was distinct from the previous proceedings, as they brought claims related to Chile’s lack of compliance with the 2008 award, as well as a series of claims related to domestic law, and sought restitution, damages, and moral damages, as well as the costs relating to the first arbitration and the enforcement proceedings in Spain in 2013.

This arbitration also was unsuccessful. In its 2019 award, the tribunal declined jurisdiction over all claims, noting, among other reasons, (i) that the BIT did not allow the Claimants to bring claims under domestic law; (ii) that the Claimants did not have an investment when Chile refused to comply with the 2008 award, and (iii) that the Claimant’s right to arbitrate, as well as their 2008 award, did not qualify as investments under the BIT.

 

Enforcement Proceedings in the Spanish Courts and Next Steps

In the most recent twist to the case and one that has grabbed headlines, on 7 December 2021, a Spanish judge ordered Chile to pay approximately US$ 430 million to Ms. Coral Pey (daughter and successor of Mr. Pey Casado) and the President Allende Foundation.1) This latest decision is not the first time that the Spanish Courts had become involved in the “El Clarín” saga. At the request of the Claimants, in July 2013 the First Instance Court of Madrid no. 101 issued an order to enforce the costs portion of the 2008 award issued in the first arbitration proceedings, which became the first case of direct enforcement of an ICSID award in Spain.  See, José Ángel Rueda García, Primera ejecución forzosa conocida de un laudo arbitral CIADI en España (Víctor Pey Casado y Fundación Presidente Allende v República de Chile): sin exéquatur.” jQuery('#footnote_plugin_tooltip_42148_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42148_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The December 2021 decision relates to the continued enforcement of the 2008 award. While the 2008 award was annulled in regard to the damages awarded by the Tribunal, subsequent awards and decisions had reiterated the Tribunal’s finding that Chile breached the BIT and had an obligation to repair the damage caused.  Pursuant to Spanish procedural law (Ley de Enjuiciamiento Civil) the lower courts have jurisdiction to hear enforcement of foreign arbitral awards.  Reportedly, the Claimants turned to the Spanish courts to determine the amount owed by Chile for its breach of Article 4 of the BIT.

Judge Pedro José Puerta ordered Chile to pay almost US$ 430 million to the Claimants, along with US$ 122 million provisionally fixed as “the interest that could arise from the enforcement and procedural costs.2) Spanish procedural law does not allow interest from enforcement proceedings to exceed 30% of the principal amount; in this instance, interest is almost at that limit, constituting approximately 28% of the amount awarded to the Claimants. jQuery('#footnote_plugin_tooltip_42148_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_42148_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

While Spanish law does not prima facie allow court judgments or awards to order the payment of unspecified amounts, it does allow for quantum to be determined at the stage of enforcement when the judgment or award clearly identifies the amounts that should be compensated and quantified. To this purpose, the Claimants reportedly provided the court with a quantum expert report directed at quantifying the compensation sought in enforcement for the breach of Article 4 of the BIT, which is likely to be the source for the quantum granted by the judge.3) Except for the 7 December 2021 decision, all orders related to the “El Clarín” case currently before first instance court no. 101 are confidential and not available to the public. jQuery('#footnote_plugin_tooltip_42148_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_42148_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Under Spanish procedural law, decisions ordering enforcement are notified to the parties and while they are not open for appeal, the aggrieved party may file its opposition to the enforcement within ten days from notification. In this case, Chile had the possibility to oppose enforcement based on a number of limited grounds, namely, and if applicable: (i) that the amount for which enforcement is sought has already been paid; (ii) that Chile has already complied with the award, with adequate justification of how this compliance has taken place; (iii) that the period in which the Claimants had to request enforcement had expired; or (iv) that there is an agreement to the contrary by the parties contained in a public document.

To ensure enforcement, if the party seeking enforcement has not designated assets with sufficient value to cover the quantum, the court would issue an order requiring the party against whom enforcement is sought to show sufficient assets to cover the amount claimed. This order can include sanctions and fines in the event the party does not comply. Typically, if the party against whom enforcement is sought does not comply with the court’s requirements, the court may order the seizure of any assets of which it is aware. In this case, the fact that the respondent, Chile, is a sovereign State implies the rules of immunity and their assets also come into play.

No publicly available information has been found to confirm whether Chile opposed enforcement and/or provided proof of its assets to cover enforcement. However, according to news reports the Spanish Courts ordered the seizure of the debts of Nexans Iberia, the Spanish subsidiary of French cable manufacturer Nexans, to Codelco, the National Corporation of Copper of Chile. News reports also advise that Nexans Iberia has reportedly confirmed receipt of the order and informed the Court that it does not have any outstanding debts with Codelco.

 

Conclusion

Given the long track record and battle between the parties, it is not unlikely that we have seen the end of this case and that the Claimants will continue with its efforts for compensation and that Chile will continue to oppose such efforts.  One other interesting issue to watch is to see how the recently elected President of Chile, Gabriel Boric manages this issue and any enforcement order issued against Chile, and specifically, if news reports are correct, Codelco. While his predecessor, Sebastián Piñera, declared in 2012 his intention to comply with any final decision reached in the case (which at the time, was still in the stage of arbitration), President Boric has not made any public statements to that effect. Again, this opens the door to more twists and turns in the long running saga of the “El Clarín” dispute.

References[+]

References ↑1 This latest decision is not the first time that the Spanish Courts had become involved in the “El Clarín” saga. At the request of the Claimants, in July 2013 the First Instance Court of Madrid no. 101 issued an order to enforce the costs portion of the 2008 award issued in the first arbitration proceedings, which became the first case of direct enforcement of an ICSID award in Spain.  See, José Ángel Rueda García, Primera ejecución forzosa conocida de un laudo arbitral CIADI en España (Víctor Pey Casado y Fundación Presidente Allende v República de Chile): sin exéquatur.” ↑2 Spanish procedural law does not allow interest from enforcement proceedings to exceed 30% of the principal amount; in this instance, interest is almost at that limit, constituting approximately 28% of the amount awarded to the Claimants. ↑3 Except for the 7 December 2021 decision, all orders related to the “El Clarín” case currently before first instance court no. 101 are confidential and not available to the public. function footnote_expand_reference_container_42148_30() { jQuery('#footnote_references_container_42148_30').show(); jQuery('#footnote_reference_container_collapse_button_42148_30').text('−'); } function footnote_collapse_reference_container_42148_30() { jQuery('#footnote_references_container_42148_30').hide(); jQuery('#footnote_reference_container_collapse_button_42148_30').text('+'); } function footnote_expand_collapse_reference_container_42148_30() { if (jQuery('#footnote_references_container_42148_30').is(':hidden')) { footnote_expand_reference_container_42148_30(); } else { footnote_collapse_reference_container_42148_30(); } } function footnote_moveToReference_42148_30(p_str_TargetID) { footnote_expand_reference_container_42148_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_42148_30(p_str_TargetID) { footnote_expand_reference_container_42148_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
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Brazilian Superior Court of Justice (STJ) and the exceptions of the Competence-Competence Principle

Tue, 2022-07-19 01:12

This article addresses the Brazilian Superior Court of Justice (STJ) ‘s precedents on the exceptions to the Competence-Competence principle due to pathological arbitration agreements present in contracts of adhesion. In addition, it approaches the Court’s position on the enforcement of a pathological (empty) arbitration clause.

The decisions below are landmark precedents and clarify crucial points differentiating franchise contracts from consumer contracts (both contracts of adhesion) and establishing when state courts must decide about the existence and validity of an arbitration clause (exceptions to the Competence-Competence principle). The decisions discussed below are the foundations of recent jurisprudence created by the Brazilian Superior Court of Justice (STJ) (e.g. 1. Special Appeal nº 1.854.483-RJ – Third Panel – Minister Nancy Andrighi– SPE Orla 1 LTDA v. Maria Vilma Rodrigues de Lima – September 9, 2020 – 2.  Specific Appeal in Appeal in Special Appeal nº 1.809.792-SP – Fourth Panel – Minister Raul Araújo – Regina Celia Matheus Crizza v. Franquia Show Assessoria em Negócios LTDA. – February 15, 2022 – 3. Specific Appeal in Motion for Clarification in Appeal in Special Appeal – Third Panel – Minister Marco Aurélio Bellizze – Missoni SPA v. MMR Investimentos e Participações S.A – March 14, 2022).

 

The Court’s Analysis

Competence-Competence Principle – general rule, specific rule and more specific rule

On November 6, 2012, a decision rendered by the Third Panel of the Brazilian Superior Court of Justice in the Special Appeal nº 1.169.841-RJ (CZ6 Empreendimento Comerciais LTDA e Outros v. Davidson Roberto de Faria Meira Júnior) was published under the opinion of Minister Nancy Andrighi. The decision addressed the validity of an arbitration clause in a real estate purchase agreement held by CZ6 Comercial Entrepreneurs Ltda and Davidson Roberto de Faria Meira Júnior. The Court of Justice of Rio de Janeiro had confirmed the trial court’s decision which considered the state’s jurisdiction inescapable in consumer contracts even with an arbitration agreement.

The Superior Court of Justice sided with the consumer and the inescapability of state jurisdiction not because it is a contract of adhesion but because it is, specifically, a consumer contract. The Court established the following guidelines differentiating generic contracts of adhesion and consumer contracts of adhesion:

In fact, with the enactment of the arbitration act, three rules came to coexist harmoniously with different degrees of specificity: (i) a general rule that binds the parties to follow the arbitration agreement; (ii) a specific rule, applicable to generic adhesion contracts, which restrains the effectiveness of the arbitration agreement; and (iii) an even more specific rule applicable to the contracts protected by the Brazilian Code of Consumer Protection, may they be adhesion contracts or not, that imposes invalidity to the mandatory arbitration agreement even if in perfect compliance with the requirements established by article 4º, §2º of the Brazilian Arbitration Act. (Translation by the author)

The rule established by article 4º §2º of the Brazilian Arbitration Act (Act º 9.307/1996) states that

In adhesion contracts, an arbitration clause will only be valid if the adhering party takes the initiative to initiate an arbitration proceeding or if it expressly agrees with its initiation, as long as it is in an attached written document or boldface type, with a signature or special approval for that clause.(translation by the author)

According to the decision, this rule applies to generic contracts of adhesion. Nevertheless, even if a consumer contract complies with this rule, the consumer can still tacitly renounce arbitration and seek the state courts’ aid. The Court added that the Brazilian Code of Consumer Defense and Protection (Act nº 8.078/1990) forbids only the mandatory use of arbitration, leaving it at the consumer’s discretion to waive arbitration and seek the judiciary.

 

Contracts of Adhesion, pathological arbitration agreement, and the Competence-Competence Principle

On November 15, 2016, another decision was rendered by the Third Panel of the Brazilian Superior Court of Justice in the Special Appeal nº 1.602.076-SP (Odontologia Rister de S. Lima v. GOU – Grupo Odontológico Unificado Franchising LTDA), published under the opinion of Minister Nancy Andrighi. The Court analyzed whether a franchise agreement should be considered a consumer contract or not and whether the judiciary had the competence to assess its arbitration clause’s validity mitigating the Competence-Competence Principle, established in the Brazilian Arbitration Act’s Article 8, sole paragraph.

The claimant (Odotonlogia Noroeste LTDA) requested the annulment of the franchise agreement and the refund of the franchise and royalties’ fees paid to the defendant (GOU – Grupo Odontológico Unificado Franchising LTDA). In addition, the claimant pleaded for the invalidation of the arbitration agreement, alleging that the franchise contract was, in fact, a consumer contract of adhesion that did not comply with the requirements set out in Article 4º, § 2º of the Brazilian Arbitration Act.

The Court ruled that the franchise contract should not be considered a consumer contract “since there is no consumption relationship but a simple economic fostering goal. That means a contract to stimulate the entrepreneurial activities of the franchisee”. However, the Court decided, franchise agreements ought to be considered generic contracts of adhesion.

In this case, the arbitration clause did not comply with Article 4º, §2º of the Brazilian Arbitration Act (in adhesion contracts an arbitration clause must be “an attached written document or in boldface type, with a signature or special approval for that clause”) and, therefore, was regarded as a pathological arbitration clause. Thus, the judiciary was entitled to examine the validity of this clause if, on its face, it seemed invalid. Moreover, because it was a contract of adhesion, the Competence-Competence Principle had to be disregarded in the case. Therefore, although the general rule is to always favor the arbitral tribunal’s power, the empty arbitration clause stipulated in a contract of adhesion would be an exception to this rule and allows the judiciary assessment of its validity.

In the same direction, on June 11, 2019, in the Internal Appeal in the Special Appeal nº 1.431.391-SP (Alex César Rodrigues Alves v. Companhia de Bebidas das Américas – AMBEV), Minister Antonio Carlos Ferreira overruled a previous decision  that claimed that only the arbitral tribunal had the power to assess an arbitration agreement in a franchise contract. Under said decision, courts were only entitled to an eventful and future (after the arbitral award) analysis. In this case, the Court reconsidered and ‎declared void the arbitration agreement of a franchise contract, concluding that the latter was considered a contract of adhesion that must comply with Article 4º, § 2º of the Brazilian Arbitration Act. Therefore, such a clause is pathological, and the Competence-Competence principle does not apply to the case.

 

Enforcement of a pathological arbitration agreement

On November 20, 2012, a decision was rendered by the Fourth Panel under the opinion of Minister Luis Felipe Solomão in the Special Appeal nº 1.082.498-MT, addressing the enforcement of a pathological arbitration agreement that failed to specify an arbitral institution. The appellee Antônia da Silva Barbosa requested that the arbitration proceeding be administered in her arbitration chamber of choice (Mediation, Conciliation and Arbitration Tribunal of Cuiabá). However, the Appellant, Condomínio Civil do Cuiabá Plaza Shopping, did not agree with the appellee’s choice.

In the case, two hearings were held before the arbitral institution. In the first hearing, the parties were unable to reach an agreement, and in the second hearing, the appellant declared its opposition to the arbitration center chosen by the appellee.

The Court considered that:

The agreement of the parties concerning the arbitrator or institution is an essential requirement. If that is not possible, the State Court should solve the matter. The Court must necessarily accept such a job to help commence the arbitration proceedings. In this case, although I recognize the competence of the arbitral tribunal, the appellant refused to sign an arbitration commitment for finding the arbitral tribunal chosen by the other party biased.

Therefore, the Brazilian Superior Court of Justice considered that the judiciary is entitled to render a decision to fill in the gaps of an empty arbitration clause according to Article 7 of the Brazilian Arbitration Act. In short, the judiciary shall be responsible for establishing the elements necessary for the commencement of the arbitration proceedings.

 

Conclusion

The Superior Court of Justice favors the Competence-Competence principle as a general rule. However, as noted, the pathological clauses in consumer adhesion contracts or generic contracts of adhesion (such as the franchise agreement) mitigate this principle and allow for the judiciary assessment of the arbitration agreement validity.

In the case of a pathological clause that makes it impossible to commence the arbitration proceedings, the interested party shall plead to the judiciary so that the state judge renders a decision. This decision’s role (an arbitration commitment per se) is to fulfill all the arbitration’s agreement gaps and contradictions.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Making Expert Evidence Engaging: ACICA45 Panel Discussion

Mon, 2022-07-18 01:06

Expert evidence is a feature of almost every arbitration. At the very least, parties will likely need to adduce expert evidence concerning the quantification of a claim for damages. However, depending on the subject matter of the dispute, a party may need to adduce expert evidence on any number of topics, ranging from aerodynamics to zoology. The expert’s precise area of expertise notwithstanding, identifying, briefing, and preparing experts for arbitration is never a simple task.

On 12 May 2022, KordaMentha and ACICA45 – a community for young and emerging arbitration practitioners organised by the Australian Centre for International Commercial Arbitration – held its first in-person session in Sydney since the outbreak of Covid-19. The session, moderated by Domenico Cucinotta (Senior Associate, King & Wood Mallesons), explored various aspects of the appointment and instruction of expert witnesses in arbitration proceedings. The panel, made up of John Temple-Cole (Partner, KordaMentha), Jacqueline Koo (Associate Director, KordaMentha), Professor Chester Brown (University of Sydney and 7 Wentworth Selborne Chambers) and Tim Ash (Director, TBH Consultancy) provided valuable insight based on their experiences as testifying expert, counsel, and second chair to a testifying expert.

 

A needle in a haystack – how to choose the right expert?

The evening started by discussing one of the most challenging tasks: how to identify the right expert with relevant expertise and experience. Speaking from his experience as both counsel and expert, Professor Brown observed that identifying the right expert was crucial, otherwise the evidence would be of little evidentiary value or inadmissible. Professor Brown posed a number of practical questions for an expert to consider in assessing whether they are the right match for the engagement, including: (a) whether the issue(s) are within an expert’s expertise; (b) whether an expert has any conflict of interest; (c) understanding the scope of work; (d) understanding the deadlines; (e) setting expectations on fee arrangements; and (f) confirming the expert’s independence from the client and instructing counsel.

Mr Temple-Cole explained that counsel and experts should prepare for an initial conference in a similar way that one might prepare for an interview: setting out clearly the reasons for engaging an expert, what matters the expert is required to address and being unafraid to enquire and challenge a candidate on the relevance of their qualifications to the task being instructed.

 

“Dirty” experts v “clean” experts

The panel then discussed the necessity of engaging a ‘dirty’ expert in addition to any ‘clean’ or testifying expert they have already engaged for the proceedings.1)For the avoidance of doubt, the dichotomy is not used to impugn the character or morality of an expert. The words “clean” and “dirty” simply distinguish the roles assumed by different experts. A “clean” expert is a testifying expert, whose role is independent to their instructing lawyers and the paramount duty is to the court or tribunal before whom they appear. By contrast, a “dirty expert” will not give evidence to a tribunal and play more of a consultancy role to the legal team, helping them understand the subject matter better. jQuery('#footnote_plugin_tooltip_42128_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_42128_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Mr Ash recounted some of his experiences acting as a “dirty” or “consulting” expert. Mr Ash advised that a “consulting expert” could be involved in various circumstances and equipped with different tasks. For example, a “consulting expert” might be engaged early to assist in setting case strategy or testing various case theories. A “consulting expert” might also assist in identifying a suitably qualified “clean expert” and helping the counsel team prepare instructions, assumptions, and questions for the “clean expert”. Mr Ash explained that the value of a “consulting expert” is more obvious when a matter involves highly technical details, with which the legal team is not necessarily familiar.

Agreeing that a “consulting expert” can be helpful in upskilling the legal team on technical matters, Professor Brown warned that it is important to strictly observe the distinction between the “clean” and “dirty expert”, and to avoid them from meeting or discussing the matter together, so as not to compromise the independence of the “clean” expert.

 

Preparing the letter of instruction and brief of documents

Another common issue that arises when briefing an expert is how much (and what) information to give to the expert and how it ought to be presented. The panel agreed that briefing an expert is usually an iterative process whereby an early engagement letter is followed by a formal instruction letter with detailed assumptions closer to the time the final report is delivered. The panel also agreed that a well-prepared brief assists an expert in understanding the scope of engagement and what further documents might be helpful.

Drawing on her experience, Ms Koo opined that instructing lawyers should be tactical in selecting the documents to provide an expert in the first instance. She explained that a balance needs to be struck between providing the expert with enough information to progress the engagement, without overwhelming the expert with unnecessary documents that achieve little other than forcing the client to incur further costs in having the expert review such documents.

On the same topic, Professor Brown noted that while there could be some frustration from repeatedly requesting more documents by an expert from instructing lawyers, it would be preferable to start the briefing with a smaller universe of key documents and responding to requests for further documents as the engagement progresses. Professor Brown also cautioned against the practice of putting detailed questions to an expert in writing too early, as that carries the risk of opposing counsel questioning the reason for the changed instructions or questions over time.

 

Dealing with draft reports

The panel turned next to the issue of draft reports and, specifically, the different approaches to the level of review or input counsel should have on draft reports, and the potential discoverability of draft expert reports.

Ms Koo considered it good practice to assume that all drafts are discoverable. Based on that assumption, Ms Koo expressed a preference for experts only providing a near-final draft to avoid any wholesale changes by counsel. Such a draft should also include appropriate disclaimers as to the finalisation of calculations and quality assurance checks.

Although it is not improper for experts and counsel to discuss the content of a draft report, Ms Koo and Mr Ash considered it important for the expert to maintain their independence and to look upon any comments from counsel as suggestions only, rather than directions to make changes.

From a legal perspective, Professor Brown recognised that the possibility of drafts being disclosed was a serious issue. Professor Brown explained that privilege often attaches to draft expert reports since they are usually prepared for the dominant purpose of an ongoing proceeding. However, the applicability of privilege must be determined on a case-by-case basis. For example, a draft prepared for the expert’s own purposes (akin to a working paper) may not necessarily be privileged, even if it is communicated to the instructing lawyer.

 

Joint expert conferences and joint expert reports

The panel observed the recent trend in both arbitration and domestic litigation to require experts engaged by opposing parties to meet and produce a joint expert report identifying areas of agreement and disagreement.

Mr Temple-Cole and Mr Ash recounted some experiences of attending expert conclaves and agreed that a joint expert meeting could be productive, allowing the experts to narrow the matters in dispute, present to the tribunal/court in a neat and simple way the precise differences between experts, and put the experts on notice of potential areas for cross-examination.

Mr Temple-Cole and Mr Ash suggested that a successful joint expert meeting relied upon: (a) experts not raising new topics or issues during the conclave; (b) clarifying the key elements of the case with counsel prior to the meeting; and (c) taking a proactive approach in preparing the first draft of the joint expert report.

 

Preparing for and being subject to cross-examination at a hearing

Finally, the panel discussed their experiences of being cross-examined, the styles of cross-examination they considered to be (in)effective and how to best prepare for oral examination.
Mr Ash reflected on his experiences as a testifying expert in construction disputes and explained that instructing counsel would be well-served by taking the time to explain the hearing process, dramatis personae, and hearing logistics with the expert to ensure their familiarity with the environment and settle any potential nervousness. Mr Ash explained that it can be dangerous for a lawyer to try and challenge an expert directly on their subject matter expertise, and so frequently the focus of cross-examination is trying to parse out potential inconsistencies in the expert report(s). Accordingly, it is critical that the testifying expert is intimately familiar with their report and is prepared to explain to the tribunal or court their opinion, and the reasons for the conclusions reached.

Mr Ash and Mr Temple-Cole warned testifying experts against arguing with opposing counsel, or volunteering answers to questions that were not asked. Experts ought to (as best as possible) be alive to counsel’s cross-examination tactics and should be prepared to ask counsel to repeat or clarify their questions, if necessary. Mr Temple-Cole explained that, to a certain degree, the only thing a testifying expert can do is to keep calm and carry on.

References[+]

References ↑1 For the avoidance of doubt, the dichotomy is not used to impugn the character or morality of an expert. The words “clean” and “dirty” simply distinguish the roles assumed by different experts. A “clean” expert is a testifying expert, whose role is independent to their instructing lawyers and the paramount duty is to the court or tribunal before whom they appear. By contrast, a “dirty expert” will not give evidence to a tribunal and play more of a consultancy role to the legal team, helping them understand the subject matter better. function footnote_expand_reference_container_42128_30() { jQuery('#footnote_references_container_42128_30').show(); jQuery('#footnote_reference_container_collapse_button_42128_30').text('−'); } function footnote_collapse_reference_container_42128_30() { jQuery('#footnote_references_container_42128_30').hide(); jQuery('#footnote_reference_container_collapse_button_42128_30').text('+'); } function footnote_expand_collapse_reference_container_42128_30() { if (jQuery('#footnote_references_container_42128_30').is(':hidden')) { footnote_expand_reference_container_42128_30(); } else { footnote_collapse_reference_container_42128_30(); } } function footnote_moveToReference_42128_30(p_str_TargetID) { footnote_expand_reference_container_42128_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_42128_30(p_str_TargetID) { footnote_expand_reference_container_42128_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
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Can Amicus Curiae Lead Investor-State Arbitration out of its Legitimacy Crisis and Towards More Efficient Dispute Resolution?

Fri, 2022-07-15 01:00

On 5 May 2022, Young ITF hosted its launch event, covering a debate on the motion that “[t]his House believes that greater use of Amicus briefs will address the legitimacy crisis that [Investor-State-Dispute-Settlement (“ISDS”)] is facing”. The selection of this topic seemed reasonable as the legitimacy crisis of ISDS particularly affects the upcoming generation of young lawyers. The panel of speakers consisted of Prof. Maxi Scherer and Rebecca Zard who pleaded in favor of the motion, as well as Dr. Martins Paparinskis and Patricia Snell who represented the opposing view. Since the positions taken by the panelists were assigned to them in advance, the views expressed during the debate do not necessarily reflect their personal opinions.

At the outset, both sides of the panel agreed that they can hardly deny the legitimacy issues ISDS is currently facing. Moreover, they argued that civil society has increasingly raised its voice against ISDS and usually describes the system as an undemocratic, unaccountable, and untransparent corporate court. But are amicus briefs the right tool to address these issues associated with ISDS, or is it just another desperate attempt at reform of a failing regime? This post offers an overview of the main points of discussion on whether amicus curiae provide a viable solution to the current ISDS legitimacy debate.

 

Positive Implications of Amicus Curiae in ISDS

In their opening, the panelists arguing for the motion identified the main contours of criticism related to ISDS, before outlining arguments on why amicus briefs are appropriate to address these criticisms. The panelists noted that the issue of transparency refers to the lack of awareness of and access to the investment process by the public, whereas the criticism of a democratic deficit and unaccountability refers to the lack of public influence in the proceedings. The panelists argued that opening the doors of the proceedings to individuals, non-governmental organizations, trade associations, or inter-governmental institutions as amicus curiae, whilst at the same time providing these entities with insights into the investment arbitration process, could address these issues. It would allow the public to become aware of the subject matter of investment disputes and improve their understanding of the investment arbitration process. Additionally, amici participation could also address the lack of public influence, by providing the public with a meaningful say in the outcome of the proceedings and by promoting an informed public dialogue regarding the subject matter of the dispute.

The positive implications of amicus curiae in ISDS have also been acknowledged by tribunals and in reform debates. In line with the arguments of the panelists, in Vivendi v Argentina, the tribunal stated that amicus submissions have the potential to improve public acceptance of the international arbitral process by increasing transparency and openness. This should be of particular importance when the proceedings involve matters of public interest. Furthermore, the tribunal in Philip Morris v Uruguay held that amicus submissions support the overall acceptability of decisions rendered by international investment tribunals. Also, in UNCITRAL’s Working Group on Arbitration and Conciliation, many delegations have expressed strong support for allowing amicus curiae submission which could be useful for the arbitral tribunal in resolving the dispute and for promoting the legitimacy of the arbitral process. This perception that amicus submissions may be a useful tool to increase the legitimacy of ISDS also explains the increased statutory recognition of amicus submissions in institutional rules (e.g. 2022 ICSID Rules, Rule 67; 2017 SIAC Investment Arbitration Rules, Rule 29.2; 2017 SCC Arbitration Rules, App III, Art 3) as well as some new-generation bilateral investment treaties (e.g. US Model BIT (2012), Art 28(3); CETA (2017), Art 8.38).

 

Negative Implications of Amicus Curiae in ISDS

The panelists arguing against the motion noted that the concept of amicus curiae originates from the common law tradition and argued that this concept is not suitable for the investment arbitration process. They noted that investment arbitration is based on an agreement between the parties, and argued that allowing third parties access to the arbitral process would undermine the consensual nature of arbitration, in effect compelling the parties to arbitrate with ‘strangers’. Further, amicus briefs could lead to procedural unfairness between the parties since most briefs are filed in favor of the respondent state. In response to the argument that amici participation invokes a productive public dialogue, the panelists argued that this could cause a politicization of the arbitral process which endangers the neutrality of the forum and transforms arbitral tribunals into ‘courts of public opinion’.

These arguments have also found resonance in practice and in reform debates. Indeed, some parties and some tribunals have held that amicus submission could lead to procedural unfairness. In Methanex Corporation v. USA, it was argued by the investor that an amicus submission cannot be tested by the party against which it is filed, placing the amicus in a ‘position of greater standing’ than the parties. It is also true that amicus curiae originate from court proceedings in common law jurisdictions. Such proceedings are not based on an agreement and also entail hearings which are usually open to the public. Arbitration, on the other hand, is consensual in nature. Amici are not parties to the arbitration agreement which begs the question why these entities should nevertheless be accorded similar rights as the parties. Finally, the panelists pointed to the Mauritius Convention on Transparency. The Convention has currently been ratified by only nine states which indicates that few states have agreed to provisions which would increase the use of amicus curiae in investor-State arbitration. For these reasons, the criticism that the potential short-term benefits of amicus curiae do not justify the risk of frustrating the very process to which the amicus seeks to participate seems understandable.

 

The Impact of Amicus Curiae on the Arbitral Process – When Intuition is Misleading

The positions of the respective debaters regarding the impact of amicus curiae on the course of ISDS proceedings could not lie further apart, which justifies addressing this particular point in a separate section. On the one hand, it was argued that tribunals have repeatedly acknowledged the benefits of amici briefs in their decision-making process as they support the tribunal with particular knowledge and expertise regarding the subject matter in dispute. On the other hand, the panelists arguing against the motion countered that amici rarely have access to the case file, which means that amici can rarely present a full picture of the facts or address the core issue of the case. On top of that, additional submissions to which both parties must have the opportunity to respond lead to additional work for the tribunal and the disputing parties and thus delay the inherently long investment arbitration process even further. While the latter argument seems intuitively right, the panelists presenting this argument were unable to support their position by any empirical data. This begs the question: which of the two propositions regarding the course of the proceedings is true?

The answer to this question was delivered by the panelists arguing in favor of the motion. The panelists presented the results of an (unpublished) empirical analysis involving the latest 66 investment arbitration cases, in which amici applications were filed and the respective decisions on these applications were published. The outcome of this study was unexpected and to some extent counterintuitive. While the median length of proceedings in which amici participated lasted 4.26 years, the proceedings where amici applications were filed but rejected by the tribunal, lasted 4.94 years. This provides a difference of 0.68 years in median length. Put simply, proceedings in which amici briefs were filed last shorter than proceedings in which they were denied doing so.

 

Concluding Remarks

Some people might question their intuition after hearing the numbers presented regarding the length of the proceedings in which amici participated compared to those in which they were denied access. The argument that amici curiae burden the tribunal and delay the proceedings is consequently not supported by the study presented by the panelists arguing in favor of the motion. But what conclusion can be drawn from this counterintuitive result? Does this e contrario mean that amici enhance the efficiency of ISDS proceedings? This question can hardly be answered with a simple ‘yes’ or ‘no’. More accurately, the answer appears to be: ‘it depends’. It depends on several variables, such as the complexity of the case, the conduct of the parties, the knowledge of the amicus, the case management of the tribunal, etc.

Can amici curiae lead ISDS out of its legitimacy crisis? Possibly. However, further tools are required to resolve the crisis in its entirety. Several suggestions on what these tools could look like can be found in the new ICSID Rules, which include the possibility to hold open hearings and incorporate additional transparency provisions like the expeditious publication of arbitral awards (see 2022 ICSID Arbitration Rules, Rules 62-4, 65). Nonetheless, an increased use of amici curiae can lead the regime in the right direction and may constitute a valuable first step for ISDS to emerge out of its crisis and into greater popularity.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Arbitration Tech Toolbox: Technology-related Dispute Resolution: Tailored Rules at UNCITRAL

Thu, 2022-07-14 01:12

From 28 March to 1 April 2022, Working Group II of the United Nations Commission on International Trade Law (UNCITRAL) held a Colloquium to explore legal issues related to dispute resolution in the digital economy and to identify the scope and nature of possible legislative work.

Forty-eight member States, 27 observer States and 57 invited international organizations attended, and more than 40 speakers with expertise in international dispute settlement made presentations during the Colloquium. The programme, video recordings, official documents and presentations can all be found here.

On days 3 and 4, the Colloquium focused on technology-related dispute resolution and draft provisions prepared by a group of experts at the request of the Commission, and upon a proposal by the Governments of Israel and Japan.

Animating these discussions was an observation made by Cedric Yehuda Sabbah (Ministry of Justice of Israel) that technology firms are underutilizing alternative dispute resolutions mechanisms. In preparatory consultations with in-house, firm and venture capital lawyers, the consistent message was that technology companies avoid the use of ADR because the mechanisms are not tailored to the needs of technology disputes.

The high-tech sector presents some unique characteristics: it is highly technical, specialized, dynamic, and populated by micro-, small- and medium-sized enterprises (MSMEs). Each characteristic requires careful consideration. Early-stage startups, for instance, will put a premium on the speed of a dispute resolution process, seeking resolution to pave the way for funding rounds. Some technology disputes will involve highly technical aspects, potentially requiring not only the appointment of experts and neutrals, but also a degree of technical expertise held by the arbitrator. These and other considerations are reflected in the draft provisions, which are designed to stimulate discussion towards the creation of a set of rules to be agreed upon by disputing parties that can adequately address the particular features of technology disputes.

Elliot Friedman (Freshfields Bruckhaus Deringer) gave the perspective of the US tech sector, particularly regarding business-to-business (“B2B”) disputes between established technology players. According to Friedman, we can safely assume a significant up-tick in technology disputes as technology companies continue to increase in the share of world trade. Technology companies have formed huge parts of the world economy for many years, causing Friedman to pose the question: why haven’t we seen more technology companies active in the international arbitration arena? Typically, B2B contracts entered into by technology companies opt to resolve disputes in the California courts, or occasionally in New York courts, even with counterparties from all over the world. For Friedman, this reflects familiarity and bargaining power held by Big Tech in contractual negotiations.

Notwithstanding this preference for court processes among Big Tech, the explanatory note to the draft provisions observes that “technology-related disputes can be described as those that require a speedy and cost-efficient resolution by a person(s) with the appropriate expertise and that require a flexible resolution process to adapt to the evolution of the dispute as well as relevant technology” (at [2]).

In defending resort to courts, Friedman pushed back on the notion that the ability to select specialist arbitrators necessarily makes arbitration a better choice. First, most technology disputes are contractual in nature, and while the subject matter of a contract may be highly technical, the dispute is often not exceedingly technical, at least not to the level that competent generalist arbitrators, assisted by counsel, would be unable to resolve the dispute. Secondly, the use of dispositive court motions such as early dismissal or summary judgment can resolve or significantly streamline disputes. By contrast, while similar case management techniques are available under most of the major arbitration rules for unmeritorious claims (see e.g. ICSID Arbitration Rule 41, discussed here and ICC Rule 22 (2021), clarified here), their use is limited.

For Friedman, international arbitration has two clear benefits that warrant consideration by Big Tech. First, C-suite executives loathe depositions. They are time- and resource-intensive and distract senior executives from their primary job. Therefore, the fact that depositions are fairly alien to international arbitration proceedings is a significant drawcard. Secondly, and even more important, the threat of publicity in the courts can be used as a lever of power in pre-dispute negotiations. The confidentiality of international arbitration thus presents a big advantage.

The draft provisions explore these and other aspects to encourage the use of international arbitration in the context of technology-related disputes, beginning with a definition of “technology dispute.”

What is a technology dispute?

Under draft provision 1(1), a technology disputes means:

“a dispute arising out of or relating to the supply, procurement, research, development, implementation, licensing, commercialization, distribution, financing, as well as to the existence, scope, and validity of legal relationships of or related to the use of emerging and established technologies.”

Such disputes may “arise out of ownership (including intellectual property rights in a specific technology), licensing terms, payment or financial issues, non-competition (unfair competition or non-competition), confidentiality (data privacy, non-disclosures), or regulatory issues.”

Concern was expressed at the Colloquium that the proposed definition of a technology dispute in draft provision 1 is overly broad. Switzerland requested – if perhaps rhetorically – an example of a dispute that would not constitute a technology dispute. France bristled at the inclusion of intellectual property in the definition – “Have WIPO been consulted?” – while the US noted that a plough is a form of technology… would a dispute involving the use of a plough be a dispute “of or related to the use of emerging and established technologies” (emphasis added)?

Against these concerns was a memorable remark made by expert Shai Sharvit (Gornitzky), that when it comes to technology disputes, like the unmentionable in Jacobellis v. Ohio, “[You] know it when you see it.” Working Group Chair Andrés Jana (Bofill Mir & Alvarez) further clarified that, like the UNCITRAL Expedited Arbitration Rules, the draft provisions would be “opt-in” at the election of the parties, potentially ameliorating concerns as to the open-ended nature of the definition.

Effective and expeditious case management: the need for speed

The draft provisions introduce various techniques for the speedy resolution of technology disputes. Under draft provision 3, an initial case management conference shall be held as soon as possible after the constitution of the arbitral tribunal. Draft provision 4 holds that any supplement to the notice of arbitration, including all supporting evidence, should be communicated within 5 days following the initial case management conference, with any reply also to be communicated within 5 days.

Draft provision 9 provides that an award may be rendered within 20 days of constitution of the arbitral tribunal if done on the papers, that unless otherwise agreed by the parties an award will be made within 40 days, to be extended in exceptional circumstances to 60 days. Draft provision 9(4) states that if the award is not rendered within the established time limit, fee reductions for the arbitrator kick in on a sliding scale, with a 20% reduction for a delay of up to 14 days, all the way up to a 90% reduction for a delay of more than 60 days.

As Tilman Niedermaier (CMS) observed, the case management timeframes are “considerably stricter” than existing arbitration rules, with procedural timeframes typically left to the discretion of the arbitral tribunal. The time limits for the making of an award similarly go beyond existing arbitration rules, such as the 6 month limit in the ICC Rules 2021 (Article 31(1)) and UNCITRAL Expedited Arbitration Rules (Article 16(1)) or the 3 month limit found in the German Institute of Arbitration Rules (Article 37).

One rationale for the compressed timeframe, stated by Israel, is to be flexible to the needs of the high-tech community, especially early-stage ventures that cannot sustain an extended dispute. Several States expressed concern, however, that such a short time frame could come at the expense of thoroughness, noting that some technology disputes are complex, multi-jurisdictional, and involve significant sums.

Default rules on confidentiality

Perhaps the most significant benefit for technology related disputes – as mentioned by Friedman – is the inclusion of a default “inbound” confidentiality clause (between the parties and tribunal) in draft provision 7. Draft provision 7(1), largely based on WIPO Arbitration Rule 54, defines the term “confidential information.” Under draft provision 7(2), a party must invoke confidentiality and explain why to the tribunal and other parties. If the parties cannot agree, draft provision 7(3) empowers the tribunal to determine under which conditions and to whom the confidential information may be disclosed (in whole or in part). One further innovation suggested by Friedman would be to expressly mention in the draft provision 7(3) conditions such as the “attorneys’ eyes only” designation – commonly determined by arbitrators – or the concept of “clean teams” – often used in merger contexts. Draft provision 7(4) also provides that, in exceptional circumstances, the tribunal may designate an advisor to make the confidentiality determination.

The inclusion of an inbound confidentiality default rule is significant, as while the rules of many arbitral institutions contain obligations of confidentiality to be held by tribunals and supporting staff, they are typically silent on confidentiality as between the parties, relying instead on tribunal discretion or national legislation (explored by Marlon Meza-Salas (DLA Piper) here). A default rule of confidentiality may thus act as a significant enticement for technology companies to opt for international arbitration.

Closing thoughts

More than once, attendees of the Colloquium observed that many of the proposed rules – such as a mandatory initial case management conference, resort to a sole arbitrator, and arbitrator discretion to hold virtual hearings – are techniques that could be employed regardless of whether the dispute is a “technology dispute.” Work remains to clarify the scope of technology disputes, and the nature of the draft provisions. In the meantime, the proposed innovations offer much food for thought in bringing arbitration to technology and technology to arbitration.

 

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

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

 

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


You, Me and Dupree: Indian Supreme Court Rethinks the Tenability of Using the Group of Companies Doctrine to Bind Non-Signatories to an Arbitration Agreement

Wed, 2022-07-13 01:53

The group of companies doctrine in arbitration has always been contentious in India. The doctrine was first recognised by the Indian Supreme Court in Chloro Controls India Private Limited v. Severn Trent Water Purification Inc. (2013) 1 SCC 641 (hereinafter Chloro Controls). Since then, Indian courts have applied the doctrine to bind group companies of signatories to arbitration agreements, forcing them to participate in arbitrations without their consent. Consequently, such group companies, particularly parent companies, are left to satisfy arbitral awards, in a manner contrary to the commercial understanding at the time of entering into the underlying agreements.

Separate and distinct corporate personality lies at the foundation of company law. It enables the modern corporate structuring practice of housing specific businesses or projects in separate purpose-specific entities, each bearing a distinct legal identity. The group of companies doctrine has its origin in the “single economic reality” view of corporate conglomerates, which ignores the legal identities of constituent companies, and views the entire undertaking as one (See, Dow Chemical France, the Dow Chemical Company v. Isover Saint Gobain, (ICC Case No. 4131); Mahanagar Telephone Nigam Ltd. v. Canara Bank, (2020) 12 SCC 767 (hereinafter MTNL); See also, observations in Cox & Kings Limited v. SAP India Private Limited & Anr. (Arbitration Petition (Civil) 38 of 2020, SC, Judgment dated May 6, 2022 (hereinafter Cox & Kings), para. 37 (Majority Opinion), para. 29 (Separate Opinion)). While the doctrine has certainly evolved away from this primitive premise it continues to implicate group companies to arbitration based on the tests of common control or transaction and the intention of the parties.

Recently, the Supreme Court rendered two judgments taking differing stands in relation to the doctrine. First, in ONGC v. Discovery Enterprises Pvt Ltd., Civil Appeal 2042 of 2022, SC (hereinafter ONGC), a full bench of the Court affirmed the application of the group of companies doctrine in Indian law and set aside an arbitral award that failed to consider the applicability of the doctrine. Close on its heels, in Cox & Kings, another full bench of the Supreme Court seemingly hit the brakes on the growing use of the doctrine. The Court questioned the doctrine’s consistency with foundational principles like party autonomy and distinct corporate personality. Ultimately, these issues of clarifying the basis, scope, and applicability of the doctrine have now been referred to a larger bench of the Supreme Court.

From Chloro Controls to Cheran Properties Ltd.  v. Kasturi & Sons Ltd., (2018) 16 SCC 413 to MTNL, jurisprudence anchors the application of the doctrine to a mutual intention amongst all the parties to bind the non-signatory to the arbitration agreement. However, different courts have used varying standards to gauge such mutual intention, and some proceeded to propound additional considerations to apply the doctrine. ONGC summarises these developments, and draws the following five considerations that apply justifying the invocation of the doctrine:

  1. The mutual intent of the parties;
  2. The relationship of a non-signatory to a party which is a signatory to the agreement;
  3. The commonality of the subject matter;
  4. The composite nature of the transaction; and
  5. [The party that has actually performed the contract].” (See, ONGC, para. 26.]

Not only is there no authoritative guidance as to the meaning of these “considerations”, there are also no clear demarcations as to the scope and the preconditions for the application of the doctrine. As a result, the outcomes of cases involving the group of companies doctrine have become wildly unpredictable. As discussed on the Blog previously, previously, High Courts have relied on the nebulous discussion from the Supreme Court to “order” into existence arbitration agreements binding a diverse set of non-signatories.

 

Tensions with arbitration law

The doctrine turns on the crucial test of the mutual intention of parties to bind all (including non-signatories) to an arbitration. Ironically, courts are forced to look for such an intention in the face of an agreement which specifically identifies the parties to the arbitration. Often these parties are consciously chosen (or even incorporated) to enter into commercial and arbitration agreements, keeping out other group entities. Looking for such a mutual intention is in effect a search for an unwritten arbitration agreement that also includes the non-signatory.

Making matters more precarious, such an exercise ignores that Indian arbitration law that requires arbitration agreements to necessarily be reduced to writing under Section 7(3) of the Arbitration and Conciliation Act, 1996. In all, the doctrine undermines the principles of consent and party autonomy which is central to arbitration as an avenue of dispute resolution.

 

Statutory basis for derivative standing

Many of the questions referred to the large bench by way of the Cox & Kings decision involve interpretation of Section 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), and whether the group of companies doctrine can be read into it. Section 8 provides that “a party to the arbitration agreement or any person claiming through or under him” can compel a court seized of a dispute subject to an arbitration agreement to refer the parties to arbitration instead of itself deciding the matter.

In fact, the expression “any person claiming through or under him” was amended into the provision in the wake of Chloro Controls. The amendment allowed a non-signatory to derive its standing before the arbitral tribunal from the signatory, as a successor in interest.

Importantly, the Law Commission of India recommended a similar amendment to Section 2(1)(h) (which defines a “party”), thereby allowing successors in interest to exercise all rights that a signatory of an arbitration agreement was entitled to, since they effectively stepped into the shoes of the signatory. Had this proposal been enacted, successors in interest, regardless of their membership to the same corporate group, would find themselves bound by arbitration agreements that their predecessors had opted into.

As noted in Cox & Kings, Parliament chose not to amend the definition of “party”. The effect of this omission to amend Section 2(1)(h) will likely be significant in assessing the validity of the group of companies doctrine.

Crucially, the language of the amended Section 8 tests a non-signatory’s standing against the interest they derive form a signatory, and not by their membership to the signatory’s group of companies. If the focus before the larger bench shifts to this language in Section 8 and the, it is likely that the Court may embrace the doctrine only in light of group companies that are in fact successor in interest to the signatories. With that outcome, the “group of companies” could be rendered a misnomer, given that its application is predicated on derivative interest, and not on membership to a group.

 

Practical implications

The doctrine comes to the aid of hopeful claimants who fear that the signatory to the arbitration agreement may not satisfy an award, and therefore seek to implicate financially healthier group companies to the proceedings. For the same reason, the doctrine is a thorn in the flesh for larger conglomerates whose parent companies might end up having to provision for costly arbitrations in their books, despite (intentionally) not being a party to the underlying arbitration agreement. Accordingly, this litigation strategy might not be very fruitful, since counter-parties might rely on the doubts now cast in Cox & Kings.

That said, ending up with an award but no way to enforce it meaningfully is a legitimate concern that parties will have. Parties may be better protected against such situations by obtaining indemnities, guarantees, or other contractual comfort from promoters or parent companies to cover such potential losses. Where agreements have already been entered into, it would be worthwhile to look out for and bring actions against contractual counterparties that are dissipating their assets in apprehension of an adverse award. In any case, relying on the group of companies doctrine to hedge against this risk may not prove successful for long.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


Has the SFT “Toughened” the Duty of Curiosity while “Softening” the Duty of Disclosure?

Tue, 2022-07-12 01:41

In Decision 4A_520/2021 of 4 March 2022, the Swiss Federal Tribunal (“SFT”) was requested to determine whether the chairperson of a panel in proceedings before the Court of Arbitration for Sport (“CAS”) lacked independence or impartiality given his repeat appointments by FIFA. The SFT declared the challenge inadmissible under R34(1) CAS Code, yet still proceeded to examine the same on its merits on a purely arguendo basis. Upon presenting the factual background of the dispute (A), this post examines two aspects of the SFT’s decision which may have a lasting, systemic impact on the principles of independence and impartiality under Swiss law, if not under the IBA Guidelines on Conflicts of Interest (“IBA Guidelines”) more generally: the SFT’s pronouncement that knowledge of a ground for challenge acquired by a party’s lawyers in the context of separate proceedings can determine the dies a quo for assessing the party’s fulfillment of its “duty of curiosity” (B); and the SFT’s emphasis on the “specificities” of sports arbitration to arguably soften the duty to disclose repeat appointments (C).

 

A. The Factual Background

The award challenged before the SFT concerned a life ban from participating in football-related activities and a fine of CHF 1,000,000.00, imposed by FIFA on a former football official (“the Appellant”) in connection with his participation in the “FIFA-Gate” scandal. The Appellant had first challenged both sanctions before the CAS, which had reduced the ban to twenty years while upholding the fine. The Appellant then filed a motion to set aside the award based, inter alia, on the ground that the CAS panel had been “irregularly constituted” within the meaning of Article 190(2) of the Swiss Private International Law Act (“PILA”), as its president lacked independence and impartiality.

The president had initially disclosed the fact that he was simultaneously chairing another case involving FIFA. After the hearing, the Appellant requested further disclosures, which were eventually made on 16 October 2020. These disclosures revealed that the president had been involved in ten additional ongoing arbitrations involving FIFA, in two of which he had been appointed by FIFA itself. They moreover revealed that a colleague at the president’s firm had recently advised FIFA on a GDPR-related matter.

The Appellant challenged the president before the ICAS Challenge Commission, which rejected the motion primarily on the ground that the allegedly undisclosed information had in fact been disclosed to the Appellant’s counsel on 2 October 2020, albeit in the context of entirely separate proceedings which did not involve the Appellant himself. The CAS therefore issued its award in its original composition, prompting the Appellant to request an annulment before the SFT.

 

B. Knowledge Acquired by a Party’s Lawyers in Unrelated Proceedings Can Determine the Dies a Quo for Assessing the “Duty of Curiosity”

Pursuant to Article 180(2) PILA, parties challenging an arbitrator on grounds of lack of independence or impartiality after the relevant deadline must demonstrate that, within that deadline, they had exercised “due diligence”, i.e. that they had performed research into the arbitrator’s independence and impartiality and displayed the requisite “curiosity” without identifying a cause for concern at the time. Before the SFT, FIFA claimed that the Appellant had not discharged his duty of curiosity since the relevant grounds were known to his counsel long before the deadline for filing a challenge under R34 CAS Code had expired.

Upon recalling that knowledge acquired by lawyers is directly attributable to their principal (4A_110/2012, c. 2.2.2), the SFT extended the 7-day limit for filing a challenge ex R34 CAS Code to the fulfillment of the Appellant’s duty of curiosity, reasoning as follows:

the rules of good faith required the appellant, if not to request the challenge of the arbitrator concerned within the seven-day period set by art. R34 of the Code after having taken cognizance of this information, at the very least, in order to fulfil his duty of curiosity, to formally request the CAS, within the said time limit, to provide further details (c. 5.4.2).

While, in Sun Yang, the SFT had arguably “softened” the duty of curiosity, this finding goes in the opposite direction: it creates a presumption of knowledge by a party of the existence of grounds for challenge, itself based on a presumption of knowledge of such grounds by the party’s counsel due to disclosures in unrelated disputes. Following this finding, to ensure the observance of the time-limit for filing a challenge should grounds for one surface at a later point, rather than merely relying on internal cross-information systems, counsel are likely to increasingly resort to pre-emptive disclosure and clarification requests; this, in turn, is likely to have an impact on the speed and overall efficiency of arbitral proceedings.

 

C. The “Particularities” of Sports Arbitration Warrant the “Softening” of the Duty of Disclosure

The key points of contention in Decision 4A_520/2021 were whether, for the purposes of the disclosure requirement of Section 3.1.3 of the IBA Guidelines, (i) joined cases should count as one and (ii) only appointments as party-appointed arbitrator should be considered. To recall, according to Section 3.1.3, situations where “[t]he arbitrator has, within the past three years, been appointed as arbitrator on two or more occasions by one of the parties, or an affiliate of one of the parties” are considered as a “previous service” for one of the parties; they thus fall within the “orange list” of issues which, depending on the circumstances, an arbitrator may be required to disclose.

FIFA’s position was that, according to footnote 5 of the IBA Guidelines, if in certain areas, such as sports arbitration, it is customary for parties to frequently appoint the same arbitrator, then no disclosure of this fact is required, since all parties to the arbitration are presumed to be familiar with this practice. FIFA alluded in this connection to (i) the large volume of appointments it had made over the past three years, as a result of the large volume of CAS proceedings initiated against it, and (ii) the CAS’ closed list of arbitrators.

Having already dismissed the Appellant’s challenge as inadmissible, the SFT proceeded to rule on the above-summarized arguments on a purely arguendo basis. After summarily dismissing the contention that proceedings in which the challenged arbitrator had not been appointed by FIFA should count, and after declining to consider joined cases separately, the SFT turned to the issue of the non-disclosure of three appointments in three years, noting as follows:

there is no indication that this practice, although inappropriate and contrary to the requirements of the duty of disclosure, was the result of a deliberate attempt by the arbitrator to conceal certain information from the parties (c. 5.5).

The SFT added that, while the president’s non-disclosure could raise some “questions”, “sports arbitration instituted by CAS has particularities […], such as the closed list of arbitrators” (c. 5.5). Since FIFA had participated in more than 400 CAS arbitrations during the relevant period, these “questions” did not raise legitimate doubts as to impartiality or independence in the absence of other “corroborating circumstances”. This is an important pronouncement with a trend-setting potential, seeing as few national courts have made clear determinations on the precise function of the duty to disclose facts under the “orange list”. It is, one, however, that prompts several concerns.

First, the SFT here reasons that, while the failure to disclose prior appointments exceeding the IBA threshold may constitute a violation of an arbitrator’s duty of disclosure, no legal consequences should be attached to such a violation absent further corroborating circumstances of lack of independence or impartiality; critically, as to what constitutes a corroborating circumstance, the SFT sets a high standard, rejecting facts such as the untimeliness of the president’s disclosures or GDPR-related work performed by the president’s law firm for FIFA. In essence, the SFT appears to suggest that, to be considered “corroborating”, the relevant circumstance must warrant a finding of bias in itself; in other words, that it must be decisive, as opposed to merely confirmatory. If this is indeed how the SFT’s reasoning must be understood, the duty to disclose has now largely been rendered a dead letter.

Second, the SFT’s pronouncement that the party challenging an arbitrator must demonstrate a “deliberate attempt” to conceal prior appointments is inconsistent with the objective nature of the threshold for a finding of lack of independence or impartiality. Plainly, the president’s subjective intent to conceal his biases by withholding evidence of prior appointments could not possibly have been the point of focus, insofar as it is the objective appearance of bias that should determine whether doubts as to an arbitrator’s independence or impartiality are legitimate.

Third, the SFT fails to identify and operationalize the alleged “particularities” of sports arbitration, alluding only to the practice of closed lists and without explaining how this factor actually precluded an appointment that would be in line with the “orange list”. At the very least, the SFT could have required the president and FIFA to offer prima facie plausible explanations in connection with the reasons for both the non-disclosure and the ineligibility of other arbitrators featuring on CAS’ roster.

Lastly, footnote 5 of the IBA Guidelines clarifies that disclosure of repeat appointments may not be required “where all parties in the arbitration should be familiar with such custom and practice”. The footnote thus sets two cumulative criteria: the existence of such a practice or custom and the parties’ familiarity with the same. In its decision, the SFT disregards the latter criterion, applying footnote 5 without considering whether the Appellant, who was neither a sophisticated club nor a federation, was familiar with the practice of repeat appointments in sports arbitration. It is worth recalling in this connection that the SFT itself has advised that sports arbitration is effectively non-consensual (4P.172/2006, c. 4.3.2.2). If parties are often unaware of the existence of an arbitration agreement governing their conduct, they cannot be lightly presumed to be familiar with the practice of repeat appointments.

 

Concluding Remarks

In Decision 4A_520/2021, the SFT articulated a series of obiter dicta concerning the duty of disclosure under Swiss law and Section 3.1.3 of the IBA Guidelines. In so doing, it arguably prompted more questions than it answered, as regards (i) the timing, type and intensity of the due diligence a party’s counsel must exercise as soon as an arbitrator is nominated by the other party, as well as (ii) footnote 5 of the IBA Guidelines, and particularly the extent to which the same can be relied upon to soften the duty of disclosure. Given the frequency of challenges in sports arbitration, the time to find out how the SFT would operationalize its dicta in a case involving a more compelling breach of the duty of disclosure must be near.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


The 2022 Dutch Arbitration Day: Fraud and Corruption in Arbitration

Mon, 2022-07-11 01:00

After two years of absence due to COVID-19, the Dutch Arbitration Association held its eighth conference on 2 June 2022 in Amsterdam. The main theme of this year’s conference was fraud and corruption in arbitration. This blog reflects the main issues of the keynote speech and the panel debates of the conference. We will not discuss two sessions dealing with additional topics, namely a breakfast panel dedicated to the importance of cognitive diversity in arbitral tribunals presented by Nathalie Allen (Addleshaw Goddard) and Leonor Díaz-Córdova (C|T Group) and the panel discussion of Erik Bos (PwC), Erik van Duijvenvoorde (Accuracy) and Alan Rozenberg (Compass Lexecon) about recent trends in damages awards.

 

Fraud and Corruption in Arbitration: Overview of Main Issues

Michael Polkinghorne (White & Case) delivered a keynote speech on “Fraud and Corruption in Arbitration“. He started by looking at various definitions of fraud and corruption, and referred to the different tools addressing the problems of fraud and corruption, such as the OECD ConventionForeign Corrupt Practices Act (FCPA). Mr Polkinghorne stressed that national courts seem to be more willing nowadays to intervene if issues of fraud and corruption are brought before them in the post-arbitration court proceedings. For example, French courts often deal with such issues in the context of public policy.

The question arises who is in a better position to decide on a fraud allegation, is it an arbitral tribunal in the initial arbitral proceedings or a state court in the following state court proceedings? Mr Polkinghorne noted that allegations of corruption should only influence the validity of an award if there is a causal link between such allegations and the outcome of the arbitral proceedings, for example, the damages awarded. He highlighted that an arbitral tribunal should raise concerns of potential fraud or corruption, if any, already during the proceedings and give parties a chance to address these matters to safeguard due process. He also posed a question whether a counsel is obliged to battle bribery or corruption, for example, by proactively reporting potential fraud, and concluded that this issue is not settled yet.

 

Bribery in International Business Transactions

The keynote was followed by a presentation of Drago Kos (OECD Working Group on Bribery) who provided an overview of the OECD activities to fight fraud and corruption in business transactions. He highlighted that research shows that there is more corruption in certain industries, such as fossil fuels, construction, transportation, and communications. Interestingly, developed and developing countries have approximately the same number of reported corruption cases. Mr Kos suggested that OECD and the arbitration community should engage more with each other on the topic, and that the arbitration community should contribute to battling fraud and corruption.

 

Corruption of Evidence

The panel moderated by Eniko Horvath (Dechert) discussed “Fraud and Corruption and Evidence in Arbitration“. The panelists were Mirjam van de Hel-Koedoot (NautaDutilh), Andrew Cannon (Herbert Smith Freehills), Melanie van Leeuwen (Derains & Gharavi) and Prof. Remme Verkerk (Houthoff).

The speakers stated that corruption of evidence comes in different forms, such as forged or corrupted evidence or non-compliance with document production orders. Arbitrators have a duty to render an enforceable award, thus, if an issue of corruption of evidence is raised, they need to react and address it.

The speakers also discussed whether the burden of proof should shift in case of allegations of corrupted evidence. In Methanex, the tribunal found that once a party shows prima facie that evidence was obtained illegally, the burden of proof should shift to the other party to demonstrate that the evidence is admissible. However, tribunals have used different standards of proof, including a high standard for allegations of forged documents. The speakers noted that the existence of red flags for illegality is not enough. They should be tested with evidence.

The panelists stated that awareness about fraud of evidence is important. They also thought it is essential to develop best practices on how to deal with fraudulent evidence procedurally, as it may interrupt the proceedings. The new edition of the IBA Rules on the Taking of Evidence in International Arbitration 2020 includes the recently adopted Article 9(3) allowing the tribunal to exclude evidence obtained illegally. However, the IBA Task Force did not reach a consensus on the specific circumstances in which such evidence should be excluded and left the matter to the tribunal.

 

Guerilla Tactics in Arbitration

Dorine ten Brink (Ploum), Albert Marsman (De Brauw Blackstone Westbroek), Franz Schwarz (WilmerHale) and Prof. Niek Peters (Simons & Simons) discussed guerilla tactics in arbitration. The workshop panel concluded that the definition of guerrilla tactics depends on the circumstances of the case. It should, thus, be established on a case-by-case basis whether a certain practice, for example, an extension request, is a guerilla tactic. The speakers discussed various examples and whether they constitute guerilla tactics, such as threatening witnesses, bombarding the tribunal with unsolicited submissions, requesting reconsideration of tribunal’s decisions and orders, making repeated disclosure requests and appointing a co-arbitrator who does not have time to act as an arbitrator, insisting on an in-person hearing.

In practice, the mentioned tactics can be used by a party in its attempt to put some pressure on or even hinder the presentation of a case by an opposing party. Usually, an experienced tribunal can spot and prevent any negative effects of such tactics during the proceedings. It is not uncommon for arbitrators to take these tactics into account in costs awards.

 

Fraud and Corruption in Investment Arbitration

In a workshop, Prof. Eric de Brabandere (Leiden University), James Boykin (Hughes Hubbard & Reed), Iuliana Iancu (Hanotiau & van den Berg) and Alfred Siwy (Zeiler, Floyd & Zadkovich) discussed fraud and corruption in investments.

The panel presented an overview of the approaches to illegality issues in investment arbitration. The “in accordance with the host state law” clause can serve as either a basis for a jurisdictional objection or a merits and/or quantum defense. The speakers proposed to use “legal realism” so that trivial violations of host state law should not deprive an investment of protection.

The panelists also debated if the burden of proof should shift to the investor if a state presents prima facie evidence of corruption. Burden of proof exists to ensure due process and shifting it can be used by a state strategically. The tribunal is required to deal with this issue, so the focus of the dispute may shift and this will inevitably lead to higher arbitration costs. Thus, there may be a significant benefit for a state to raise such allegations. In any event, the speakers agreed that shifting the burden of proof should not be automatic. This is also supported by case law, as arbitral tribunals in numerous arbitrations, including in Jan Oostergetel and Rompetrol, have adopted a general assumption that prima facie evidence submitted by a claimant is generally not sufficient to shift the burden of proof to a respondent.

Furthermore, the speakers discussed that enforcement of investment arbitral awards is often delayed by allegations of fraud and corruption. Providing security under Article VI of the New York Convention may be a good practical option to eliminate corruption concerns. If a party seriously believes in fraud or corruption allegations it raised in the post-award court proceedings, it should be ready to provide security in the amount awarded by the tribunal.

 

Fraud or Corruption in Arbitration-Related Court Proceedings

Another panel discussion, moderated by Sophia von Dewall (Derains & Gharavi), dealt with the role of state courts in enforcement and setting aside proceedings involving fraud or corruption and provided observations from a few jurisdictions. Wouter Cortenraad (Amsterdam Court of Appeal), Prof. Stefan Kröll (Bucerius Law School), Julie Spinelli (Le16) and Prof. Gerard Meijer (Linklaters) gave insights into Dutch, French and German law. This topic was already touched upon by Mr Polkinghorne during the keynote speech.

In the Netherlands, in case of a fraud involving arbitrators, a court will usually conduct a full review. If the case involved allegations of fraud regarding the substance of the dispute, on the other hand, courts should have more restraints in doing a full review. If fraud is discovered after an award is rendered, Dutch law provides for a revocation procedure.

The French courts consider the facts but they are bound by the findings of arbitrators. In Belokon, the French Supreme Court did a de novo review of the legal and factual evidence and then applied a red flags test. However, the de novo review by courts is not unlimited, and it will usually not go into the merits of the case, but the judges will check if enforcing an award will be against public policy.

A full review is also provided under German law in case of public policy concerns. Lower courts would do a full review of law and a restricted review of facts. In contrast with Dutch law, no revocation procedure exists in German law. In addition, when a party brings allegations of illegality in the arbitration-related court proceedings, German courts need to check if the award was actually affected by such illegality.

Thus, the courts may have different approaches. However, as an overall emerging trend, we observe that state courts now engage more with issues of fraud and corruption in arbitration-related court proceedings. Although courts do have a duty to protect public policy, it is up to the arbitration community to stop and punish the behavior that undermines awards with fraud allegations in courts, where such allegations are clearly frivolous.

The various topics discussed during the conference show that fraud and corruption may appear in different forms and at different stages of an arbitration dispute, such as procurement of a contract containing an arbitration clause, defrauding the arbitrator, admitting the illegally obtained evidence or even after the award is rendered in the post-award court proceedings. The conference discussions covered the main forms thereof. “You know it when you see it” may be a suitable starting point, however, a tribunal should test red flags before them with additional available evidence. The arbitration community should think of the best practices on how to tackle fraud and corruption allegations.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


What’s New on Canada’s West Coast? VanIAC’s New International Commercial Arbitration Rules of Procedure

Fri, 2022-07-08 01:51

Canada’s west coast has long welcomed arbitration as a means of dispute resolution and provided a venue for arbitrations of all kinds. The Vancouver International Arbitration Centre (VanIAC) – established in 1986 under the name British Columbia International Commercial Arbitration Centre (BCICAC) – has recently made further strides in providing parties with workable and efficient routes for resolving their disputes outside the courts. Its offerings now include a new set of International Commercial Arbitration Rules of Procedure that came into effect on July 1, 2022.

VanIAC had several objectives in updating its previous international rules. First, VanIAC wished to incorporate innovations such as emergency arbitrator procedures (which have proven helpful in other venues as well as under VanIAC’s earlier-updated domestic rules) and take into account changes (postdating the rules’ last amendment, in 2000) to the UNCITRAL Model Law and Canadian arbitration legislation, all while preserving well-tested elements of the international rules’ prior content.

Second, relatedly, VanIAC’s new international rules solidify its appeal as an administering arbitral institution for parties internationally. Those parties will benefit from the new rules’ express provision for virtual hearings as well as from VanIAC’s adoption of best practices competitive with those of leading arbitral institutions around the world.

Third, VanIAC sought to make its international rules suitable not only for parties from different countries but also where an arbitration governed by VanIAC rules is seated elsewhere in Canada than VanIAC’s home province of British Columbia.  Under Rule 1(d) of the new international rules, in a case seated in another Canadian province or territory between parties that have agreed to arbitrate disputes under any VanIAC (or BCICAC) rules, VanIAC’s new international rules, rather than its domestic rules, will apply.

Why is the last point important? In 2020, the province of British Columbia enacted a new domestic Arbitration Act that, in contrast to its relatively skeletal predecessor, included much of the procedural detail that had formerly been found in VanIAC’s domestic rules (the Arbitration Act was previously discussed on this blog here). Accordingly, also in 2020, VanIAC revised its domestic rules to mesh with the new domestic legislation, streamlining those domestic rules to avoid overlap. VanIAC’s more streamlined domestic rules, however, no longer work as well alongside other provincial or territorial legislation that does not include the same content as BC’s new Arbitration Act. VanIAC’s international rules provide the additional detail needed in circumstances not governed by BC’s domestic arbitration statute.

 

Resolving Disputes Expeditiously

Further shaping VanIAC’s new international rules is the principle that disputes should be resolved expeditiously while still ensuring, as reflected in Rule 19, that the parties are treated with equality and each given a reasonable opportunity to present their case. In this regard:

  • Rule 19 also provides that the arbitral tribunal shall endeavour to conduct the proceedings expeditiously and avoid unnecessary delay and expense; the parties too shall endeavour to promote the expeditious conduct of the arbitration and to avoid unnecessary delay and expense. The arbitral tribunal may allocate costs or take any other steps it considers necessary to preserve these objectives.
  • Rule 21 provides that a party may seek leave to bring an application for early disposition of one or more issues of fact or law at any stage in the proceedings.
  • Rule 23 provides that unless otherwise agreed by the parties or directed by the arbitral tribunal, the direct evidence of witnesses shall be provided by way of written witness statements.
  • The new international rules expressly contemplate the prospect of virtual hearings, providing specific details in this regard in Rule 25.
  • Under Rule 35, unless otherwise agreed by the parties or directed by the arbitral tribunal, the arbitral tribunal shall issue an award within 90 days of the latter of the close of the hearing and the last written submissions received by the arbitral tribunal.
  • Beyond the above, VanIAC’s new international rules are supplemented by specific expedited procedures which – subject to other determination by the parties, arbitral tribunal or VanIAC – apply to arbitrations conducted by a sole arbitrator if the parties agree or if no claim (or estimate of the amount claimed) by any one party in a notice to arbitrate or notice of counterclaim exceeds $500,000 CAD exclusive of interest and costs. The expedited procedures set out short timelines, including that all written material must be exchanged no later than 120 days from the appointment of the arbitrator, unless otherwise agreed by the parties or directed by the arbitrator. They also provide that, unless otherwise agreed by the parties or directed by the arbitrator, a final award shall be issued without an oral hearing based on the written material. If an oral hearing is necessary, under the expedited rules it is generally to be no more than one day in length. Unless otherwise agreed by the parties or directed by the arbitrator, the expedited arbitrator shall issue an award within 45 days of the last written material received by that arbitrator, or, where an oral hearing has been ordered, within 45 days of the closure of proceedings.

 

Appointing and Challenging Arbitrators

VanIAC’s new international rules set out the process for appointing – and, where this circumstance arises, challenging – arbitrators (Rules 11 and 13).

Rule 12 confirms that arbitrators acting under VanIAC’s international rules shall be and remain wholly independent and impartial of any party involved in the arbitration. When a person is approached in connection with their possible appointment as an arbitrator, the person must disclose any circumstances likely to give rise to justifiable doubts as to the person’s independence or impartiality.

For the purposes of VanIAC’s new international rules, there are justifiable doubts as to an arbitrator’s independence or impartiality only if there is a real danger of bias on the part of the arbitrator in conducting the arbitration.

 

Interim Measures

VanIAC’s new international rules also address the topic of interim relief. Consistent with the prior rules, Rule 26 makes clear that unless otherwise agreed by the parties in writing, the arbitral tribunal may, at the request of a party, grant any interim measure the tribunal deems appropriate, including security for all or part of the amount in dispute, or the preservation, storage, sale or other disposal of property under the control of any party and relating to the subject matter of the arbitration.

Rule 27 goes on expressly to state that unless prohibited by law or otherwise agreed by the parties in writing, the arbitral tribunal may, at the request of a party, grant an ex parte preliminary order (that is, an order made without notice to the other party) directing a party not to frustrate the purpose of a requested interim measure. A preliminary order shall only be granted in exceptional circumstances where the arbitral tribunal considers that prior disclosure of a request for an interim measure to the party against whom it is directed risks frustrating the interim measure’s purpose.

Ex parte relief requires certain safeguards to be satisfied. Under Rule 27, a party applying for an ex parte preliminary order must disclose to the arbitrator all circumstances that are likely to be relevant to the arbitrator’s determination of whether to grant or maintain the order. Further, at the earliest practicable time, the arbitral tribunal must give a reasonable opportunity to the party against whom a preliminary order is directed to present its case. After the party has had a reasonable opportunity to present its case, the arbitral tribunal may issue an interim measure adopting or modifying the preliminary order.

A preliminary order expires 20 days after the date on which it was issued. The preliminary order itself is binding on the parties but is not an arbitral award and is not subject to enforcement by a court.

VanIAC’s new international rules also address the difficult situation where relief is required before the arbitral tribunal that will ultimately decide the merits of the dispute is constituted. To deal with this circumstance, VanIAC’s new international rules set out certain emergency arbitration procedures (although Rule 32 allows parties to agree in writing to opt out of same).

Under Rule 29, where a party applies in accordance with Rules 26 and 27 for an interim measure or preliminary order prior to the constitution of the ultimate arbitral tribunal, VanIAC shall appoint an emergency arbitrator within two days of its receipt of the application. The emergency arbitrator shall establish a procedure within three days of appointment and, under Rule 31, issue any interim measure or preliminary order within 15 days of appointment.

The emergency arbitrator may issue an interim measure or preliminary order after the ultimate arbitral tribunal has been constituted but shall not have any further powers. (Under Rule 29(d), unless otherwise agreed by the parties, an emergency arbitrator appointed under the new international rules cannot be appointed as part of the arbitral tribunal in the same arbitration.)

 

Looking Forward

As mentioned by VanIAC’s managing director, VanIAC looks forward to providing expert and trusted dispute resolution services by implementing the new international rules. It welcomes questions from anyone considering adoption of those rules as well as feedback from those who use them.

 

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190


What are the Limits of the Fiona Trust Doctrine? A Review of Recent Cases on Inconsistent Dispute Resolution Clauses

Thu, 2022-07-07 01:09

It is critical to invest time to ensure that there are no inconsistencies between multiple dispute resolution/jurisdiction clauses within a particular contractual relationship (whether within a single contract or across multiple related contracts). Such inconsistencies inevitably lead to disputes over how the parties should resolve their disputes – a potentially costly sideshow to the resolution of the real dispute between the parties.

In the seminal case of Fiona Trust & Holding Corp v Privalov [2007] 2 Lloyd’s Rep 267, the UK House of Lords (as it then was) introduced what is often referred to as the “presumption in favour of one-stop adjudication”. The Fiona Trust doctrine presumes that “rational businessmen” are likely to have intended that any disputes arising between them will be decided by the same court or tribunal, unless they use clear language indicating otherwise.

There have been several recent decisions around the world exploring the limits of the doctrine. These cases suggest that, where there are conflicting arbitration and court jurisdiction clauses, in the absence of clear language indicating the parties’ intention to resolve certain aspects of a dispute in one forum as opposed to another, the Fiona Trust doctrine will be applied to reconcile both clauses such that they continue to remain valid and operative. These decisions have given effect to both clauses by finding as a matter of construction that the parties intended all disputes to be resolved through arbitration with the court providing supervisory jurisdiction, given the other way round would mean that the arbitration clause would become inoperative.

 

Melford Capital Partners (Holdings) LLP l v Wingfield Digby [2021] EWHC 872 (Ch)

In Melford Capital, there was a breakdown of a business relationship between partners to Melford Capital, and there were two conflicting dispute resolution clauses contained in a limited liability partnership agreement. One was an exclusive jurisdiction clause in favour of the English courts and the other was an arbitration clause, which did not specifically designate a seat of arbitration.

The Court interpreted the exclusive English jurisdiction clause as providing for the supervisory jurisdiction of the English courts in support of arbitration, and therefore concluded that it was possible to read the clauses in harmony rather than in conflict with each other.  A similar approach had been taken in other cases prior to Fiona Trust, in particular Paul Smith Ltd v H&S International Holding Inc [1991] 2 Lloyd’s Rep 127.

This arguably went one step further than the House of Lords did in Fiona Trust, given the jurisdiction clause was not expressed to be exclusive in Fiona Trust, and the court and arbitration clauses referred to each other in Fiona Trust.  In contrast, in Melford Capital there were two arguably completely contradictory clauses, each of which would work independently of the other. The judge considered that the question was whether to determine that the arbitration clause was completely inoperable such that it was “eviscerated”, or instead to make the two clauses work together.

 

Surrey County Council v Suez Recycling and Recovery Surrey [2021] EWHC 2015 (TCC)

This case concerned a waste disposal project agreement together with three successive agreements, all of which were described as variations to that first agreement. The four contracts each contained various iterations of the same arbitration clause and an exclusive jurisdiction clause in favour of the English courts. The third deed of variation, by which the parties agreed to implement an “EcoPark”, contained a new additional exclusive jurisdiction clause in favour of the English courts.

The Claimant, Surrey County Council, commenced court proceedings against Suez relating to delay in the construction and commissioning of the EcoPark. Suez disputed the court’s jurisdiction and brought an application for a stay under section 9 of the English Arbitration Act. Suez argued that the development of the EcoPark fell to arbitration in accordance with the original waste disposal agreement, whereas Surrey argued that disputes concerning the EcoPark should be ring-fenced and heard by the English court.

Referring back to Fiona Trust, the judge held that the arbitration clause should be construed broadly to encompass disputes concerning the EcoPark, as there was no reason why the parties would have chosen a different forum for one category of dispute without any clear language to indicate that. The judge found that the reference to arbitration and courts in the same contract was a reference to the supervisory jurisdiction of the English courts in support of arbitration, in line with Melford Capital.

As for the new jurisdiction clause in the third deed of variation, rather than finding that the existence of the arbitration clause and court jurisdiction clause created a conflict, the judge found that the “varied clauses” would fall to arbitration, but that the rest (e.g. the standard boilerplate clauses) would fall to the court. The judge accepted that the jurisdiction clause would therefore be of limited applicability.

The Melford Capital and Surrey County Council judgments could arguably be characterised as an expansion of the Fiona Trust doctrine from “presumption in favour of one-stop adjudication” to “presumption in favour of arbitration”. However, despite the approach taken in the above cases, there have also been several cases in England, Singapore and Hong Kong where the courts have found that the parties’ intention was not to submit all disputes to arbitration.

 

Albion Energy v Energy Investments Global [2020] EWHC 301 (Comm)

This case involved a sale and purchase agreement (SPA) containing a court jurisdiction clause, and an escrow agreement containing an arbitration clause. The court considered that there would be good reasons why parties would choose different dispute resolution provisions for principal and security agreements forming part of the same transaction. Therefore, the court found that the arbitration agreement in the escrow agreement did not supersede the court jurisdiction clause in the SPA.

 

Silverlink Resorts Limited v MS First Capital Insurance Limited [2020] SGHC 251

Silverlink involved an insurance policy which contained an arbitration clause with respect to “any dispute arising out of or in connection with this Policy” and a jurisdiction clause conferring jurisdiction to the Singapore courts with respect to “any dispute… regarding the interpretation or the application of this Policy”. Further, a renewal certificate included a choice of law jurisdiction provision which also conferred jurisdiction to the Singapore courts “in the event of any dispute over interpretation of this Policy”.

The claimant commenced court proceedings when its claim under the insurance policy was rejected. The defendant applied to the Singapore courts to stay the proceedings in favour of arbitration pursuant to section 6 of the International Arbitration Act of Singapore. As part of its reasoning in rejecting the stay application and determining that the arbitration clause did not apply to the dispute before it, the Singapore High Court ruled that the jurisdiction clause was intended to carve out disputes regarding interpretation and application of the policy from the arbitration clause, such that the two clauses were not inconsistent. Further, the court found that the renewal policy confirmed the parties’ intention to resolve disputes falling within the jurisdiction clause through the courts rather than arbitration.

 

H v G [2022] HKCFI 1327

Most recently in H v G, the Hong Kong Court of First Instance set aside an arbitral tribunal’s determination that it had jurisdiction over claims under a warranty where an associated building contract between the developer and contractor contained an arbitration clause, but the warranty itself between the two parties and a subcontractor submitted disputes to the non-exclusive jurisdiction of the courts of Hong Kong. The Hong Kong court found that the Fiona Trust doctrine was not applicable, as on the facts of the case, the parties had clearly intended to carve out disputes under the warranty from the arbitration agreement in the building contract and this displaced the Fiona Trust presumption.

 

Comments and take away

In circumstances where there are conflicting arbitration and court jurisdiction clauses (whether exclusive or not) and in the absence of other indications one way or another, it would appear that the only way in which such conflicting clauses can co-exist is for the court jurisdiction clause to be construed as confirming the supervisory jurisdiction of the court in support of arbitration.

Therefore, arguably the approaches taken in Melford Capital and Surrey County Council remain true to the original Fiona Trust doctrine – a presumption that disputes should be resolved in the same forum, and not necessarily demonstrative of a presumption in favour of arbitration, which would be an expansion of the Fiona Trust doctrine. That said, these cases demonstrate that the courts are willing to stretch the Fiona Trust doctrine to apply even where two conflicting clauses exist independently of one another.

The other cases discussed above demonstrate that the courts and tribunals may not always give preference to an arbitration clause for disputes arising in connection with a particular contractual relationship. Much will depend on the specific circumstances and the wording found in the inconsistent clauses, and what they indicate as to the parties’ intentions. An argument could be made that these cases lower the bar for what constitutes sufficiently clear language for the Fiona Trust doctrine not to apply.

The key takeaway from these cases is that arbitration clauses and jurisdiction clauses must be adequately reviewed to avoid inconsistencies (especially in multi-contract transactions). Where the intention is to carve out certain disputes for one forum as opposed to the other, such division and intention should be made clear using express drafting to avoid any unintended outcomes and wasteful disputes over the appropriate forum.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
by Arif H. Ali & David L. Attanasio
€ 202
Arbitration in Egypt: A Practitioner\'s Guide
by Ibrahim Shehata
€ 190