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Counsel Ethics in International Arbitration: The Glass Slipper Still Does Not Fit

Fri, 2021-07-02 01:23

The story of counsel ethics in international arbitration is very much like Cinderella’s fairytale. Once the clock struck midnight, all that remained was her glass slipper. This left the prince to search the kingdom for a maiden with the perfect fit for a “happily ever after”. Counsel ethics in international arbitration similarly involve an ongoing pursuit, with no end in sight. It is necessary to apply the proper law, find the appropriate forum to raise any concerns, and then determine a suitable remedy. This post seeks to tell the story of the various difficulties and challenges when navigating this tricky landscape, as illustrated in a recent case before the Canadian Federal Court (the “Court”) – Geophysical Service Incorporated v. Canada.

In this case, the Court refused to review the decision of the Trade Law Bureau of Global Affairs Canada (“TLB”), which had declined to remove a member of its counsel team representing Canada in a NAFTA arbitration. The Applicants (Claimants in the NAFTA arbitration) alleged that one of TLB’s counsel was conflicted because of prior employment at the Claimant’s third-party funder. The Applicants asserted that said counsel had access to privileged information that could prejudice their position in the NAFTA arbitration since the negotiation of their funding terms took place immediately prior to that counsel joining the TLB. Because the application was one for judicial review, and not a direct challenge of the counsel in question, the Court was able to avoid addressing the alleged conflict of interest by refusing to intervene on jurisdictional grounds. This post highlights the key considerations of the Court and maps out the likely journey of this application before the arbitral tribunal.

 

Judgment of the Federal Court – The Court Dismisses the Application

Issue 1 – The Court has No Jurisdiction to Review the Contested Decision

The Court conducted a narrow assessment under the Federal Courts Act (“FCA”) and found that the contested decision of the TLB was private in nature, and thus outside of the Court’s jurisdiction for review. Under Article 17(3)(b) of the FCA, the Court may set aside, prohibit or restrain a contested decision of a federal body. The Supreme Court of Canada has recognized the “sweeping” nature of this definition, that includes everything “from the Prime Minister and major boards and agencies to the local border guard and customs official and everybody in between.” Yet, the Court found that this definition did not encompass “any other body that is loosely connected to the Crown”, such as the TLB.

The Court reasoned that the TLB, as a representative of the federal government, acted as any other arbitration counsel. Thus, its decisions regarding the constitution of Canada’s defense team are inherently private and outside of the Federal Court’s purview. In conclusion on this issue, the Court also added that the NAFTA arbitration does not have any public implications, as the Applicants were “claiming damages for the misappropriation of their property”. The court held that the Applicants had other remedies available to ensure the public interest of “conflict-free lawsuits” without identifying any remedy in particular.

The Court analyzed the nature of the contested decision through a very narrow lens that did not encompass the context of the underlying NAFTA arbitration, which could have impacted the final decision. Firstly, the Court characterized the TLB as “loosely connected to the Crown”, despite the fact that it represents the government before international tribunals (in this case, in a NAFTA arbitration). Secondly, the Court denied any public interest in the underlying NAFTA arbitration, focusing on the specific claim of the investor, rather than the broader framework of the case. While investors generally pursue their private interests against host States in investment arbitration, as is widely recognized within the arbitration community (and also by critics of the investor-State dispute settlement system), this does not diminish the public dimension of the proceedings, not least because any adverse award of damages will be paid out of the public budget. Further, should the refusal of the TLB to remove the challenged counsel from Canada’s defense team result in adverse costs in the arbitration, such costs would be borne by the government. Therefore, although this narrow reading of the nature of the underlying issues provided the interpretive framework for the Court’s decision on jurisdiction, it is difficult to square with the full picture of the case.

 

Issue 2 – The Court Cannot Intervene in Proceedings Under Chapter 11 of NAFTA

On the second issue, the Court relied on Article 5 of the UNCITRAL Model Law to find that the review of the decision in question was outside of the Court’s jurisdiction. The Court went on to state that the Applicant’s request was not a proper interim measure in its nature, and even if it were, the tribunal had the express power to order such measures under Article 17 of the Model Law. However, there may have been avenues which would have allowed the court to consider the request, both under NAFTA and the Model Law itself.

It is well established that parties who agree to arbitrate thereby waive their right to resort to national courts, subject to exceptions stipulated by contract, or provided by law. This is also the case under Articles 1121(1)(b) and 1121(2)(b) of NAFTA that provide exceptions to the exclusive jurisdiction of the arbitral tribunal for “…any proceedings for injunctive, declaratory or other extraordinary relief, not involving payment of damages”. The Application in this case could arguably fall under the express exception provided in these articles, as it did not relate to the merits of the case, nor did it involve the payment of damages.

The UNCITRAL Model Law and the UNCITRAL Rules recognize the competence of courts to issue interim measures in relation to arbitral proceedings, without derogating from the agreement to arbitrate. Therefore, the Court’s power to review the contested decision is not incompatible with the NAFTA tribunal’s jurisdiction.

 

What Would the Arbitral Tribunal Do?

The decision is not likely to be any easier once this issue is raised before the arbitral tribunal. The main difficulties will relate to the determination of the applicable rules and standards governing such a challenge. The fact that the challenged counsel is a member of the State defense team additionally complicates the already layered issues. Prior investment awards do not provide much guidance in this sense. The few known cases where the tribunal did take up the issue related to allegations of conflicts between the counsel and a member of the arbitral tribunal.

In Hrvatska Elektroprivreda d.d. v. Slovenia and Rompetrol v. Romania the parties requested the removal of counsel due to alleged conflicts of interest with tribunal members. Both tribunals recognized that the ICSID Rules were silent on such matters, and emphasized party autonomy in the context of selecting their representatives. In Hrvatska Elektroprivreda the tribunal deduced the powers to decide on the challenge and removal of counsel from the principle of the “immutability of properly-constituted tribunals”. The tribunal in Rompetrol noted that, when such powers are found to exist, they should be exercised in exceptional cases.

However, such analytical gymnastics would be of little help in the case at hand, as the alleged conflict of interest did not relate to the arbitral tribunal, or the merits of the case, rather the professional relationships of a member of the State defense team.

Finally, and most consequentially, even if the tribunal were to find a conflict of interest on the side of Canada’s counsel, the existing arsenal of remedies does not guarantee the protection of the integrity of the proceedings. The IBA Guidelines on Party Representation provide some examples of possible remedies that tribunals can order in cases of misconduct by party representatives, which include: admonishing the representative, drawing adverse inferences in the evidence or the legal arguments, considering the misconduct when apportioning costs and taking any other appropriate measure in order to preserve the fairness and integrity of the proceedings. None of the suggested measures can resolve alleged conflicts of interest, unless the tribunals find that the alleged conflict would endanger the “integrity of the arbitral proceedings”.

 

What About the Conflicts of Interest?

The analysis above illustrates the journey of challenges related to alleged conflicts of interest of counsel in international arbitration. With proper standards and rules still out of sight, both national courts and arbitral tribunals will be reluctant to resolve these issues, and where they do, they will find themselves in an ethical “no man’s land”. In the analyzed case, the Applicants sought to resolve the issue through judicial review, as interim relief, only to learn that it was not a good fit under the applicable law. The arbitral tribunal, under the current framework, is not in a much better position, as it lacks investigatory resources and disciplinary authority.

Numerous instruments have been proposed over the years, ranging from universal international rules of ethics to choice-of-law rules and specialized checklists, as discussed in previous contributions to this blog.

Since the “happily ever after” is not yet in sight,  and considering the harmful effects of the persistent uncertainty, it may be time to put the idea of specialized rules aside for a more pragmatic agreement on the proper forum and choice of law rules to apply to issues of counsel conduct in international arbitration. Perhaps it is time to trade in the glass slipper for a more sensible choice that is more likely to fit.

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VIAC Rules Revision 2021 Part I: Revised Vienna Rules Enter into Force on 1 July 2021

Thu, 2021-07-01 01:23

The Vienna International Arbitral Centre (“VIAC”) announces its most recent update to the VIAC Rules of Arbitration and Mediation (the VIAC Rules of Arbitration and Mediation 2021) taking effect on 1 July 2021.

The revision of the VIAC Rules of Arbitration and Mediation was triggered by the drafting of the new standalone set of VIAC Rules of Investment Arbitration and Mediation that will likewise enter into force on 1 July 2021. This was taken as an opportunity to adapt the existing arbitration rules for commercial disputes (the “Vienna Rules”) to new needs and developments in the market and to open up a new field of business, namely disputes relating to succession, by appending a new annex. Both sets of rules apply to all proceedings commenced after 30 June 2021, respectively.

A working group consisting of representatives of the VIAC Board and Secretariat as well as the National and International Advisory Board has drafted the amendments of the VIAC Rules (in alphabetical order: Claudia Annacker, Alice Fremuth-Wolf, Günther Horvath, Johanna Kathan-Spath, Stephan Karall, Werner Jahnel, Christian Koller, Paul Oberhammer, Patrizia Netal, Michael Nueber, Nikolaus Pitkowitz, Dietmar Prager, Lucia Raimanova, Stefan Riegler, Franz Schwarz, Irene Welser, Nathalie Voser, Britta Zöchling-Jud). The working group has met regularly over the course of more than a year to discuss how to codify existing practices, streamline procedures, and respond to users’ demands. On 2 June 2021, the Extended Presiding Committee of the Austrian Federal Economic Chamber approved the amended version of the rules. The new version of the VIAC Rules of Arbitration and Mediation 2021 are now available on the VIAC website.

The modifications to the 2018 version of the Vienna Rules for commercial disputes were limited to specific matters with the principal aim of bringing the rules in line with modern international arbitration trends.

 

Key features of the Vienna Rules 2021

Amendments reflecting new developments

Article 1 para 1 has been amended to explicitly include VIAC’s authority to administer investment proceedings as well as to act as appointing or administrating authority in ad hoc proceedings and to administer proceedings based on unilaterally foreseen arbitration agreements.

Since third-party funding is no longer limited to impecunious parties but is more widely used, a definition of TPF was considered useful which is contained in Article 6 paragraph 1.9. The new Article 13a contains further provisions on third-party funding in order to create the framework for this instrument, mainly to ensure the independence and impartiality of the arbitrators through appropriate disclosure.

The new Annexes 4 and 5 contain detailed rules for cases in which VIAC is requested to act as appointing or administering authority in ad hoc proceedings (such as the UNCITRAL Arbitration Rules).

A new Annex 6 contains supplementary rules for disputes relating to succession, which take into account the unique characteristics of arbitration proceedings foreseen in a disposition of property upon death.

 

Amendments reflecting technical innovations and the introduction of the VIAC Portal

Even if this was already possible under the 2018 version of the Vienna Rules, Article 30 now explicitly states that oral hearings may be conducted in person or by other means (e.g. remote via videoconferencing technology – for further information, see the “Vienna Protocol – A Practical Checklist for Remote Hearings); the arbitral tribunal shall decide on this, taking into account the views of the parties and the particular circumstances of the case.

Taking account of the increased use of video-conferencing technology during the pandemic, Article 36 paragraph 5 of the 2021 Rules now expressly provides that the Secretary General, “if it is not possible or feasible to send the award in hardcopy form within a reasonable time, or if the parties so agree (…) may send a copy of the award in electronic form”. A copy of the award in hardcopy form may be sent at a later stage in order to ensure enforcement of the award where such enforcement is sought in a jurisdiction where there is a risk that courts would not accept a copy of an electronic award as a “duly authenticated original award” in the meaning of Article IV(1)(a) of the New York Convention.

 

Other amendments further enhancing the efficiency of the proceedings

In order to encourage settlements and thus an efficient resolution of the dispute, it is now expressly stated in Article 28 para 3 that the arbitral tribunal is entitled at any time during the proceedings to assist the parties in their endeavors to reach a settlement.

A further key amendment to increase the efficiency of the proceedings has been included in Article 32, which now foresees a time limit for the issuance of the award in paragraph 2, i.e. the award shall be rendered no later than three months after the last hearing concerning matters to be decided in an award or the filing of the last authorized submission concerning such matters, whatever is the later. The Secretary General may extend this period upon reasoned request or on its initiative.

 

Amendments in the provisions on costs

With regard to the determination of costs of the proceedings, three amendments deserve to be mentioned: First, the arbitral tribunal may now, at any stage of the arbitral proceedings, at the request of a party, make a decision on costs pursuant to Article 44 paragraphs 1.2 and 1.3 (i.e. all costs except for the administrative and arbitrator’s fees) and need not wait for the final award in this respect (Article 38 paragraph 3).

Secondly, in determining the advance on costs as well as the arbitrator’s fees, the VIAC Secretary General now has greater flexibility to address the high complexity of proceedings, especially in multiparty scenarios.

Finally, the Schedule of Fees in Annex 3 has been revised after 8 years (last in 2013 with minor changes in 2018). While the registration fee and administrative fees for low amounts in dispute have remained the same, the administrative fees for amounts in dispute above EUR 100,000 as well as the arbitrators’ fees for amounts in dispute above EUR 200,000 have been raised to reflect the increased complexity in proceedings as well as the extended services of VIAC (HighQ file sharing platform, electronic case management database, etc.). Nonetheless, VIAC remains very attractive for parties in terms of costs compared with other institutions but ensures that arbitrators are remunerated fairly for demanding proceedings with high amounts in dispute.

 

Conclusion

The update strikes a balance between modernizing the arbitration rules and at the same time maintaining the flexibility and predictability of the VIAC Rules. The amendments reflect practices that have proven effective in institutional arbitration in general and the best practices of VIAC itself. This reform should thus help the VIAC to foster its position as one of Europe’s leading arbitral institutions for the CEE/SEE and CIS region, offering its services in resolving international commercial as well as investment disputes.

 

Johanna Kathan-Spath is legal counsel at the VIAC Secretariat and was responsible for overseeing the whole revision process including the drafting of the new Investment Rules.

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Ecuador Signs the ICSID Convention: Next Steps for Entry Into Force

Wed, 2021-06-30 03:00

On June 21, 2021, Ecuador’s Ambassador to the United States, Ivonne Juez Abuchacra de Baki, signed the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the “ICSID Convention“) on behalf of the Republic of Ecuador (“Ecuador“).  With Ecuador, the number of signatory States to the ICSID Convention is now 164.

Although under Ecuadorian law, the power to enter into and ratify international treaties lies with the President, a legal discussion has arisen regarding whether the ICSID Convention falls within one of the exceptions to this presidential power. If this were the case, ratification would require prior approval from the National Assembly.  The Constitutional Court is the body in charge of deciding if such approval is required or not.1)See, Article 109 of the Organic Act of Jurisdictional Protections and Constitutional Control. jQuery('#footnote_plugin_tooltip_37938_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

On the same day that Ambassador Baki signed the ICSID Convention in Washington DC, the Office of President Lasso sent a letter to the Constitutional Court indicating that its position is that the ICSID Convention does not fall under one of the exceptions to the presidential power to sign and ratify international treaties, and that accordingly the President is authorized to sign the ICSID Convention without authorization from the National Assembly.

In the coming weeks, the Constitutional Court will decide whether it will uphold the President’s position, confirm the constitutionality of the ICSID Convention, and thereby allow ratification of the instrument without further approval from the National Assembly.

 

Background

Ecuador first signed the ICSID Convention in 1986. In 2009, however, under former President Rafael Correa’s government, Ecuador sent a written notice of denunciation of the ICSID Convention to the World Bank Group, which took effect on January 7, 2010 — in accordance with Article 71 of the ICSID Convention.

The Correa regime denounced the ICSID Convention on the grounds that it was unconstitutional to allocate sovereign jurisdiction to an international arbitral tribunal.  In the years following the denunciation of the ICSID Convention, Ecuador terminated all of its Bilateral Investment Treaties (“BITs”).

In 2010, Ecuador’s legislative branch enacted the Organic Production, Trade and Investment Code (“COPCI” for its acronym in Spanish), which sets forth general and specific rules, incentives, guarantees, and protections for domestic and foreign investment in Ecuador.2) Article 100 of the COPCI and Articles 313 and 316 of the Constitution allow for the participation of the private sector in the economy under exceptional grounds. jQuery('#footnote_plugin_tooltip_37938_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  In March 2015, Ecuador passed new regulations to promote foreign investment through Public Private Partnership (PPP) initiatives (the “PPP Regulation”).  Consequently, the current investment protection regime in Ecuador is mainly comprised of these two domestic instruments.

On May 24, 2021, President Guillermo Lasso assumed the presidency in Ecuador, promising to revive the economy and promote private sector investment.  As part of President Lasso’s campaign to promote foreign investment, his administration instructed the Ambassador of Ecuador in the US to sign the ICSID Convention on behalf of the country.

Ecuador’s recent accession to the ICSID Convention is an attempt on the part of the new government to show that the country is once again open and willing to comply with its commitments towards foreign investors and offer them further international law protections.  Another indicia of this is that Ecuador is reportedly setting funds aside to pay an unfavorable ICSID award for US$ 374 million.

 

Process of Ratification of the ICSID Convention in Ecuador

Ambassador Baki’s signing of the ICSID Convention does not automatically make Ecuador a member of the Convention.  Pursuant to Articles 147(10) and 418 of the Ecuadorian Constitution, the President of Ecuador has the power to sign and ratify treaties.  The only requirement under Article 418 is a 10-day notice period to the National Assembly before the President ratifies the relevant instrument.

In addition, pursuant to Article 438 of the Constitution, the Constitutional Court of Ecuador shall deliver a binding ruling on the constitutionality of an international treaty signed by the President.  Further, under Article 109 of the Organic Act of Jurisdictional Protections and Constitutional Control, the Constitutional Court is also empowered to determine whether prior approval from the National Assembly is required pursuant to Article 419 of the Constitution.

The discussion over the ICSID Convention’s entry into force arises in relation to Article 419 of the Constitution, which provides a list of exceptions to the general rule for the ratification of treaties.  Article 419 of the Constitution states that:

“Article 419: Prior approval by the National Assembly shall be required in order to ratify or denounce international treaties where: 

  1. They involve territorial or boundary matters.
  2. They set up political or military alliances.
  3. They contain a commitment to enact, amend or repeal a law.
  4. They relate to the rights and guarantees laid down in the Constitution.
  5. They subject the State’s economic policy as laid out in its National Development Plan to conditions set by international financial institutions or transnational companies.
  6. They bind the country into integration and trade agreements.
  7. They confer competences inherent to the domestic legal system to an international or supranational body.
  8. They compromise the natural heritage, especially water, biodiversity and its genetic resources.”

(Free translation) (Emphasis added).

Those opposing Ecuador’s accession to the ICSID Convention argue that the ICSID Convention falls within the scope of Article 419(7) of the Constitution and that in accordance with Article 422 of the Constitution, “no international treaties or instruments may be signed in which the Ecuadorian State surrenders sovereign jurisdiction to international arbitration bodies with regard to contractual or commercial disputes between the State and private natural or legal persons.”3)Former Minister of Economy Mr. Diego Borja, former presidential candidate Mr. Andrés Arauz, and Congressman Pabel Muñoz have commented in a series of tweets that the ICSID Convention violates the Constitution, and that authorization by the National Assembly is required for ratification. jQuery('#footnote_plugin_tooltip_37938_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

On its face, however, the ICSID Convention does not fall within the scope of Article 419.4)See, Iñigo Salvador Crespo, Mélanie Riofrío Piché, “La denuncia del Convenio del Centro Internacional de Arreglo de Disputas Relativas a Inversiones o la calentura en las sábanas”, Revista Ecuatoriana de Arbitraje, 2010, p. 94 (“Sin embargo, no hay tal cesión de jurisdicción. El artículo 190 de la Constitución reconoce expresamente el arbitraje sin distinguir entre el arbitraje nacional y el internacional: ‘Se reconoce el arbitraje, la mediación y otros procedimientos alterativos para la solución de conflictos. Estos procedimientos se aplicarán con sujeción a la ley, en materias en las que por su naturaleza se puede transigir’. Asimismo, el arbitraje es jurisdicción, la jurisdicción convencional, es decir “la que nace de la convención de las partes, en los casos permitidos por la Ley”. Así, la resolución de un conflicto por un tribunal arbitral es ejercicio de la jurisdicción convencional, con igual sustento constitucional y legal que la jurisdicción ordinaria de los jueces. No es acertado, por lo tanto, hablar de ‘cesión’ de jurisdicción si ésta no es exclusiva de las cortes locales sino que también se ejerce por árbitros o tribunales arbitrales.“).  See also, David Toscano, Antonella Cordero, “Signing the ICSID Convention: a strategic decision that sends a powerful message to the international community“, TADIR Dispute Resolution, June 22, 2021 (“In particular, the ICSID Convention is not a treaty dealing with territorial boundaries; it does not establish or deals with political or military alliances; it does not contain any commitments to issue, modify, or abrogate any laws; it does not deal with constitutional rights or guarantees; it does not jeopardize the economic policy, nor is an economic integration agreement; it does not jeopardize nature; nor does it grant powers to the Center (as Ecuador may, or may not, use it). The purpose of the ICSID Convention was to create a Center for the settlement of investment disputes. However, by ratifying the ICSID Convention, Ecuador will not be providing its consent to resolve any dispute. Such a consent will be given (or not) by a different instrument. Since the ICSID Convention does not fall within any of the exceptions established in article 419 of the Constitution, the President of the Republic can ratify it without prior approval of the National Assembly.”). jQuery('#footnote_plugin_tooltip_37938_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  The ICSID Convention is not an integration or trade agreement, nor does it attribute competences of the domestic legal system to an international or supranational body.5)The official World Bank website states that the ICSID Convention “is a multilateral treaty formulated by the Executive Directors of the World Bank to further the Bank’s objective of promoting international investment. ICSID is an independent, depoliticized and effective dispute-settlement institution. Its availability to investors and States helps to promote international investment by providing confidence in the dispute resolution process. It is also available for state-state disputes under investment treaties and free trade agreements, and as an administrative registry.” jQuery('#footnote_plugin_tooltip_37938_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  In fact, the ultimate purpose of the ICSID Convention is to “strengthen the partnership between countries in the cause of economic development.”6)Christoph H. Schreuer, The ICSID Convention: A Commentary, Cambridge University Press, 2001, pp. 124-125 (“The only possible indication of an objective meaning that can be gleaned from the Convention is contained in the Preamble’s first sentence, which speaks of ‘the need for international co-operation for economic development and the role of private international investment therein’. This declared purpose of the Convention is confirmed by the Report of the Executive Directors which points out that the Convention was ‘prompted by the desire to strengthen the partnership between countries in the cause of economic development’.”). jQuery('#footnote_plugin_tooltip_37938_27_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

ICSID is an international body of the World Bank Group that provides a series of services, including facilitating conflict resolution between foreign investors and States through methods such as arbitration and conciliation.7)Yarik Kryvoi, ‘Part I: Development and Structure of ICSID’, in International Centre for Settlement of Investment Disputes (ICSID), Kluwer Law International, 4th edition, 2020, p. 15 (“The Convention sought to remove major impediments and risks to foreign direct investments (FDIs) in the absence of specialized facilities for investment dispute settlement. It created the Centre for Settlement of Investment Disputes as an impartial international forum providing facilities for the resolution of international investment disputes. The Centre facilitates resolution of disputes between foreign investors and states through conciliation or arbitration procedures. Recourse to the ICSID facilities is always voluntary and subject to the parties’ consent.”). jQuery('#footnote_plugin_tooltip_37938_27_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  States that have ratified this treaty are not automatically obliged to submit themselves to any of these two dispute resolution methods.  This follows from the preamble of the ICSID Convention:

no Contracting State shall by the mere fact of its ratification, acceptance or approval of this Convention and without its consent be deemed to be under any obligation to submit any particular dispute to conciliation or arbitration.”

This is also in line with the travaux préparatoires of the ICSID Convention, which provide that the “Convention establishes the International Centre for Settlement of Investment Disputes as an autonomous international institution (Articles 18-24). The purpose of the Centre is ‘to provide facilities for conciliation and arbitration of investment disputes’ (Article 1(2)). The Centre will not itself engage in conciliation or arbitration activities. This will be the task of Conciliation Commissions and Arbitral Tribunals constituted in accordance with the provisions of the Convention.”8)See, Lucy Ferguson Reed, Jan Paulsson, Nigel Blackaby, ‘Chapter 1: Introduction to ICSID’, Guide to ICSID Arbitration, edited by Ferguson Reed et al., Kluwer Law International, 2010, p. 9 (“ICSID is one of the five international organizations that make up the World Bank Group. It is located at the World Bank headquarters in Washington, DC. The Centre itself does not conduct arbitration proceedings, but administers their initiation and functioning.”). jQuery('#footnote_plugin_tooltip_37938_27_8').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); (Emphasis added).

In this regard, Prof. Jan Paulsson has commented that the travaux préparatoires expressly state that “consent of the parties [to arbitrate] must exist when the Centre is seized9)Jan Paulsson, ‘Chapter 7: The Tipping Point’, Building International Investment Law: The First 50 Years of ICSID, edited by Meg Kinnear, Kluwer Law International, 2015, p. 86 (“Consent may be given, for example, in a clause included in an investment agreement, providing for the submission to the Centre of future disputes arising out of that agreement, or … a host State might in its investment promotion legislation offer to submit disputes arising out of certain classes of investments to the jurisdiction of the Centre, and the investor might give his consent by accepting the offer in writing.”). jQuery('#footnote_plugin_tooltip_37938_27_9').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and that this mechanism “was a vote of confidence in the mechanism created by the ICSID Convention as a manifestation of the rule of law, intended to depoliticize investor-State disputes in a context of equality of arms.”10)Ibid. jQuery('#footnote_plugin_tooltip_37938_27_10').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Consequently, to access the services offered by ICSID for the international settlement of investment disputes, not only are States required to be signatories to the ICSID Convention, but they are also required to perform an additional act: consent to arbitrate or mediate disputes that fall within the jurisdiction of the ICSID Convention.11)Georges R. Delaume, “ICSID Arbitration: Practical Considerations”, Journal of International Arbitration, 1984, pps. 101, 104–105 (“The scope of such a consent is within the discretion of the parties. In this connection, it should be noted that ratification of the ICSID Convention is, on the part of a Contracting State, only an expression of its willingness to make use of the ICSID machinery. As such, ratification does not constitute an obligation to use that machinery. That obligation can arise only after the State concerned has specifically agreed to submit to ICSID arbitration a particular dispute or classes of disputes. In other words, the decision of a State to consent to ICSID arbitration is a matter of pure policy and it is within the sole discretion of each Contracting State to determine the type of investment disputes that it considers arbitration in the context of ICSID.”). jQuery('#footnote_plugin_tooltip_37938_27_11').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_11', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  This consent involves a subsequent act, that is independent from the ratification of the ICSID Convention.12)Georges R. Delaume, “ICSID Arbitration in Practice”, International Tax & Business Lawyer, 1984, p. 60 (“The Convention allows the parties to choose the form of their consent to ICSID arbitration. Consent may be established through an arbitration clause in an investment agreement or through a simple exchange of letters. Consent may also result from the investor’s acceptance of a unilateral offer from the host State if a consent provision is contained in the host’s investment law or in a bilateral treaty with the Contracting State of which the investor is a national”). See supra note 8, pp. 13 and 21 (“ICSID also accepts arbitrations that arise from State consent to ICSID arbitration contained in: (a) the host State’s national investment laws; (b) a BIT between the host State and the investor’s home State; or (c) a multilateral investment treaty (MIT) or free trade agreement between countries that include the host State and the investor’s home State. … As with arbitration, consent to conciliation by both parties is necessary.”); See also, Hanno Wehland, ‘Chapter 8: Jurisdiction and Admissibility in Proceedings under the ICSID Convention and the ICSID Additional Facility Rules’, in ICSID Convention after 50 Years: Unsettled Issues, edited by Crina Baltag, Kluwer Law International 2016, p. 239 (“Apart from the requirements regarding the jurisdiction of the Centre in ICSID proceedings under Article 25 of the Convention, the main jurisdictional requirement in both ICSID and ICSID Additional Facility arbitrations is the existence of an agreement referring the dispute to arbitration under the relevant set of rules.”) jQuery('#footnote_plugin_tooltip_37938_27_12').tooltip({ tip: '#footnote_plugin_tooltip_text_37938_27_12', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In theory, a State may be a signatory to the ICSID Convention and yet never sign any BITs, enter into arbitration clauses or enact investment laws providing for arbitration or mediation under the International Centre for Settlement of Investment Disputes Arbitration Rules (the “ICSID Arbitration Rules“).  Hence, entering into the ICSID Convention alone does not imply the assignment of any sovereignty of the Ecuadorian State.  Notably, the situation might be different with respect to entering into BITs or other international agreements that provide for investor-state arbitration.

Acceding to the ICSID Convention allows a State to become a Member State of an institution created under public international law.  As a Member State of the ICSID Convention, each State can participate in its Administrative Council (the governing body of ICSID that considers and approves the Annual Report of the Centre and adopts the budget of the Centre for the next fiscal year).  Among the Administrative Council’s powers is the consideration of proposed amendments to the ICSID Arbitration Rules, which have been frequently discussed in the last years.

Therefore, ratification of the ICSID Convention should not require prior authorization from the National Assembly, as it does not fall within the exceptions listed in Article 419 of Ecuador’s Constitution.  As a result, upon confirmation of the Constitutional Court of the constitutionality of the treaty, it should be sufficient for the President to notify the National Assembly of the signing and subsequent ratification of the ICSID Convention, in accordance with Article 418 of the Constitution.

 

Conclusion

Ecuador’s return to the ICSID Convention will allow the country to re-enter the international investment community, and is likely to be of great value for the restarting of the economy after the COVID-19 pandemic. The Constitutional Court is due to rule in the next few weeks on the constitutionality of the signing of the ICSID Convention and whether prior authorization of the National Assembly is required. We look forward to seeing how this legal issue will unfold for Ecuador.

 

The views expressed by the authors do not represent the position of Herbert Smith Freehills or its clients.

References[+]

References ↑1 See, Article 109 of the Organic Act of Jurisdictional Protections and Constitutional Control. ↑2 Article 100 of the COPCI and Articles 313 and 316 of the Constitution allow for the participation of the private sector in the economy under exceptional grounds. ↑3 Former Minister of Economy Mr. Diego Borja, former presidential candidate Mr. Andrés Arauz, and Congressman Pabel Muñoz have commented in a series of tweets that the ICSID Convention violates the Constitution, and that authorization by the National Assembly is required for ratification. ↑4 See, Iñigo Salvador Crespo, Mélanie Riofrío Piché, “La denuncia del Convenio del Centro Internacional de Arreglo de Disputas Relativas a Inversiones o la calentura en las sábanas”, Revista Ecuatoriana de Arbitraje, 2010, p. 94 (“Sin embargo, no hay tal cesión de jurisdicción. El artículo 190 de la Constitución reconoce expresamente el arbitraje sin distinguir entre el arbitraje nacional y el internacional: ‘Se reconoce el arbitraje, la mediación y otros procedimientos alterativos para la solución de conflictos. Estos procedimientos se aplicarán con sujeción a la ley, en materias en las que por su naturaleza se puede transigir’. Asimismo, el arbitraje es jurisdicción, la jurisdicción convencional, es decir “la que nace de la convención de las partes, en los casos permitidos por la Ley”. Así, la resolución de un conflicto por un tribunal arbitral es ejercicio de la jurisdicción convencional, con igual sustento constitucional y legal que la jurisdicción ordinaria de los jueces. No es acertado, por lo tanto, hablar de ‘cesión’ de jurisdicción si ésta no es exclusiva de las cortes locales sino que también se ejerce por árbitros o tribunales arbitrales.“).  See also, David Toscano, Antonella Cordero, “Signing the ICSID Convention: a strategic decision that sends a powerful message to the international community“, TADIR Dispute Resolution, June 22, 2021 (“In particular, the ICSID Convention is not a treaty dealing with territorial boundaries; it does not establish or deals with political or military alliances; it does not contain any commitments to issue, modify, or abrogate any laws; it does not deal with constitutional rights or guarantees; it does not jeopardize the economic policy, nor is an economic integration agreement; it does not jeopardize nature; nor does it grant powers to the Center (as Ecuador may, or may not, use it). The purpose of the ICSID Convention was to create a Center for the settlement of investment disputes. However, by ratifying the ICSID Convention, Ecuador will not be providing its consent to resolve any dispute. Such a consent will be given (or not) by a different instrument. Since the ICSID Convention does not fall within any of the exceptions established in article 419 of the Constitution, the President of the Republic can ratify it without prior approval of the National Assembly.”). ↑5 The official World Bank website states that the ICSID Convention “is a multilateral treaty formulated by the Executive Directors of the World Bank to further the Bank’s objective of promoting international investment. ICSID is an independent, depoliticized and effective dispute-settlement institution. Its availability to investors and States helps to promote international investment by providing confidence in the dispute resolution process. It is also available for state-state disputes under investment treaties and free trade agreements, and as an administrative registry.” ↑6 Christoph H. Schreuer, The ICSID Convention: A Commentary, Cambridge University Press, 2001, pp. 124-125 (“The only possible indication of an objective meaning that can be gleaned from the Convention is contained in the Preamble’s first sentence, which speaks of ‘the need for international co-operation for economic development and the role of private international investment therein’. This declared purpose of the Convention is confirmed by the Report of the Executive Directors which points out that the Convention was ‘prompted by the desire to strengthen the partnership between countries in the cause of economic development’.”). ↑7 Yarik Kryvoi, ‘Part I: Development and Structure of ICSID’, in International Centre for Settlement of Investment Disputes (ICSID), Kluwer Law International, 4th edition, 2020, p. 15 (“The Convention sought to remove major impediments and risks to foreign direct investments (FDIs) in the absence of specialized facilities for investment dispute settlement. It created the Centre for Settlement of Investment Disputes as an impartial international forum providing facilities for the resolution of international investment disputes. The Centre facilitates resolution of disputes between foreign investors and states through conciliation or arbitration procedures. Recourse to the ICSID facilities is always voluntary and subject to the parties’ consent.”). ↑8 See, Lucy Ferguson Reed, Jan Paulsson, Nigel Blackaby, ‘Chapter 1: Introduction to ICSID’, Guide to ICSID Arbitration, edited by Ferguson Reed et al., Kluwer Law International, 2010, p. 9 (“ICSID is one of the five international organizations that make up the World Bank Group. It is located at the World Bank headquarters in Washington, DC. The Centre itself does not conduct arbitration proceedings, but administers their initiation and functioning.”). ↑9 Jan Paulsson, ‘Chapter 7: The Tipping Point’, Building International Investment Law: The First 50 Years of ICSID, edited by Meg Kinnear, Kluwer Law International, 2015, p. 86 (“Consent may be given, for example, in a clause included in an investment agreement, providing for the submission to the Centre of future disputes arising out of that agreement, or … a host State might in its investment promotion legislation offer to submit disputes arising out of certain classes of investments to the jurisdiction of the Centre, and the investor might give his consent by accepting the offer in writing.”). ↑10 Ibid. ↑11 Georges R. Delaume, “ICSID Arbitration: Practical Considerations”, Journal of International Arbitration, 1984, pps. 101, 104–105 (“The scope of such a consent is within the discretion of the parties. In this connection, it should be noted that ratification of the ICSID Convention is, on the part of a Contracting State, only an expression of its willingness to make use of the ICSID machinery. As such, ratification does not constitute an obligation to use that machinery. That obligation can arise only after the State concerned has specifically agreed to submit to ICSID arbitration a particular dispute or classes of disputes. In other words, the decision of a State to consent to ICSID arbitration is a matter of pure policy and it is within the sole discretion of each Contracting State to determine the type of investment disputes that it considers arbitration in the context of ICSID.”). ↑12 Georges R. Delaume, “ICSID Arbitration in Practice”, International Tax & Business Lawyer, 1984, p. 60 (“The Convention allows the parties to choose the form of their consent to ICSID arbitration. Consent may be established through an arbitration clause in an investment agreement or through a simple exchange of letters. Consent may also result from the investor’s acceptance of a unilateral offer from the host State if a consent provision is contained in the host’s investment law or in a bilateral treaty with the Contracting State of which the investor is a national”). See supra note 8, pp. 13 and 21 (“ICSID also accepts arbitrations that arise from State consent to ICSID arbitration contained in: (a) the host State’s national investment laws; (b) a BIT between the host State and the investor’s home State; or (c) a multilateral investment treaty (MIT) or free trade agreement between countries that include the host State and the investor’s home State. … As with arbitration, consent to conciliation by both parties is necessary.”); See also, Hanno Wehland, ‘Chapter 8: Jurisdiction and Admissibility in Proceedings under the ICSID Convention and the ICSID Additional Facility Rules’, in ICSID Convention after 50 Years: Unsettled Issues, edited by Crina Baltag, Kluwer Law International 2016, p. 239 (“Apart from the requirements regarding the jurisdiction of the Centre in ICSID proceedings under Article 25 of the Convention, the main jurisdictional requirement in both ICSID and ICSID Additional Facility arbitrations is the existence of an agreement referring the dispute to arbitration under the relevant set of rules.”) function footnote_expand_reference_container_37938_27() { jQuery('#footnote_references_container_37938_27').show(); jQuery('#footnote_reference_container_collapse_button_37938_27').text('−'); } function footnote_collapse_reference_container_37938_27() { jQuery('#footnote_references_container_37938_27').hide(); jQuery('#footnote_reference_container_collapse_button_37938_27').text('+'); } function footnote_expand_collapse_reference_container_37938_27() { if (jQuery('#footnote_references_container_37938_27').is(':hidden')) { footnote_expand_reference_container_37938_27(); } else { footnote_collapse_reference_container_37938_27(); } } function footnote_moveToReference_37938_27(p_str_TargetID) { footnote_expand_reference_container_37938_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_37938_27(p_str_TargetID) { footnote_expand_reference_container_37938_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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The Emancipation of Arbitration: Recent Developments from the Supreme Court of Canada

Wed, 2021-06-30 01:00

The approach historically taken by Canadian courts to playing the role of guardian with respect to domestic commercial arbitration has sometimes been both confused and confusing, a situation only cofounded by recent Supreme Court of Canada (“Supreme Court”) jurisprudence.

With the release of Sattva in 2014 and Teal Cedar in 2017 , the Supreme Court declared that the right to appeal domestic commercial arbitration awards is to be construed narrowly. The Supreme Court reiterated that courts are to review awards according to a deferential standard – reasonableness – in order to advance the central aims of commercial arbitration: efficiency and finality. This state of affairs has seemingly come undone with the Supreme Court’s recent decisions, including the 2020 decision in Uber and the very recent February 2021 concurring reasons in Wastech, which remind us that the recognition of domestic arbitration’s independence still does not sit well with all Canadian judges.

Domestic commercial arbitration exists as a private, contractually-based dispute mechanism that necessarily requires a healthy distance from over-bearing court minders. I propose here, as I have argued before, that the key to maintaining a functional relationship between Canadian courts and domestic arbitration is to take a cue from dysfunctional parent-child relationships: allow arbitration to emancipate itself (at least in part) from the domestic judicial system. Only by removing the option to appeal arbitral awards altogether can we achieve some sort of co-existence that recognizes the true purpose of domestic commercial arbitration as an independent and fully realized dispute resolution mechanism, rather than an unruly child that requires constant supervision.

 

Vavilov, Wastech, and the appeal conundrum

In its landmark 2019 decision in Vavilov  (a decision previously discussed on the Blog), the Supreme Court ruled that, if a statute explicitly provides for the right to appeal an administrative decision, the appellate standard of review applies. This means that questions of law are reviewed on a correctness standard, while questions of fact or mixed fact and law are reviewed on a standard of reasonableness. Since Vavilov, lower courts have split on whether the new rule for appellate review of administrative decisions also applies to the review of domestic commercial arbitration awards under the various provincial statutory rights of appeal.

In the more recent decision in Wastech, the Supreme Court addressed this issue for the first time. The parties raised arguments about the applicable standard of review to the commercial award at issue, but relied on the arbitration-specific decisions of Sattva and Teal Cedar. However, the Supreme Court had other ideas.

The majority left unanswered the issue of whether Vavilov affects the standard of review applicable to arbitral awards set out in Sattva and Teal Cedar. Instead, the Supreme Court dropped two contradictory hints to keep us on our toes. First, the majority was “mindful” that Vavilov, which was released after the appeal was heard in Wastech, “set out a revised framework for determining the standard of review a court should apply when reviewing the merits of an administrative decision” (at para. 45). This implies that Vavilov may be applicable to the review of domestic arbitral awards. Second, the majority noted that Vavilov “does not advert either to Teal Cedar or Sattva, decisions which emphasize that deference serves the particular objectives of commercial arbitration” (ibid.), suggesting that these decisions have not been overturned.

The concurring judges (Côté, Brown and Rowe JJ.), however, firmly believed that in light of the contradictory lower court decisions, the issue of Vavilov’s effect on domestic arbitration appeals should be addressed. In just five paragraphs, the concurring judges washed away principles confirmed in Sattva and Teal Cedar, disregarded the fundamental differences between statutorily-created administrative tribunals and private commercial arbitration tribunals, and decreed that a word must be given the exact same meaning in each and every statute in which it appears, regardless of context or the legislator’s intent (at paras. 117-121).

The concurring judges provide their four reasons for doing so in two paragraphs: (i) the “important” differences between arbitration and administrative decision-making do not affect the applicable standard of review, which is purely a matter of statutory interpretation; (ii) the word “appeal” should have the same meaning across all statutes; (iii) the fact that domestic arbitration statutes use the word “appeal” overrides any factors justifying deference to arbitrators, including respect for the parties’ selection of a private method of dispute and of an appropriate adjudicator; and (iv) Vavilov must be read as overturning both Sattva and Teal Cedar for the principles of statutory interpretation set out in Vavilov to have any meaning (at paras. 119-120).

 

Wastech, Northland Utilities and the fear of helicopter parenting

The Wastech concurring judgment would not be as alarming if it did not align with several lower court decisions finding that Vavilov changed the standard of review applicable to appeals of commercial arbitration awards. This includes the judgment of the Northwest Territories Court of Appeal in Northland Utilities , which was decided by a panel of judges from Alberta’s Court of Appeal. In a recent article, my colleagues and I expressed the concern that lower court judges who are uncomfortable with domestic commercial arbitration may rely on the Wastech concurring reasons to bolster the precedential value of the Northland Utilities judgment and exercise tighter judicial control over domestic arbitration awards.

This concern appears confirmed. In late March, an Alberta judge commented in obiter that, because the concurring Wastech reasons are consistent with Northland Utilities – which was decided by a panel of judges from the Alberta Court of Appeal – they agreed that Vavilov had displaced the Sattva/Teal Cedar standard of review. Courts in other provinces, including in the recent Johnston decision, have also hinted that they may be bound by the concurring reasons in Wastech.

The British Columbia Court of Appeal’s upcoming judgment in the lululemon case, which will likely have to deal with the issue head-on, is one to watch. In the meantime, parties resolving disputes via domestic commercial arbitration in Canada are left wondering exactly just how “efficient” and “final” domestic arbitration really is in the face of potentially overbearing judicial oversight.

 

The case for the emancipation of arbitration

Domestic commercial arbitration and domestic courts in Canada have had a turbulent relationship over the years. While at times it appears that Canadian courts are willing to recognize domestic arbitration’s value as an independent, parallel method of dispute resolution, every step forward seems to be followed by two big steps back. At this point, it is difficult to believe that Canadian courts will ever stop acting as helicopter parents rushing to involve themselves in domestic commercial arbitration at the first sign of trouble, real or perceived. Arbitral tribunals are not administrative tribunals, nor are they lower courts. Domestic commercial arbitration is a valid, proven, alternative dispute resolution mechanism. It is not part of the court system nor its  competitor: it runs in parallel, freeing up precious judicial resources for pressing and substantial matters, including ever-increasing case backlogs. To ensure the efficiency and effectiveness of two systems working and existing alongside one another, courts have to resist the urge for constant oversight. While cutting the cord is difficult, the time has more than come for courts to let go.

To that end, provincial legislators need to step in and (partially) emancipate Canadian domestic arbitration: the right to appeal domestic commercial awards needs to be abolished. Although the “opt-in” appeal regime presented by the Uniform Law Conference of Canada in 2016 is enticing, it still leaves the option to appeal – and the accompanying uncertainty – on the table. In fact, the draft Act proposed by the Toronto Commercial Arbitration Society in February 2021 still contains a provision allowing parties to opt-in to the right to appeal a domestic award on a question of law. It is important to recall that domestic commercial arbitration is based in contract. Parties willingly choose arbitration and are well aware of its pros and cons. If they do not want to give up the right to appeal, they can choose to rely on the courts.

Where courts are given oversight powers, there is always the risk that they will try to broaden them, often with the misguided rationale that parties should be saved from an “incorrect” award. Common law jurisdictions seem to forget that Quebec does not allow appeals from domestic commercial arbitration awards and the sky has yet to fall.1) Article 2638 of the Civil Code of Quebec states that “An arbitration agreement is a contract by which the parties undertake to submit a present or future dispute to the decision of one or more arbitrators, to the exclusion of the courts”. jQuery('#footnote_plugin_tooltip_37818_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37818_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It is also important to recall that parties are not left in the cold if their right to appeal domestic awards is taken away. Egregious situations involving partial arbitrators or serious breaches of procedural fairness can be remedied by the set aside mechanism, consistent with the Model Law. This allows commercial parties to enjoy the advantages of arbitration, efficiency and finality, without being exposed to gross unfairness. And yes, the arbitration tribunal might get it wrong. But so do courts, even at the highest level. Indeed, what basis does a judge have to conclude that he or she is better placed or more experienced to identify the “correct” solution to a commercial dispute than an expert arbitrator who was chosen by the parties? More kicks at the can does not make something a better process; rather, it creates costs, takes time, and perpetuates uncertainty. It is time to let domestic arbitration make its own way in the world, knowing that this independent system works just fine without constant judicial oversight.

 

The author is grateful to Charles Feldman for his insightful comments, as always.

References[+]

References ↑1 Article 2638 of the Civil Code of Quebec states that “An arbitration agreement is a contract by which the parties undertake to submit a present or future dispute to the decision of one or more arbitrators, to the exclusion of the courts”. function footnote_expand_reference_container_37818_30() { jQuery('#footnote_references_container_37818_30').show(); jQuery('#footnote_reference_container_collapse_button_37818_30').text('−'); } function footnote_collapse_reference_container_37818_30() { jQuery('#footnote_references_container_37818_30').hide(); jQuery('#footnote_reference_container_collapse_button_37818_30').text('+'); } function footnote_expand_collapse_reference_container_37818_30() { if (jQuery('#footnote_references_container_37818_30').is(':hidden')) { footnote_expand_reference_container_37818_30(); } else { footnote_collapse_reference_container_37818_30(); } } function footnote_moveToReference_37818_30(p_str_TargetID) { footnote_expand_reference_container_37818_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_37818_30(p_str_TargetID) { footnote_expand_reference_container_37818_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Naturgy v. Colombia: Considerations on Police Powers and a Setback from Urbaser?

Tue, 2021-06-29 01:56

On 12 March 2021, a tribunal issued an award in the case of Naturgy v. Colombia (ICSID Case No. UNCT/18/1) under the Colombia-Spain BIT (2005) (the “BIT”). The decision is the first in a wave of four decisions decided in the first half of 2021 in favor of Colombia. Naturgy is noteworthy for its engagement with debates on the police powers doctrine and the jurisdiction of arbitral tribunals over counterclaims by States against investors.

 

The Facts

The tribunal, composed by Stephen Drymer, Alexis Mourre and Eric Schwartz, analyzed a dispute concerning the takeover of Electricaribe (an electricity company operating in the Caribbean region of Colombia) by the national authority regulating public utility services. The intervention occurred in 2016 after a series of government measures attempting to balance the financial situation of the company. Pursuant to Law 142 of 1994, that regulates public utilities, the State can take temporary control of public utilities as a “preventive” measure in certain cases. Some of the situations include when the company can no longer provide services with the quality and continuity required if such service is indispensable to preserve public or economic order, to avoid serious damage to users or third parties, and if the company has suspended or might suspend payment of its obligations.

Naturgy claimed that through these measures its property in Electricaribe was expropriated and that Colombia violated the fair and equitable treatment clause of the BIT.

Colombia argued that intervention in the company was a valid exercise of its police powers, that the requirements for takeover under domestic law were met, and that the intervention was justified.

 

The Decision on the Merits: Colombia Used its Police Powers

The tribunal started from the premise that States are not obliged to pay compensation to investors for damages arising out of regulatory actions taken in good faith, and Article 11(2) of the BIT does not prevent a Contracting Party from “adopting or maintaining measures destined to preserve public order.”

The award concluded that Colombia legitimately exercised its police powers because the requirements for takeover under Law 142 of 1994 were met. The takeover was justified by Electricaribe’s financial distress, the danger of the disruption of service, and a ‘systemic risk’ that the company could no longer comply with its financial duties to purchase energy in the national market (¶ 468). Hence, the Tribunal decided that Colombia’s takeover was not an expropriation and Colombia accordingly did not owe compensatory damages to the claimant.

The tribunal also dismissed the FET claim, finding that that the takeover was not a disproportionate decision. The government’s actions included hiring external advisors to prepare financial indicators to establish Electricaribe’s economic condition. Additionally, the company had the opportunity to request the revision of the decision as an administrative recourse. The request for reconsideration was rejected and Electricaribe did not file an appeal to the decision which confirmed the company’s intervention (¶ 504).

 

No Jurisdiction over Counterclaims

Colombia filed counterclaims requesting compensation for the claimant’s mismanagement of Electricaribe. It alleged that this mismanagement meant that “Colombia was forced to channel [funds] into the Company” to maintain its operations during the intervention, and produced a negative impact in regional development, lower tax revenues from Electricaribe and the reduction in the value of Colombia’s shareholding in the company. (¶ 582).

The tribunal analyzed its jurisdiction over such counterclaims under the applicable BIT and the scope of consent given by the parties. The Treaty’s dispute settlement clause, article 10(2) covers: “[a]ll disputes regarding investments that may arise between one of the Contracting Parties and an investor of the other Contracting Party regarding issues governed by this Agreement…”. The tribunal recalled the absence of admissibility rules for counterclaims under the UNCITRAL Rules and followed the two-step approach in Saluka, to confirm that counterclaims (i) could fall within the tribunal’s jurisdiction; and (ii) were within the dispute resolution provisions of the applicable treaty (¶ 600).

Colombia argued that the tribunal had jurisdiction over the counterclaims since the BIT covers “all disputes”, and that there was a “reasonable” connection between the investor’s claims and the State’s counterclaims as required by article 19(3) of the UNCITRAL Rules of 1976 (¶ 590). As the Treaty requires disputes to be “regarding issues governed by [the BIT]”, Colombia argued that because article 10(9) includes domestic law as one of the applicable laws, the investor’s duties under domestic law were implicitly “regulated by the treaty,” and thus under the tribunal’s jurisdiction (¶ 620).

The tribunal concluded that article 10(2) of the BIT, read together with the other sections of the same article, indicated a specific scope of consent and did not provide grounds for counterclaims.

First, the Tribunal differentiated the BIT from other treaties, pointing out that the former did not contain language entitling Contracting Parties to bring counterclaims. It emphasized that the Saluka tribunal did not suggest that the expression “all disputes” provides a general basis for jurisdiction over State’s counterclaims, but that, in principle, it did not preclude the possibility in that case (¶ 604). The Saluka tribunal declined jurisdiction over the counterclaims as it considered that they were not “sufficiently closely connected with the subject matter of the [investor’s] original claim” (Saluka, ¶ 81). Moreover, other treaties, e.g., the Organisation of Islamic Cooperation Investment Agreement expressly include references to awards containing orders against investors for counterclaims (Hesham, ¶ 660).

Second, other sections of article 10 of the BIT, beyond section 2, were drafted specifically to refer to claims “from an investor,” without references to a State’s counterclaims (¶ 615). The Tribunal also concluded that, given the detailed treaty clause addressing dispute-settlement, it was at least doubtful that the contracting parties omitted references to counterclaims if they intended to extend an arbitral tribunal’s jurisdiction to such claims (¶ 616). For example, article 10(4) referred to the grounds for a claim concerning treaty violations by a Contracting Party and the losses or damages suffered by the investor (¶ 617). Likewise, article 10 (10) referred to the impossibility of States to formulate as a defense that the investor received or will receive compensation from an insurance contract or guarantee for the losses suffered from BIT violations.

Finally, as article 10(2) of the Treaty covered investor-State disputes regarding issues regulated by [the] Agreement, the tribunal considered that the treaty did not regulate the management of the investment by the investor in a sector regulated by domestic law. Thus, it rejected Respondent’s argument that the reference to domestic law in the applicable law would amount to a matter “regulated by the treaty” (¶ 620). The arbitrators considered that the dispute settlement clause in the treaty was precise enough to qualify the covered disputes, and the broad interpretation proposed by Respondent would “deprive the provision of any meaning” (¶ 619).

 

A Setback from Urbaser on the close connection test?

In 2016, the tribunal in Urbaser v. Argentina ruled that it had jurisdiction over counterclaims brought in relation to violations of the right to water for the lack of investments by the Claimants. However, the treaties in Urbaser and Naturgy had different language regarding the covered claims. In Urbaser, the Argentina-Spain BIT (1991) covered disputes “in the sense of the present Agreement”, while the Colombia-Spain BIT referred to disputes “regarding issues regulated by the present Agreement.”

Thus, the Urbaser tribunal interpreted the close connection test broadly by concluding that there was a manifest factual link between the investor’s claims and the State’s counterclaim as the claims were “based on the same investment, or the alleged lack of sufficient investment, in relation to the same concession” (¶1151).

The Naturgy tribunal considered that the necessary close connection test developed in Saluka, and Paushok was not proven. The tribunal concluded that the counterclaims concerned Electricaribe’s operation being inconsistent with Colombian law, and the compensation sought by Colombia was “different in nature and based on different factual and legal grounds than the compensation sought by Claimants in the main claims” (¶ 623). Thus, unlike Urbaser, the same factual context would not suffice to determine that there was a connection between the investor’s claims and the State’s counterclaims.

 

Conclusion

The decision in Naturgy v. Colombia further developed the police powers doctrine and emphasized the possibility for States to take measures in highly regulated industries. It also engaged in the debate as to the jurisdiction of investment tribunals over counterclaims. There was a return to Saluka through a more restrictive interpretation of the close connection test, narrower than in Urbaser where a factual connection to the investment was deemed enough. The tribunal interpreted the requirement of a connection between claims and counterclaims to focus on the factual and legal basis of the claims to compensation, requiring counterclaims to be based on the treaty. However, while the tribunal held that it lacked jurisdiction over the counterclaim as raised, it signaled a way forward for States interested in bringing counterclaims, in terms of the drafting of treaties to establish consent and a comprehensive framework to allow claims ruled under such instruments.

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A View from Malaysia: Confidentiality in Arbitration-Related Court Proceedings

Mon, 2021-06-28 01:00

Confidentiality is one of the distinctive features of arbitration and is often promoted as an advantage of arbitration. Most arbitral institutions require arbitral tribunals and parties to preserve confidentiality of arbitral proceedings. Having said that, commercial disputes which are subject to arbitration agreements most often do not simply disappear from the limelight. Quite the opposite, such commercial disputes are regularly reported in the media despite the existence of an agreement to arbitrate the matter. A recent development on confidentiality in arbitration is reflected in La Kaffa International Co Ltd v Loob Holding Sdn Bhd & Another appeal (2018) 9 CLJ 593 where both parties sought the Malaysian court’s aid in obtaining injunctive relief orders. Despite the fact that the dispute was to be heard by way of arbitration in Singapore, the Malaysian High Court and the Court of Appeal scrutinised the facts and evidence presented by the parties in ruling on the parties’ applications. Whilst the parties were subsequently reported to have reached an amicable settlement, the judgments of the High Court and Court of Appeal were published and the disputes were widely reported.

 

The amendments in 2018: Requirement to preserve confidentiality

 Prior to 2018, the Malaysian Arbitration Act 2005 (“Act”) did not have provisions addressing confidentiality in arbitration proceedings. With the amendments introduced in 2018, the Act now regulates disclosure of information relating to arbitral proceedings and awards. Section 41A prohibits parties from publishing, disclosing or communicating information relating to the arbitral proceedings under the arbitration agreement and the award made in those arbitral proceedings (Section 41A of the Act).

 

Exceptions

 There are 5 exceptions to the restriction imposed i.e. (a) if the parties consented on the disclosure; or (b) where the publication, disclosure or communication is made:

(i) to protect or pursue a legal right or interest of the party;

(ii) to enforce or challenge the award;

(iii) to any government body, regulatory body, court or tribunal where the party is obliged by law to make the publication, disclosure or communication; or

(iv) to a professional or any other adviser of any of the parties.

The confidentiality obligation under Section 41A applies to parties to the arbitral  proceedings only. In Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd (2019) 1 LNS 1452,  Section 41A was invoked by the defendant to expunge reports  produced by the plaintiff on the basis that the documents were prepared for the purposes of an arbitration where the defendant was one of the parties. The defendant argued that it did not consent to the publication, disclosure or communication of the impugned documents. The Malaysian High Court did not allow the expungement request as the obligation to preserve confidentiality in Section 41A applies only to parties to the arbitral proceedings, to which the plaintiff was not a party.

The parties’ duty to maintain confidentiality under Section 41A does not apply in a situation where one party is seeking to register and enforce an arbitral award in Malaysia pursuant to Section 38 of the Act. Section 38 requires the applicant to make an application to the High Court for the award to be recognised as binding and enforced by its entry as a judgment. A party seeking to register and enforce an arbitral award is required to produce two documents with the High Court (Order 69 rule 8, Rules of Court 2012)]:

(a) the duly authenticated original award or a duly certified copy of the award; and

(b) the original arbitration agreement or a duly certified copy of the agreement.

In another decision in the case of Siemens Industry Software GMBH & Co KG (Germany) v Jacob and Toralf Consulting Sdn Bhd  (2020) 3 MLJ 1, the respondents sought to register the entire award. The appellant opposed the application on the ground that only the dispositive portion of the award which sets out the orders or the exact relief granted by the arbitral tribunal in Singapore was capable of being registered as a judgment of the High Court. The Federal Court ruled in favour of the appellant and held that the High Court would enforce the dispositive portion of the award which sets out the orders or the exact relief obtained in the arbitral award and not the reasoning or findings of the judgment of the foreign courts. As analysed in this blog post, on the issue of confidentiality, the Federal Court agreed with the appellant’s argument that to register the entire award would undermine the confidentiality of the arbitration proceedings. Although the decision did not deal with Section 41A, the jurisprudence behind that decision is consistent with the objective of Section 41A.

 

Hearings are to be heard otherwise than in open court

 With the exceptions in Section 41A, in real terms, the confidentiality enjoyed by parties in arbitration proceedings is not without limitation. This leads to another interesting provision in the Act which provides that all hearings are to be heard otherwise than in open court (Section 41B). Section 41B does not distinguish between matters where disclosure is prohibited and those where disclosure is permitted under the exceptions in Section 41A.

Section 41B only prohibits matters to be heard in open court but does not preclude judgments on arbitration-related court proceedings from being published. The rationale is simple: there is a need for open justice to ensure the development of arbitration jurisprudence in Malaysia and that such need is not stifled by upholding confidentiality in arbitration.

The question that arises is whether judgment for proceedings heard in camera should be published in its entirety or whether certain information such as identity of the parties or confidential information should be redacted to preserve confidentiality.

There may be lessons to be drawn from jurisprudence in Singapore courts. In Singapore, a party may apply to the court for directions that certain information, relating to the proceedings including the identity of the party, be kept confidential and not publishable. One such example is the case of AZT and others v AZV (2012) 3 SLR 794, where the Singapore court granted a sealing order and published the judgment with the parties’ identity kept anonymous for the purposes of preserving confidentiality of the arbitration proceedings on the ground that the dispute between the parties was purely commercial, with nothing to suggest that there was any countervailing and legitimate public interest weighing in favour of disclosure.

In CES v International Air Transport Association (2020) 4 SLR 44, the Singapore court allowed CES’s request to redact its name in the judgment and the references to its chairman and managing director were also anonymised by use of the letter ‘M’ in an arbitration-related court proceedings. The court however, refused IATA’s belated request for its name to be redacted. The refusal was on the ground that  IATA did not provide a basis for such application; the belated request merely objected to its name being published for the purpose of obtaining consistency subsequent to CES’s aposition in redacting its name. That was not sufficient.

 

Conclusion

 In arbitral-related court proceedings, the court is often required to consider matters related to arbitration proceedings. On the one hand, there is a need to preserve confidentiality of arbitration; on the other hand, if judgments are not published by reason of confidentiality, the law will not develop.

In such circumstances, a compromised position can be achieved by having cause papers sealed and relevant information redacted from judgments in matters where this is warranted by the circumstances. The Act does not have an express provision to that effect and the Malaysian courts have not embarked on that journey. It will be interesting to observe the legal developments in this area.

 

 

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Procedural versus Substantive Reforms: Is the Work of UNCITRAL WGIII Worth the Wait?

Sun, 2021-06-27 01:58

Calls for investor-State dispute settlement (“ISDS”) reform have persisted for some time (see blog coverage here). Competing calls for retaining the status quo, modifying the system, or abandoning the system altogether have each gained traction. With a drastic increase in the number of investment cases being brought, accompanied by the “mega” awards, the international community has had to respond.

One of the most prominent global initiatives to address these reforms has been the UNCITRAL Working Group III (“WGIII”) process (see blog coverage here). WGIII’s discussions began in 2017 and, as recently announced, WGIII plans to conclude its reform process by 2025. The question that arises is whether this 8-year reform process will meaningfully address the calls for reform. This is a significant question because if, after undertaking such a long and detailed reform process, criticisms on the basic ideas of ISDS persist, the international community has to consider whether the transaction cost was worth it at all.

 

What Issues or Reforms Have States Raised?

With the resumed 40th session of WGIII on ISDS reforms in May, we surveyed prior submissions from States during UNCITRAL’s ISDS reform process. Our objective was to take stock of the arguments put forward by States and assess whether WGIII will meaningfully address them. Below is a detailed table that captures selected examples of issues or reforms suggested by States. Importantly, WGIII received the mandate to address only procedural, and not substantive, matters. Indeed, recently prominent groups like the Columbia Center for Sustainable Investment have called into question the work undertaken by WGIII, arguing that the limited reforms have the effect of locking in a “broken system.” As the table demonstrates, the focus on procedural, rather than substantive, matters results in critical gaps in the reform process.

 

Selected Examples of Issues or Reforms Suggested by Governments during UNCITRAL’s ISDS Reform Process

Reforms Suggested by Governments Description Within the scope of the WGIII mandate? Claimants should be required to exhaust local remedies Requiring exhaustion of local remedies may reduce the need for arbitration. (e.g., Indonesia, Morocco) Maybe Fees and costs should be transparent Establishing transparent fee structures and budgets for the proceedings may encourage efficient case management and reduce costs.  (e.g., South Africa, Thailand) Yes Frivolous claims dismissed Developing a standardized framework and guidelines for identifying and dismissing frivolous claims may prevent investors from filing excessive or abusive arbitration requests.  (e.g., Indonesia, Morocco) No Timelines should be streamlined Establishing predetermined timeframes for the proceedings may avoid unnecessary delays and costs, due to existing ad hoc nature of current arbitral timetables. (e.g., Thailand) Maybe Third-party funding should be disclosure of banned altogether Requiring disclosure of, or banning altogether, third-party funding arrangements may obviate otherwise unknown potential conflicts of interest. (e.g., South Africa, Thailand) Yes A code of conduct for arbitrators should be standardized Developing a standardized and widely accepted code of conduct, with clear and enforceable guidelines, may avoid potential conflicts of interest, especially in “multiple-hatting” scenarios. (e.g., Chile, Israel, Japan, Bahrain) Maybe (parallel work undertaken by ICSID/UNCITRAL) An Advisory Centre on International Investment Law should be created Creating an advisory center may help States that struggle to respond effectively to investment disputes because of the lack of resources and institutional capacity. (e.g., Thailand) Yes An Appellate Mechanism or Multilateral Investment Court should be created Establishing an appellate mechanism, with defined procedures and enforcement mechanisms, may enhance access to justice and procedural fairness. (e.g., Russian Federation, South Africa) No Counterclaims should be permitted Permitting counterclaims may counter the perceived imbalance in favor of investors in IIAs. (e.g., South Africa) No Third-party intervention should be permitted Increasing participation from third parties that have legitimate interests in a dispute may foster transparency and equity.  (e.g., Ecuador, South Africa) Yes Investor obligations should be established Establishing direct and binding investor obligations in IIAs may counter the perceived imbalance in favor of investors in IIAs. (e.g., South Africa) No Regulatory chill should be prevented Preserving regulatory autonomy may reduce State reluctance to regulate in key domestic areas due to fear of litigation.  (e.g., Indonesia, Burkina Faso) No

 

Identifying Gaps

Putting aside the merits of the argument that the distinction between procedural and substantive reforms is difficult to make, the reality is that criticisms of ISDS extend to both the procedure and substance. Indeed, as is demonstrated in the table above, States continued to raise substantive concerns, even before WGIII began. A reform process that only considers procedural reform addresses merely half of the problem, despite the significant transaction costs associated with the process. Moreover, because certain procedural reforms have a substantive component, it may be shortsighted to only address the procedural component. For example, procedural reforms relating to counterclaims should also be paired with substantive reforms focused on establishing direct and binding investor obligations in IIAs.

While certain reforms put forward by States, such as an appellate mechanism and a code of conduct for arbitrators, are currently under consideration by WGIII, many are not. For example, regulatory chill has been raised often by government throughout the ISDS reform process as a significant barrier, yet WGIII has acknowledged that this is not a procedurally related issue and has chosen not to engage.

As further examples, several reforms suggested by governments specifically relate to drafting IIAs, including establishing direct and binding investor obligations (which remain rare in IIAs). Perhaps because these are issues are substantive in nature, WGIII has not engaged. It appears unlikely that any such issues will be addressed by WGIII before the proposed end-date of 2025. This misses a critical opportunity to collaborate with governments to fully address their stated concerns with the ISDS system. Indeed, it may also have the unintended effect of exacerbating what is often viewed as an investor-focused system, which would have further downstream negative effects on, for example, regulatory chill.

Further, several critical issues arising out of the investment treaty jurisprudence focus on substantive issues and will remain unanswered. For example, can an investor restructure an investment to take advantage of BITs? Does the most-favored-nation clause extend to dispute resolution matters? Are legitimate expectations protected under the minimum standard of treatment? Can an investor select the valuation date in the case of an unlawful expropriation? Such issues are endemic to investment treaty arbitration and subject to a wide-range of highly contested views. But, as these are “substantive” issues, they will not be addressed by WGIII.

 

The Road Ahead

We are reminded of South Africa’s comment during WGIII that “we cannot divorce the procedural from substantive concerns as they are intricately related.” In the absence of a holistic reform process that looks at both substance and procedure, problems will persist. Indeed, these remaining gaps, which are primarily substantive, rather than procedural, can provide a helpful roadmap for furthering ISDS reform efforts outside of UNCITRAL and in parallel to it.

Substantive reforms will require concerted engagement by States via their role in negotiating new IIAs. For example, two of us have highlighted trends in recent IIAs (here) and model agreements (here) that could help to address these gaps. These trends underline a concurrent process by many governments to address both procedural and substantive concerns within their ability to both develop model agreements and enter into investment treaties. Indeed, the recently released Canadian FIPA Model addresses many of these concerns (see blog coverage here).

WGIII could take note of such trends and seek to link procedural reforms by engaging with governments on how best to align procedural and substantive dimensions. For example, a consultation process after the conclusion of WGIII could provide governments with an opportunity to reflect back on WGIII and its outputs, so as to identify any unresolved matters and options for further engagement.

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Expansion of the Meaning of ‘Public Policy’: The Belarusian Approach

Sat, 2021-06-26 01:41

This blog post examines the approaches of Belarusian law and judicial practice to the application of public policy rules. Considering specific cases, the author makes suggestions for mitigating the risks to challenge of arbitral awards on the grounds of non-compliance with Belarusian public policy.

 

Supreme Court Resolution on Public Policy

Under Belarusian law, Belarusian economic courts must refuse to recognize and enforce foreign arbitral awards in whole or in part if the recognition and enforcement of the arbitral award would be contrary to the public policy of Belarus (Article 248(1)(8) of the Economic Procedure Code of Belarus). In this regard, Belarusian law, in contrast to the approach in the New York Convention, requires refusal of recognition and enforcement.

The practice of Belarusian economic courts on analysing questions of public policy was summarized in the Methodological Recommendations approved by the Resolution of the Presidium of the Supreme Economic Court of Belarus (the Resolution).1)Note that from 1 January 2014, the Supreme Economic Court of Belarus was attached to the Supreme Court of Belarus. jQuery('#footnote_plugin_tooltip_37769_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37769_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In the Resolution, public policy is defined as the fundamental principles of international law, the norms of the Constitution of Belarus, international treaties to which Belarus is party, and basic principles of the fundamental branches of law (e.g. constitutional law, civil law, etc.). If an arbitral award violates these principles and norms, it could violate public policy.

The Resolution also states that courts must justify applying public policy as a reason to refuse the recognition or enforcement of foreign arbitral awards. Courts must provide detailed reasoning concerning their findings on public policy in their decisions refusing enforcement. A detailed statement of reasons and grounds for refusing recognition or enforcement contributes to the development of a more consistent practice and consensus on the principles and rules that are part of Belarusian public policy.

However, the court practice on applying public policy in 2019-2020 indicates that Belarus’s economic courts do not always set out in detail the grounds for invoking public policy and tend to interpret the concept broadly.

 

Examples from the Economic Court Practice

In case No. 1-5их/2019, a Latvian joint-stock company (JSC) applied to the Economic Court of the Gomel Region for recognition and enforcement of an arbitral award made under the Arbitration Rules of the Court of Arbitration of the Latvian Chamber of Commerce and Industry.

The court refused to recognize and enforce the award establishing several violations of Belarusian public policy:

  1. The debtor was not properly notified of the arbitration proceedings since the notice of arbitration was sent in violation of the Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Cases 1965 (Hague Service Convention). The court recognized that the debtor participated in the proceedings and did not raise any arguments on this point. To my mind, the parties’ participation, notwithstanding the lack of notice, demonstrates that the court should not have applied public policy.
  2. The arbitral tribunal denied the debtor’s request for an interpreter from Latvian into Russian. The court found that the principle of equality of citizens, organizations, and individual entrepreneurs before the law and the court was not ensured by the arbitral tribunal. The debtor’s representatives who spoke Latvian were, however, present at the arbitral hearing. A translator was needed only to translate one of the debtor’s representatives.
  3. The ruling indicated that “the debtor’s representative produced correspondence with a representative of the Estonian police on the initiation of a criminal case under the disputed agreement”. According to the court, combating corruption is part of both domestic and international public policy. Thus, corruption, which could have occurred during the conclusion and execution of the contract, based on which the arbitral award was made, is a ground for applying public policy.

The conclusion that initiating a criminal case indicates a violation of Belarusian public policy does not correspond to the fundamental presumption of innocence enshrined in Article 26 of the Constitution of Belarus and cannot be evidence of a public policy violation. None of the above-mentioned circumstances should have been considered grounds for applying public policy.

In another case No. 13-1их/2020/507К, the Economic Court of Minsk considered an application of JSC K for recognition and enforcement of an arbitral award made under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce to recover debts from JSC B. When considering the application, the court pointed out that the dispute arose from a construction contract concluded between JSC B (customer), JSC T (contractor) and JSC K (contractor), in which JSC T was an independent party to the contract. In the court’s opinion, JSC T had rights and obligations towards other parties to the contract and had a material and legal interest that would be affected by the arbitral award.

The legislation of Belarus (for example, Article 13 of the Constitution of Belarus) enshrines the principle of equality before the law and the court and also guarantees the right to judicial protection of one’s rights and legitimate interests.

The court found that JSC T did not participate in the arbitration. The court stated that JSC T had a substantive interest that could be affected by the enforcement of the arbitral award since the subject of the dispute was the assessment by the arbitral tribunal of the legal consequences of termination of the contract as a result of which JSC T was deprived of the right guaranteed by the legislation of Belarus to protect its interests. The court concluded that enforcement of the arbitral award would be contrary to Belarusian public policy.

The court’s decision is rather controversial. Based on the content of the decision, JSC T, whose rights could be affected by the arbitral award, did not file complaints against this award. JSC T did not participate in the court proceedings, where violation of public policy was argued. Thus, the court applied public policy without actually clarifying the particular circumstances that may arise as a result of the recognition and enforcement of the arbitral award. A violation of public policy could be established only if there was evidence of violation of the party’s rights as a result of the enforcement of the arbitral award in Belarus.

 

Conclusions

Based on the above examples from Belarusian judicial practice, the following conclusions can be drawn:

  1. Belarusian economic courts should be following the Resolution which is applicable and binding on them. However, in practice, the courts do not always consider the Resolution and:
    • interpret the concept of public order too broadly, for example, ignoring the constitutional principle of the presumption of innocence, decide based on the mere fact of notifying the police about a possible crime, without waiting for a final decision, or
    • ignore the requirements of the Resolution on the need for a detailed statement of grounds for applying public policy, for example, in the case with an alleged infringement of the rights of a third party by an arbitral award.
  2. When considering relevant cases, the parties, in support of their position, need to refer more to the specific norms of the Resolution, which have to be assessed by the court when making a decision.
  3. When drafting arbitration clauses in contracts with Belarusian parties, if enforcement is expected to take place in Belarus, the parties should more actively entrust the resolution of disputes to Belarusian arbitral institutions and / or appoint Belarusian specialists as arbitrators.

The procedural aspects of the arbitration rules of Belarusian arbitral institutions are in line with the approaches of the state courts and, therefore, minimize the possibility of violation of public order due to non-compliance with procedural aspects of public policy. The secretariat of the arbitral institutions also, as a rule, informs an arbitral tribunal consisting of foreign arbitrators about the practice of application of public policy rules by national courts.

Belarusian arbitrators know better than foreign arbitrators the approaches of Belarusian courts to issues of proper notification, translation, etc. Consequently, Belarusian arbitrators can anticipate and prevent possible violations of Belarusian public policy during the proceedings. For example, by taking additional measures to comply with the notice requirements in the national procedural legislation, although not provided for by the arbitration rules, but ensuring compliance with the public policy of the place of recognition and enforcement of the arbitral award.

Belarussian courts typically carry out an in-depth review of arbitral awards for compliance with legal grounds for refusal of recognition and enforcement. Incomplete indication of the circumstances of the case in the arbitral award may lead to a misunderstanding during its subsequent assessment by a court and to a refusal to recognize and enforce the arbitral award on public policy grounds. It is important to ensure that arbitral awards contain a detailed description of circumstances that could be considered grounds for applying public policy rules in Belarussian courts. Belarusian arbitrators will be able to, considering the peculiarities of Belarusian legislation, practice, and courts’ decision-making logic, draw up a more motivated arbitral award, considering possible future objections about violation of Belarusian public policy.

References[+]

References ↑1 Note that from 1 January 2014, the Supreme Economic Court of Belarus was attached to the Supreme Court of Belarus. function footnote_expand_reference_container_37769_30() { jQuery('#footnote_references_container_37769_30').show(); jQuery('#footnote_reference_container_collapse_button_37769_30').text('−'); } function footnote_collapse_reference_container_37769_30() { jQuery('#footnote_references_container_37769_30').hide(); jQuery('#footnote_reference_container_collapse_button_37769_30').text('+'); } function footnote_expand_collapse_reference_container_37769_30() { if (jQuery('#footnote_references_container_37769_30').is(':hidden')) { footnote_expand_reference_container_37769_30(); } else { footnote_collapse_reference_container_37769_30(); } } function footnote_moveToReference_37769_30(p_str_TargetID) { footnote_expand_reference_container_37769_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_37769_30(p_str_TargetID) { footnote_expand_reference_container_37769_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Is International Arbitration Going Green? Findings from the 2021 Queen Mary University|W&C International Arbitration Survey

Fri, 2021-06-25 01:59

More than a year after the World Health Organization declared COVID-19 a pandemic, we hope we are getting closer to the end of this and will soon be able to enjoy our freedom again in full. However, before going back to “normal” and resuming business as usual, we should think if there are any positive takeaways for international arbitration practice. The twelfth empirical survey of the School of International Arbitration, Queen Mary University of London, the 2021 Queen Mary University/W&C International Arbitration Survey (“the Survey”), aimed among others to identify any “silver lining”. The travel restrictions and the move to a new virtual reality have had at least one positive consequence on arbitration practice: they shone a spotlight on the merits of sustainable practices. This post discusses some of the relevant findings.

 

I. A List of Measures to Reduce the Environmental Impact of International Arbitration

Few, if any, would disagree that reducing the environmental impact of international arbitration is a noble objective. The important questions are how “green” arbitration practice actually is, how COVID-19-related developments have changed attitudes and practices, and whether these short-term revised practices will have a positive lasting impact on sustainability.

The Survey Questionnaire included a list of measures that might be used to reduce the environmental impact of international arbitration. For each option, respondents were asked to indicate whether they had experience of using that measure. They were also asked whether they thought the measure should be used going forward. It was not required that respondents have experience of using any given option in order to express their view of whether it should be used. In the qualitative interviews that followed with more than 190 individuals who expressed an interest, many interviewees on the topic explained that they had mistakenly understood when completing the Questionnaire that if they had used a given measure, they did not then need to specify whether they also thought it should be used. While this was not the case for all respondents, the findings from this question (see Chart below) must be assessed in light of this clarification.

 

 

II. Embracing paperless practices

As the data shows, the most commonly used measures among the Survey respondents concerned paperless practices. “Production of documents in electronic rather than hard-copy form in document production exercises”, “submissions, evidence and correspondence in electronic format rather than in hard copy” and “use of electronic rather than hard-copy hearing bundles” were chosen by around half of the respondents (55%, 51% and 48% respectively). All three options also ranked highly as measures that respondents felt should be used (between 38% and 40% in each case).

This preference towards more paperless practices was also confirmed in the qualitative interviews (see also Survey Report, p. 35). Several users emphasised the importance of electronic exchanges. Relatedly, in response to another question, respondents indicated that they would be most willing to do without “unlimited length of written submissions” if this would make their arbitration cheaper or faster. Such page-limits were also viewed as a means to print less. Although all interviewees embraced the positive environmental impact, they often focused more on the cost and efficiency of the arbitration rather than on the environmental benefit of such approaches.

These findings suggest that the time is ripe for a shift to adopting paperless practices by default. Going paperless should be an opt-out rule as electronic communications, filings, and bundling could reduce the material waste in arbitral proceedings. Parties in a given arbitration can choose whether or not to print documents, rather than having to print multiple copies of hearing bundles.

It seems that several arbitral institutions have moved in this direction. For example, the most recent 2020 LCIA Rules, provide for electronic communications as a default (Article 4 in relation to requests of arbitration and the response thereto, as well as to any written communication). In the same vein, the new 2021 ICC Rules have shifted to electronic filing, in addition to the express provision for the possibility of remote hearings (Article 26). Since 2019, SCC arbitrations have been administered on the SCC platform. During the pandemic the SCC also offered an ad hoc platform, which was provided free of charge. ICSID has also been a pioneer in remote administration of arbitrations. In March 2020, it announced that electronic filings would be the default procedure. It expressly linked this decision to its ‘ongoing commitment to leverage information technology to make its proceedings more efficient and environmentally friendly’.

 

III. Guidance from Tribunals and Soft Law Instruments

‘Specific directions from arbitral tribunals in relation to reducing environmental impact’ is a measure with which only 13% of respondents declared to have experienced. Nevertheless, 40% of respondents said that such directions should be used. This indicates users expect tribunals to promote greener arbitration practices.

The Survey results indicate a widespread need for more guidance. The ‘adoption of soft law instruments’ (such as the Green Pledge) was chosen as a measure that should be used by 40% of respondents. The merits and demerits of soft law instruments is an often-debated issue (see also on the Blog’s coverage here). Interviews also reflected the divergence of views and the difficulty in striking a balance between the need for guidance, on the one hand, and the avoidance of over-regulation through soft law on the other.

Be that as it may, the message seems clear: more concrete guidance is welcome. Such guidance may come from arbitral tribunals, arbitral institutions and their rules, counsel but also other actors, such as service providers and hearing centers. For instance, hearing centers could link environmentally-friendly practices (e.g., use less plastic in disposable items) to a cost reduction (see e.g., the suggestions in the Framework and Green Protocols, Campaign for Greener Arbitrations which was signed by the HKIAC). Going green cannot be an abstract wish, but must be translated to specific choices throughout the arbitral process.

 

IV. Remote Interactions: Think Before You Travel?

The choice of a virtual rather than an in-person interaction has an impact on sustainability. ‘Procedural conferences held via telephone conference, videoconference or virtual hearing rooms’, ‘meetings with clients and witnesses via telephone conference’, ‘video-conference or virtual hearing rooms rather than in person’, ‘substantive hearings held via video conference or virtual hearing rooms’ and ‘witness evidence being given via video conference or virtual hearing rooms’ were all measures that significant numbers of respondents both reported having experienced and thought should be used. In addition, 34% of respondents identified ‘less environmental impact’ as a main advantage of virtual hearings. Only 24% of respondents, however, indicated that ‘environmental sustainability’ is a factor that would make them more likely to choose a virtual rather than in-person format for hearings post-COVID-19.

This last finding is another indication that environmental considerations are a welcome side-effect but not the determinant factor behind the choice between an in-person or a remote interaction (a hearing or another remote interaction). Interviews also confirmed that, although the environmental benefits of remote participation were recognised, this was not the primary motivation behind the decision on whether interactions should be remote or in person. Making the arbitration proceeding cheaper and faster emerged as a perennially important consideration.

If travel in a particular case is unavoidable, one should at least think about the ways in which the environmental impacts can be minimized. As suggested elsewhere, there are ways to reduce the environmental impact by, for example, traveling by train or choosing airlines on the basis of their carbon-efficiency. This is an achievable goal. Nevertheless, the Survey findings show that we are not there yet: only 15% of respondents had experience with ‘carbon offsetting of flights,’ but 40% think that this is a measure that should be used.

 

V. Concluding Remarks

Although it has been a long time since ‘greener’ international arbitration has emerged as a trend, the pandemic may prove to be the opportunity to embrace more ambitious sustainable practices. We hope that these positive changes will remain after the pandemic recedes. After all, going paperless and sustainable travel are not only efficient and cost-effective but also the right thing to do for the sake of the environment. In light of urgent action on climate change being taken across all sectors, the arbitration community must also adapt.

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Two’s Company, Three’s A Crowd: Revisiting the Group of Companies Doctrine

Thu, 2021-06-24 01:57

The use of the group of companies doctrine in India to join non-signatories to an arbitration is an interesting but underexplored topic. First, since its adoption in 2012, Indian courts have either: (i) applied the doctrine in conjunction with other doctrines including alter ego and piercing of the corporate veil, or (ii) focussed on specific elements of the doctrine, ignoring others. Second, the factual assessment done by Indian courts to apply the doctrine presents another set of problems on account of the tenuous connections often used to determine mutual intent. Thus, the application of the doctrine has resulted in a muddled jurisprudence.

 

A. The Necessity for Group of Companies Doctrine?

The Indian Supreme Court first adopted the group of companies doctrine in Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Ors. in the context of a reference to arbitration under Section 45 of the (Indian) Arbitration and Conciliation Act, 1996 (“Act”). Chloro Controls came in the background of an earlier Supreme Court decision, Sukanya Holdings Pvt. Ltd v. Jayesh H. Pandya & Anr. which was in the context of Section 8 of the Act. Sukanya Holdings held that: (i) a composite reference to arbitration would not be permissible where some parties were not bound by the arbitration agreement; and (ii) since the bifurcation of causes of action or parties was not permissible, this necessarily meant that the arbitration agreement could not be enforced even between signatories. The adoption of the group of companies doctrine in Chloro Controls solved this problem by permitting arbitration of disputes involving multiple interrelated agreements, some of which contained arbitration agreements while others did not. This was not only pro-arbitration but also served as an efficiency rationale as parties would avoid multiplicity of proceedings and conflicting findings.

Chloro Controls held that a non-signatory forming part of the same corporate group as a signatory could be made a party to the arbitration where it is clear from circumstances surrounding the transaction that the “mutually held intent” was to bind the signatory as well as the non-signatory to the arbitration agreement. The doctrine could be applied to join non-signatories based on: (i) direct relationship between the signatories and the non-signatories; (ii) direct commonality of the subject matter; (iii) the composite nature of the transaction between the parties; and (iv) whether the ends of justice would be served by referring the disputes to arbitration.

The doctrine laid down in Chloro Controls was borrowed from certain international arbitration precedents, although even today the doctrine’s applicability is not universally accepted (see here and here). In adopting the doctrine, the Supreme Court diverged from the position taken by most common law countries (including England, which does not recognise the group of companies doctrine) and civil law countries. The reluctance to adopt the doctrine by other jurisdictions had to do with the fact that fundamentally it is at odds with ideas of separate legal personality, privity of contract, and party consent to arbitrate (for example, see here). Subsequent expositions of the doctrine by the Supreme Court have only added to the fundamental challenge of applying this doctrine as part of Indian law.

For instance, in Cheran Properties Ltd. v. Kasturi and Sons Ltd. and Ors., the Supreme Court applied the doctrine to enforce an award against a non-signatory even though there was no composite transaction, and the non-signatory was never sought to be joined as a party to the arbitration. Then, in Ameet Lalchand Shah and Ors. v. Rishabh Enterprises and Anr., the Supreme Court applied the doctrine to join non-signatories as parties in a composite transaction even though the participants in the transaction were not part of the same corporate group. The emphasis was on the interlinked agreements for a single commercial project. Finally, in Mahanagar Telephone Nigam Limited v. Canara Bank, the Supreme Court extended the application of the doctrine in cases of a tight group structure with strong organizational and financial links, so as to constitute a single economic unit or a single economic reality. The Supreme Court has gone a step ahead and adverted to fund flow between group companies as an adequate circumstance for applying the doctrine. Thus, piercing of the corporate veil, which could only be done in extremely limited circumstances, could be circumvented through the group of companies doctrine.

These expansions by the Supreme Court have left the High Courts in India with a difficult task when applying this doctrine. High Courts have often applied the doctrine, with very little focus on determining the mutual intent, provided other elements such as composite interlinked transaction or tight group structure are satisfied. One example is the Madras High Court’s judgment in SEI Adhavan Power Private Limited & Ors. v. Jinneng Clean Energy Technology Limited, where non-signatories to an undertaking were made parties to an arbitration pertaining to breach of the undertaking. This was done on the basis that they were part of the same economic group as the signatory to the undertaking, having common central control, common email ids, and common premises, and the transactions were undertaken in relation to a common project. Similarly, the Delhi High Court in Magic Eye Developers Pvt. Ltd. v. Green Edge Infra Private Limited, only cursorily referred to intent while joining two non-signatories on the basis of them being group companies of the signatory. Another example is RV Solutions Pvt. Ltd. v. Ajay Kumar Dixit & Ors. where the Delhi High Court referred non-signatories to arbitration simply on the basis of commonality of subject matter, interests, and parties although none of the other requirements for application of the doctrine were met. Notably, the respondents were ex-employees of the plaintiff company and their new employer (the non-signatory) who were alleged to have conspired together to solicit the plaintiff’s clients and employees.

There have also been instances where High Courts have applied the doctrine with a mix of other principles to join non-signatories to arbitration. Recently, the Delhi High Court in Shapoorji Pallonji and Co. Pvt. Ltd. v. Rattan India Power Ltd. has applied group of companies doctrine along with principles of alter ego and lifting of the corporate veil.

The above discussion makes clear that while it promotes efficiency in arbitration proceedings, the doctrine and its application have certain pitfalls.

First, the application of the doctrine carries a high risk of undermining party consent (which is a fundamental principle of arbitration) as non-signatories may be compelled to join an arbitration proceeding that they did not intend to join. The determination of mutual intent entails extensive factual assessment in judicial proceedings under Sections 8, 9, 11, or 45 of the Act which contemplate only prima facie scrutiny.

Second, it is seen that the doctrine is poorly understood and/or applied. Along with the doctrine, the courts resort to multiple corporate law principles, such as alter ego and lifting of corporate veil, since these are additional justifications in support of the result indicated by the doctrine. As a result, in some cases, substantive liability under the contracts could arise rather than just a joinder of non-signatories, even if it is a prima facie assessment.

The reality is that transactions are often structured to take advantage of separate legal personalities by limiting risk and liabilities. The same is fairly common, legally well recognised, and in certain cases even statutorily approved. While several agreements put together may form a single composite transaction, very often the idea is to limit parts of the transaction to specific entities. By collapsing them, non-signatories may be compelled to assume risks that they might not have envisaged at the time of contracting. For example, for a project, a special purpose vehicle may be set up to execute and perform the agreement, so as to insulate other companies in the group from the risks of that particular project.

Third, courts have often determined parties’ mutual intent based on tenuous connections such as the use of a common letterhead, addresses or email id, negotiations by representatives having authority in multiple capacities, or financial support given by entities in the same corporate group to one another. The use of such tenuous connections often undermines the commercial realities of business transactions and complex corporate structures used to implement them.

 

B. An Alternate Approach

It is evident from the above discussion that the application of the group of companies doctrine has ventured into diverse directions, even moving away from the initial principles laid down in Chloro Controls. Therefore, there is certainly a need to reconsider the use of the group of companies doctrine, or at the very least clarify its contours.

 

One way of doing this is by amending the definition of “party” under Section 2(1)(h) of the Act. The 246th Law Commission Report had initially suggested amending Sections 2(1)(h) and Section 8 of the Act to include persons claiming through or under a party to an arbitration agreement within their fold. However, such an amendment was only brought about to Section 8 of the Act. The Law Commission’s suggestion was given with the intent of making the definition of party wider to include non-signatories so as to be consistent with Chloro Controls. But given the manner in which the doctrine is being applied, this amendment may not be appropriate. Instead, the definition of a party under Section 2(1)(h) of the Act should be amended to include third parties/non-signatories subject to a definite rule that the contract confers a direct benefit on the third party rather than an incidental benefit on the performance of the contract. This would ensure that third parties who are only involved in a limited or ancillary manner in the transaction are not dragged into arbitrations without their consent. It would also avoid situations like Ameet Lalchand Shah or RV Solutions where third parties who were not even members of the same corporate group were compelled to arbitrate on the basis that they were participants in a composite interlinked transaction. Where members of corporate groups are involved in composite interconnected transactions, the tests of alter ego, agency, piercing the corporate veil and acquiescence continue to be available to join them as parties.

In the meanwhile, the parties to contracts governed by Indian law can exclude the application of the doctrine by specifically providing in their contracts (including arbitration agreements) that (i) the benefits derived from the contract will be limited to only the parties to the contract; and (ii) only the signatories and defined individuals/entities will be treated as parties.

 

Anjali Anchayil and Tamoghna Goswami are Senior Associates at J. Sagar Associates.

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Virtual Hearing Guidelines: A Comparative Analysis and Direction for the Future

Wed, 2021-06-23 01:55

The COVID-19 pandemic continues to test nearly every industry and break the idea of “normal” in both our personal and professional lives. Even as large segments of the population receive vaccines and look forward to once again meeting friends, hugging grandparents and traveling to foreign countries, the international arbitration service industry has entered a new era of increased reliance on technology. Before the first reported case of COVID-19, major international arbitration institutions already began accepting the necessity of virtual hearings in certain situations. Guidelines for virtual hearings were officially announced with the escalation of the COVID-19 pandemic.

Here, we explore three widely cited “guidelines” and discuss ongoing developments focusing on addressing potential shortcomings of virtual hearings.

 

A Comparative Analysis of Virtual Hearing Guidelines

There is no shortage of information analyzing the benefits and concerns of virtual hearings in the COVID-19 era. Parties can undoubtedly save considerable time and expense by avoiding international travel. However, concerns have also been raised in terms of confidentiality, technological shortcomings and overall fairness.

The ICC Guidance Note on Possible Measures Aimed at Mitigating the Effects of the COVID-19 Pandemic (19 April 2020) (“ICC Guidance Note”), HKIAC Guidelines for Virtual Hearings (14 May 2020) (“HKIAC Guidelines”) and Seoul Protocol on Video Conference in International Arbitration (18 March 2020) (“Seoul Protocol”) were drafted to assist tribunals and parties when holding virtual hearings. While the guidelines share the same objective, parties should be mindful of the major differences between these guidelines.

We focus on three key considerations, including: (1) technology and cyber security; (2) examination of witnesses and experts; and (3) venue.

 

A Difference in Approach

Each of the three guidelines shares the same objective of assisting parties during virtual hearings. The actual approach, however, differs significantly.

The ICC Guidance Note focuses on issues that may arise as a result of holding hearings virtually and encourages parties to consider certain measures that promote efficiency during arbitral proceedings. Rather than submitting hard copies, for instance, the ICC Guidance Note recommends that tribunals encourage parties to communicate electronically to the fullest extent possible.

The HKIAC Guidelines also have the objective of promoting efficiency during arbitral proceedings, but encourages parties to use available resources of the institution. Particular services (i.e., video conferencing, interpretation, electronic bundling and presentation of evidence, etc.) are considered essential when organizing a virtual hearing. With these services, the HKIAC Guidelines reference resources that the HKIAC offers, including IP-based encrypted and cloud-based video conferencing.

The Seoul Protocol offers guidance concerning the logistical challenges presented by remote arbitration hearings. Its guidelines focus on default standards applicable to streamline video-conference proceedings. To avoid disruption, for instance, the Seoul Protocol mandates testing of all video conferencing equipment and that adequate backup equipment (i.e., cable back-ups, teleconferencing, etc.) is available for use.

 

Technology and Cyber Security

ICC Guidance Note

Parties are encouraged to come to an agreement regarding the minimum system specifications and technical requirements for virtual hearings. The ICC Guidance Note provides examples, including hardware equipment (not limited to display screens), high-resolution webcams and other software applications.

It is recommended that parties first determine whether they reached a consensus on issues, including minimum requirements of encryption, log-in location and the recording of proceedings. Suggested clauses for virtual hearings include “no recording […] unless authorized in advance by the tribunal.” A stipulation like this would clarify any confusion when a recording occurs without the parties’ consent.

HKIAC Guidelines

The HKIAC Guidelines recommend the use of HKIAC resources, including video conferencing software, back-up systems for hearings and a hearing manager. Recommendations are made to ensure confidentiality and security of virtual hearings. One notable example is the circulation of the attendees’ personal details and locations where the attendees are attending from. In practice, these recommendations can be useful by preventing a situation where attendees log-in from a designated place and move to another location with poor security. When recording, any audio recording is subject to the parties’ agreement or tribunal’s direction.

Seoul Protocol

Seoul Protocol Art. 5 provides technical requirements to ensure sufficient quality of hearings. Detailed examples are given, including the minimum transmission speed and resolution. This is explained fully at Annex 1, where the common industry standards for video conferencing equipment recommended by the International Telecommunications Union are adopted. The specifications are classified into video, audio, picture, channels, bandwidth and more. With recordings, Art. 8 states that no recording shall be taken without leave of the tribunal.

 

Examination of Witnesses and Experts

ICC Guidance Note

The ICC Guidance Note provides a wide range of considerations for parties and tribunals concerning the examination of witnesses and experts. These considerations include the use of multi-screens and whether synchronous communications between witnesses and parties are permissible in chat rooms or through concealed channels of communication. Distinction of connection time and duration of availability are also considered. These considerations consist of many of the issues that have arisen during virtual hearings. This is significant as no other guidelines have had such specificity. If parties do come to an agreement concerning these issues before the hearing, parties’ equal treatment and right to be heard would likely be met regardless of the newly adopted virtual setting.

HKIAC Guidelines

The HKIAC Guidelines briefly provide for remote witness and expert hearings. However, the guidelines still consider valuable points, including arranging a hearing invigilator to attend at the same place as the witness. Arrangement of a 360-degree viewing of the room by video at the beginning of each session of the virtual hearing is also required and an update on how such security can be maintained throughout the entire hearing is needed.

Seoul Protocol

The Seoul Protocol focuses on witness examination hearings throughout Art. 1. One noticeable measure is that the tribunal holds considerable discretion if it decides to terminate the witness examination via video conferencing. This can occur when the tribunal deems the video conference unsatisfactory because it is unfair for either party to continue.

Requirements of witness statements are given, including “a reasonable part of the interior of the room in which the Witness is located be shown on screen, while retaining sufficient proximity to clearly depict the Witness.” Such a depiction is used to provide updates, clarify the vague standard and determine whether it is possible for both conditions to be met.

 

Venue

Venue is a critical consideration in the process of virtual hearings. It is the place that can reflect technical issues and cyber security methods. It also demonstrates the improvement points mentioned regarding the examination of witnesses.

The Seoul Protocol offers minimum standards for venues where the video conference must occur. The requirement for an appropriate venue covers factors not limited to on-call IT technicians, safeguarded cross-border connections to prevent unlawful interception by third parties and security of video conference participants. This is particularly the case in Art. 5.1 through 5.6, discussing various points from audio output device to communication lines and screen width. Meanwhile, the ICC Guidance Note and HKIAC Guidelines provide no guidance regarding venue.

 

Direction for the Future                        

Virtual hearings were examined before the COVID-19 pandemic and adjusted when the “new normal” arrived. Continuous updates on virtual hearing guidelines, therefore, are warranted. At the same time, venues reflecting these virtual hearing requirements can be developed alongside these guidelines.

One of the noteworthy developments soon to be presented is the “Seoul IDRC Guidelines” (tentative title), a joint-project by the Korea Commercial Arbitration Board (“KCAB”) and the Seoul International Dispute Resolution Center (“Seoul IDRC”). Seoul IDRC, a neutral sophisticated hearing center located in Seoul, aims to provide case-by-case tailored virtual hearing services. Tailored services are said to include the classification of types of hearings: jurisdictional hearings, witness examination hearings, methods of hearings (partial or fully virtual hearings) and users of the hearings (foreign tribunals and foreign parties).

 

Concluding Remarks  

While people eagerly await the end of the COVID-19 pandemic, we can reasonably expect some aspects of pandemic life to remain. This does not mean (hopefully) that we will have to wear masks in public and keep a “safe distance” from friends and family for the rest of our lives. Rather, some of the conveniences of the COVID-19 pandemic are here to stay.

As a result of the COVID-19 pandemic, parties and tribunals now know that virtual hearings are not simply possible, but effective as well. ICC Guidance Note, HKIAC Guidelines and Seoul Protocol are pioneer approaches to the changing world of international arbitration. These guidelines recognize the widely cited shortcomings of virtual hearings and address them by encouraging parties to work towards efficient proceedings.

When considering how a virtual hearing will proceed, parties should be mindful of what approach will best suit their needs. Technology and cyber security, examination of witnesses and experts and venue are just three important considerations worth noting when comparing these guidelines.

Changes will continuously be needed as a number of virtual hearings takes place. Next steps are already being discussed, as can be seen with the “Seoul IDRC Guidelines.” International arbitration is still just at the beginning stage of virtual hearings, and for now we can only say “stay tuned” as we learn more.

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Milan Court Torpedoes International Arbitration and Substitutes Own Decision on Merits

Tue, 2021-06-22 01:42

Despite the prominence of Italian industry in international trade – Italy is one of the G7 countries – the country has long struggled to build a reputation in international arbitration as a reliable and arbitration-friendly seat. Italy’s court system is notoriously among the slowest in Europe, and the slowest to reach a conclusion through its Supreme Court. But just as damaging to Italy as the speed of justice is an open question of whether the judiciary is capable of adopting a modern approach to arbitration.

A recent decision by the Milan Court of Appeals, the court in Italy’s leading industrial city, demonstrates the risk parties face that judges will simply substitute their view of the merits over those of the arbitrators chosen by the parties. Judgment no. 1790/2021 of 8 June 2021 is a virtual roadmap of the pitfalls a party may encounter when choosing Italy as a seat of arbitration:

(a) merits-based annulment;

(b) re-determination of the merits by the court, ordering a foreign respondent to pay the damages sought by an Italian claimant without any re-hearing of the evidence;

(c) “de-internationalization” of an arbitration despite the presence of a foreign party where the court, in its discretion, deems Italy to be the “centre of interests” for the performance of obligations;

(d) deference to a partial award issued by a tribunal whose chair was successfully recused and replaced before the final award;

(e) lengthy delay (i.e., over three years for a decision on an award rendered on 30 March 2018).

The background reported in the judgment was a relatively straightforward contract to deliver turbines for a wind farm that was to include project financing, which the buyer ultimately failed to obtain after the seller had begun deliveries. After initial work was delivered and advance payments of circa Euro 10 million made, the buyer failed to obtain the required project financing and initiated arbitration under the rules of arbitration of the Milan Chamber of Arbitration (CAM) for restitution of sums paid. The seller counterclaimed for damages, or in alternative for costs and expenses incurred prior to termination.

The final award rejected the claimant’s request. The Milan Court of Appeals came out with a very different result that will leave non-Italian parties questioning whether to opt for Italy as a seat of arbitration.

 

Background

In 2009, Wind Energy Racalmuto Srl (WER) entered into a contract for the supply and the installation of wind turbines for the realisation of an electric production plant with GE Wind Energy Gmbh and GE International inc. Italian Branch (GE). The contract provided for two advance payments amounting in aggregate to 50% of the contract price. The remaining consideration was to be guaranteed through a payment security (PS) granting an irrevocable mandate to a project financing entity that would pay directly GE.

WER paid the first instalment, and GE provided an advance payment bank guarantee (AP bond) for the same amount. The contract was then amended twice in 2010 due to WER’s inability to obtain project financing, and the deadline for the provision of the PS was eventually postponed indefinitely.

By June 2010, GE had delivered some of the work, including parts of the foundations of the wind turbines, issued a parent company guarantee and provided the AP bond, and WER had paid 20% of the total price. Throughout 2011 and 2012 WER attempted in vain to secure the financing to finalise the project.

In August 2013, WER claimed that GE had breached the contract by not renewing the expired AP bond, and demanded restitution of the entire amount paid up to that moment. GE responded that renewal of the AP bond was not required until WER delivered the PS.

In February 2015, WER initiated arbitral proceedings claiming termination of the contract due to GE’s contractual breach.

With a partial award issued in June 2016, the Tribunal held that:

  • the parties had put the contract on hold, subjecting its future performance to a “condition precedent” of a project financing;
  • neither party’s breach was preponderant and of such gravity to justify termination of the contract; hence, no party was entitled to contractual damages;
  • the contract was nonetheless terminated due to the non-occurrence of the condition precedent, which had become impossible;
  • GE was still to be compensated for the delivery of contractual goods initially accepted and later challenged by WER; lacking a precise determination in the contract, a further evidentiary phase was needed.

The partial award, albeit challenged by GE, became final.

The court’s judgment reports, however, that GE subsequently sought the recusal of the President of the Tribunal, who was duly substituted. The judgment does not state the grounds for the recusal, but the 2010 CAM rules contain a code of ethics that imposes upon arbitrators strict obligations of competence, availability, independence, and impartiality.

The re-constituted arbitral tribunal issued a final award in March 2018. The award held that GE was entitled to retain the amounts paid by WER.

 

Annulment and “Reformulation” of the Annulled award

WER challenged the award on four grounds, the contrariety of the final award to the partial award being the only one actually analysed by the Court.

Relying heavily on the dissenting opinion by the only Italian arbitrator of an international tribunal, the court held that the case met the remarkably high-standard test set by the Supreme Court for successfully challenging an award for incoherent or lacking reasoning of the decision.1) When dealing with an alleged inconsistency between the partial and the final award, Italian Courts seem to be relying on Art. 829(1) no. 8, and – to a lesser extent, possibly not relevant when the partial award has already become res judicata – on Art. 829(1) no. 4 or no. 11. The Milan Court of Appeals seem to have also applied Art. 829(1) no. 5. On the distinction between Art. 829(1) no. 5 and no. 11, and the possible reasons behind their joint application, see M. V. Benedettelli, International Arbitration in Italy, Kluwer Law International, 2020, § 10.72, jointly written with Z. Crespi Reghizzi. jQuery('#footnote_plugin_tooltip_37880_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37880_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This requires the reasoning to be entirely absent or so scant that the rationale of the decision is impossible to understand. In particular, the Court held that the Tribunal went too far with the analysis of the nature (retroactive or not) of the termination as the partial award had simply remitted to later determination the costs incurred by GE in delivering the initial phase of the contract. In the court’s interpretation, this entailed an irremediable incoherence between the awards, sufficient to vacate the final award.

In evaluating the nature of the termination, however, the Court observed that the arbitration had included the report of a quantum expert who had assessed GE’s costs of delivering equipment but took no note of it. Further, the Court’s decision simply mentioned in passing the recusal of the president of the arbitral tribunal that had issued the partial award.

In adopting a preference of the partial award over the final in its reasoning, the Milan appeals court also failed to mention the discretionary power granted under the 2010 CAM Rules to a newly-constituted Tribunal to repeat all or some of the acts of the proceedings prior to a successful recusal, nor even the potential ineffectiveness of the activities of a recused arbitrator under the applicable Italian law (Art. 815 of the Civil Procedure Code). Considering that in some circumstances such a recusal might even render the partial award invalid,2) U. Draetta – R. Luzzatto (Editors), The Chamber of Arbitration of Milan Rules: A Commentary, JurisNet, Huntington, 2012, 292. jQuery('#footnote_plugin_tooltip_37880_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37880_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); it is odd that the Court failed to address this while deferring to the partial award in its decision. In sum, not only did the Court completely overlook the CAM’s finding that an arbitrator was unfit for chairing the Tribunal, but also went so far as giving preference to the recused arbitrator’s decision over that of the re-constituted Tribunal.

Incredibly, after having declared the final award void, the court asserted its own power to decide the actual merits of the case.

In doing so, the court held that the arbitration was not to be treated as international under Italian law, which requires either party to be domiciled abroad at the time of entering into the arbitration agreement (Art. 830 of the Civil Procedure Code). Although one of the parties was, in fact, domiciled in Germany, the Court found there to be a “centre of interests” with its Italian branch, such that it should be treated as domiciled in Italy. This is in open contrast with the nature of the dispute, the domicile of the parties, and the CAM’s (correct) interpretation of the dispute resulting in its choice of an international Chair (pursuant to Art. 14.5 CAM Rules). The court’s interpretation is further at odds with the intentions of international parties contracting to do work in Italy, who adopt arbitration in order to avoid the vagaries of the Italian legal system. And it does not compare at all well with the clear rules of a nearby civil law jurisdiction, France, where arbitration is deemed international when international commercial interests are at stake (Art. 1504 Code de Procédure Civile), regardless of the domicile of the parties. The uncertainty of the Italian approach – apparently granting the courts discretion to determine that an arbitration is not international despite the existence of a foreign party – appears strikingly not arbitration friendly.

Finally, the court held that, despite the findings of the final award on the work performed by GE, WER was entitled to full restitution of the entire amount it had paid because reimbursement of expenses was incoherent with the determination of the partial award that the parties were entitled to no damages.

The decision is, candidly, so at odds with modern practice of arbitration – domestic and international – that comment on its conclusions hardly seems necessary. It may be worth noting, however, that the court’s decision appears to fall outside of the set-aside grounds under Art. IX of the European Convention on International Commercial Arbitration 1961 (ECICA), with the consequence that the award should be still enforceable in any of the contracting States of the ECICA.

All considerations above should be further put into context giving the right weight to the judgement having been rendered by a Court of second instance, with a three-senior-judge deciding panel, in the most industrialised and business-oriented city in Italy.

 

A look at the future

Even in the best of circumstances, the development of a reputation as an arbitration-friendly jurisdiction requires the active support of the courts. Nearby France, for example, took steps in March 2018 to further burnish its pro-arbitration reputation by introducing a specialised section of the Court of Appeals to hear all annulment proceedings of Paris-seated international arbitral awards.

By contrast, a national judiciary already lacking a reputation of expertise in international arbitration, combined with an inclination to impose its own view of the merits over those of the adjudicators agreed by the parties, would normally be enough to send international parties to more favourable seats.

The WER judgment, however, goes a step even further towards disincentivizing arbitration over the courts in Italy. Had the dispute been decided in the first instance courts, the respondent would have been presented an opportunity for its costs to be considered in the calculation of losses, instead of undergoing an entire arbitration, reaching an award on the merits, only to be followed by an annulment decision that granted to the claimant the entirety of its demand without the opportunity for the defendant to present its case.

In an effort to overcome the severe impact of the inefficiencies of its courts on the overall economy (some studies here and here), Italy has embraced the use of both arbitration and mediation as a means to lighten the burdens on the justice system. The latest commissions created with this purpose, namely the Alpa Commission and the more recent Luiso Commission which submitted its conclusions at the end of May 2021, have proposed some amendments which would certainly improve the overall system. Whether Parliament will follow the suggestions of the Luiso Commission, and whether this will be enough for a significant improvement,3) For a critical analysis see R. Oliva, Il (nuovo?) progetto di riforma, available in Italian here. jQuery('#footnote_plugin_tooltip_37880_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37880_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); is yet to be seen.

At the same time, CAM has adopted forward-looking Rules over the course of 2019 to support this.

However, as the WER judgment of the Milan Court of Appeals makes clear, all such noble efforts will be in vain if the courts remain hostile to the decisions of arbitrators chosen by the parties.

References[+]

↑1 When dealing with an alleged inconsistency between the partial and the final award, Italian Courts seem to be relying on Art. 829(1) no. 8, and – to a lesser extent, possibly not relevant when the partial award has already become res judicata – on Art. 829(1) no. 4 or no. 11. The Milan Court of Appeals seem to have also applied Art. 829(1) no. 5. On the distinction between Art. 829(1) no. 5 and no. 11, and the possible reasons behind their joint application, see M. V. Benedettelli, International Arbitration in Italy, Kluwer Law International, 2020, § 10.72, jointly written with Z. Crespi Reghizzi. ↑2 U. Draetta – R. Luzzatto (Editors), The Chamber of Arbitration of Milan Rules: A Commentary, JurisNet, Huntington, 2012, 292. ↑3 For a critical analysis see R. Oliva, Il (nuovo?) progetto di riforma, available in Italian here. function footnote_expand_reference_container_37880_30() { jQuery('#footnote_references_container_37880_30').show(); jQuery('#footnote_reference_container_collapse_button_37880_30').text('−'); } function footnote_collapse_reference_container_37880_30() { jQuery('#footnote_references_container_37880_30').hide(); jQuery('#footnote_reference_container_collapse_button_37880_30').text('+'); } function footnote_expand_collapse_reference_container_37880_30() { if (jQuery('#footnote_references_container_37880_30').is(':hidden')) { footnote_expand_reference_container_37880_30(); } else { footnote_collapse_reference_container_37880_30(); } } function footnote_moveToAnchor_37880_30(p_str_TargetID) { footnote_expand_reference_container_37880_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Judicial Review of Arbitration Agreements in PR China

Mon, 2021-06-21 01:27

The Chinese Arbitration Act (1995) recognizes the principle of competence-competence in Article 20, under which a party challenging the validity of the arbitration agreement may request the relevant arbitration commission to make a decision or apply to the court for a ruling. Ultimately, though, it is the reviewing courts in PR China that shall have the final say on the validity of an arbitration agreement including its scope. Under the Chinese legal system, such reviewing courts are spread amongst different geographical locations.

Taking arbitration agreements choosing Shanghai International Economic and Trade Arbitration Commission (also known as Shanghai International Arbitration Center; the “SHIAC”) as example, the court responsible for reviewing such arbitration agreements is the Shanghai No.2 Intermediate People’s Court in accordance with Article 12 of the Judicial Interpretation on Arbitration Act (2006) (the “2006 Judicial Interpretation”) made by the Supreme People’s Court of the People’s Republic of China (the “SPC”).1)The SHIAC is a permanent arbitration institution established in Shanghai since 1988. jQuery('#footnote_plugin_tooltip_37640_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

However, where an arbitration agreement does not designate an institution, the question of validity (including the scope) of an arbitration agreement will be determined in accordance with Chinese Civil Procedural Laws (2017), i.e., pursuant to the principle of actor sequitur forum rei, whereby a party must seek relief from competent jurisdiction.

 

Standardized Practices and Increased Transparency

Reviewing court judgments in PR China are without precedential effect. Without standardized practices, this could lead to judgments that lack uniformity and thus yield uncertainty about the law.2)Article 20 of the Chinese Arbitration Act (1995) provides that: “[i]f the parties object to the validity of the arbitration agreement, they may apply to the arbitration commission for a decision or to a people’s court for a ruling. If one of the parties submits to the arbitration commission for a decision, but the other party applies to a people’s court for a ruling, the people’s court shall give the ruling. If the parties contest the validity of the arbitration agreement, the objection shall be made before the start of the first hearing of the arbitration tribunal.” jQuery('#footnote_plugin_tooltip_37640_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In order to unify the courts’ practices on judicial review of arbitration agreements, the SPC issued several judicial interpretations, one of which was issued in 1987 for foreign-related arbitration agreements and another in 2017 for purely domestic arbitration agreements. Together, the two judicial interpretations from SPC form the Internal Reporting Mechanism under which lower courts are required to seek approval from higher courts, and up to the SPC if necessary, before striking down an arbitration agreement.

Further, in view of the development of legal technology and increasing awareness of judicial transparency, the SPC ordered in July 2013 publication of court judgments and verdicts on the internet after they become effective. As of August 2020, the website has published more than one hundred million judgments and verdicts, a significant number of which relate to arbitration agreements.

SHIAC has observed that an increasing number of judgments and verdicts relating to arbitration agreements that choose SHIAC are being published. These judgments and verdicts reflect the pro-arbitration attitude of the courts in PR China when assessing arbitration agreements choosing SHIAC. In this regard, two selected cases relating to the issue of arbitrability are summarized below.

 

Case No. 1:3)(2020) E 0802 Min Chu 2196 Hao jQuery('#footnote_plugin_tooltip_37640_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Are Tort Claims Arbitrable?

Facts

In December 2016, the petitioner and the respondent concluded a leasing agreement, under which the petitioner leased the roof area of certain industrial premises to the respondent for use in a power-generating project. Since 2018, the premises began to experience problems allegedly due to improper use of the roof area by the respondent which caused damage to, inter alia, the petitioner’s leased premises. The petitioner accordingly sought compensation from the respondent.

In reliance on Chinese Tort Law (replaced by Chapter 7 of the PRC Civil Law Code) and Chinese Civil Procedural Laws, the petitioner filed court proceedings in the court of the place where the respondent was domiciled. The respondent objected to the court’s jurisdiction and argued that the dispute should be submitted to arbitration in accordance with the arbitration agreement contained in the leasing agreement between the parties, which specified that “any dispute arising out of the performance of the agreement……shall be submitted to Shanghai International Arbitration Center for arbitration”.4)This is the author’s courtesy translation of the original provision in Chinese. jQuery('#footnote_plugin_tooltip_37640_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Court’s Ruling

The competent court, located in Hubei Province in the middle part of Mainland China, identified the core issue as whether the court had jurisdiction over the dispute brought by the petitioner against the respondent.

Firstly, the court examined whether such tort claim fell under the scope of arbitrable disputes under Article 2 of the Chinese Arbitration Act (1995), and found after reading the text of Article 2 that such tort claims were arbitrable.

Secondly, the court examined whether the tort claim submitted by the petitioner fell under the scope of the arbitration agreement. The court found that the arbitration agreement gave a broad discretion to the SHIAC arbitral tribunal to determine “any dispute arising out of the performance of the agreement”. The court was of the view that such tort claims were included under this broad scope.

Thirdly, the court considered whether such tort claims were detachable from the parties’ contractual rights and obligations, and therefore would fall outside the broader scope of performance of the underlying lease agreement. The court took note that Article 6 of the leasing agreement specified that “Party B [(i.e., the respondent)] shall be responsible for the maintenance of the power-generating project on the roof, and for the water-proof work resulted by the power-generating project…”.5)This is the author’s courtesy translation of the original provision in Chinese. jQuery('#footnote_plugin_tooltip_37640_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The court further noted Article 2 of the Judicial Interpretation on Arbitration Act (2006), providing that “[w]here the parties concerned synoptically agree that the matters to be arbitrated are contractual disputes, the disputes arising out of formation, effectiveness, modification, assignment, performance, liabilities for breach, interpretation, rescission, etc. of the contract may all be ascertained as matters to be arbitrated”,6)This is the author’s courtesy translation of the original provision in Chinese. jQuery('#footnote_plugin_tooltip_37640_27_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and found with reference to Article 6 of the leasing agreement that the respondent’s alleged tortuous acts were closely connected with and could not be detached from the respondent’s performance of the leasing agreement.

Based on the above analysis, the court determined that there was a valid arbitration agreement between both parties and that their disputes, including claims on torts, should be referred to arbitration. The petition was accordingly dismissed.

 

Case No. 2:7)(2020) Su 10 Min Chu 144 Hao jQuery('#footnote_plugin_tooltip_37640_27_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Are Disputes over Public-Private-Partnership Arbitrable?

Facts

In November 2015, the respondent signed a Building-Owning-Operation (“BOO”) Contract for the development of a cultural tourism resort (the “Project”) with a third party. Due to funding issue, the respondent invited the petitioner to join the development and construction of the Project adopting the Public-Private-Partnership (“PPP”) model. The petitioner and the respondent subsequently signed the BOO Contract in dispute, which contained clauses on the investment, construction and operation of the Project.

On March 14, 2018, the respondent unilaterally issued a notice for an early termination of the Project to the petitioner, after which the petitioner notified the respondent of its agreement to the early termination, and of its request for compensation to which the respondent objected. The petitioner then filed court proceedings to seek compensation from the respondent. The respondent relied on the arbitration agreement contained in the BOO Contract and objected to the jurisdiction of the court, claiming that the dispute should instead be submitted to arbitration.

 

Court’s Ruling

The competent court to hear the case, which is located in Jiangsu Province in the eastern part of Mainland China, considered that the disputed BOO Contract was concluded for a Project using the PPP model, which in general contains both commercial and administrative elements. In this regard, under Article 3 of the Chinese Arbitration Act (1995), administrative disputes are not arbitrable and shall be handled by the administrative organs as prescribed by law, instead of via commercial arbitration.

However, the court determined that the disputed BOO contract was of a civil rather than administrative nature, based on the following considerations:

  1. From the perspective of contract formation, a standard BOO contract contains the rights and obligations negotiated by the parties on the basis of the principle of equality thus having the basic characteristics of a civil contract, e., parties negotiate at arms’ length;
  2. The contents of a standard BOO contract typically involve matters of a civil nature which can be contracted and negotiated, g., project capital, construction scope, construction standards, acquisition of benefits and risk allocation; and
  3. The Project involved in the dispute was essentially a framework of cooperation between parties, neither of whom was a public authority nor was subordinate to the other.

The court found that since the disputed BOO Contract was of a civil nature and that it contained a valid arbitration agreement, the petitioner’s claims did not fall under the jurisdiction of the court and should be referred to through arbitration. The petition was accordingly dismissed.

 

Concluding Remarks

As demonstrated in the two cases discussed, the courts in PR China adopt an arbitration-friendly attitude in their acknowledgement of the validity of arbitration agreements and in their recognition a broad scope of discretion of arbitral tribunals to determine their own jurisdiction. In doing so, arbitration as a dispute resolution mechanism may become even more widely available to users, and in turn help alleviate the overwhelming caseload faced by the courts in PR China. Such an achievement should be attributed to the SPC for its efforts in standardizing the practice of the reviewing courts.

In terms of continuing efforts of the judiciary, one example is the revision of the Chinese Arbitration Act (1995) which is currently under progress. Although the current draft revision has yet to undergo public consultation, legal experts involved have indicated that one key development pertains to having the law of the seat as the law applicable to the arbitration agreement, which is a concept so far only introduced in the SPC’s judicial interpretations, e.g. the 2006 Judicial Interpretation and the Provisions of the Supreme People’s Court on Several Issues concerning Trying Cases of Arbitration-Related Judicial Review (2018) (the “2018 Provisions”).8)Article 13 of the 2018 Provisions explicitly provides that, “if the parties intend to agree on the choice of applicable law for the arbitration agreement, the parties should do so through explicit expression. The parties’ choice of the law applicable for the contract should not be used as the law for determining the validity of the arbitration clause in the same contract”. (This is the author’s courtesy translation of the original provision in Chinese.) jQuery('#footnote_plugin_tooltip_37640_27_8').tooltip({ tip: '#footnote_plugin_tooltip_text_37640_27_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

On this point, it could reasonably be expected that the said concept of law of the seat will exclusively apply to determination of validity of arbitration agreements which, together with the persistent efforts of the courts in PR China towards unifying practices on judicial review of arbitration agreements, may help resolve the fundamental question of determination of the proper law governing the arbitration agreement.

References[+]

↑1 The SHIAC is a permanent arbitration institution established in Shanghai since 1988. ↑2 Article 20 of the Chinese Arbitration Act (1995) provides that: “[i]f the parties object to the validity of the arbitration agreement, they may apply to the arbitration commission for a decision or to a people’s court for a ruling. If one of the parties submits to the arbitration commission for a decision, but the other party applies to a people’s court for a ruling, the people’s court shall give the ruling. If the parties contest the validity of the arbitration agreement, the objection shall be made before the start of the first hearing of the arbitration tribunal.↑3 (2020) E 0802 Min Chu 2196 Hao ↑4, ↑5, ↑6 This is the author’s courtesy translation of the original provision in Chinese. ↑7 (2020) Su 10 Min Chu 144 Hao ↑8 Article 13 of the 2018 Provisions explicitly provides that, “if the parties intend to agree on the choice of applicable law for the arbitration agreement, the parties should do so through explicit expression. The parties’ choice of the law applicable for the contract should not be used as the law for determining the validity of the arbitration clause in the same contract”. (This is the author’s courtesy translation of the original provision in Chinese.) function footnote_expand_reference_container_37640_27() { jQuery('#footnote_references_container_37640_27').show(); jQuery('#footnote_reference_container_collapse_button_37640_27').text('−'); } function footnote_collapse_reference_container_37640_27() { jQuery('#footnote_references_container_37640_27').hide(); jQuery('#footnote_reference_container_collapse_button_37640_27').text('+'); } function footnote_expand_collapse_reference_container_37640_27() { if (jQuery('#footnote_references_container_37640_27').is(':hidden')) { footnote_expand_reference_container_37640_27(); } else { footnote_collapse_reference_container_37640_27(); } } function footnote_moveToAnchor_37640_27(p_str_TargetID) { footnote_expand_reference_container_37640_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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ADGMAC Protocol for Remote Hearings: An Overview

Sun, 2021-06-20 01:10

The Abu Dhabi Global Market Arbitration Centre (“ADGMAC) introduced its Protocol for Remote Hearings (“Protocol”) in June 2021. The Protocol provides parties, their lawyers and the Tribunal with a set of procedural and logistical arrangements for the conduct of hearings that may be conducted remotely (whether fully or in part).

Previously, in September 2019, ADGMAC published its Arbitration Guidelines (“Guidelines”). While the Guidelines did not expressly provide guidance for remote hearings, where applicable they (a) permitted witnesses to attend the hearing by video conference or telephone, and (b) encouraged parties to convene case management conferences by telephone or by video-conference (unless the parties agree otherwise or the tribunal is reasonably satisfied that it is necessary and cost-effective for the parties to meet in person).

Many arbitration rules and guidelines have been amended to expressly allow proceedings to be conducted virtually, including the ADGM Arbitration Regulations 2015 (which were amended on 23 December 2020) (the “ADGM Arbitration Regulations”). The recently-amended Arbitration Regulations clarify, and indeed promote, the use of technology in arbitration in multiple instances.

Following the amendment of the ADGM Arbitration Regulations and publication of the Guidelines, the introduction of the Protocol is timely as it introduces a clear set of guidelines that ensure remote hearings are organised and conducted in a fair, efficient, reliable and cost-effective manner. In this article, we review selected and key aspects of the Protocol.

 

Key aspects of the Protocol

Structure and Use of the Protocol

The Protocol is designed to cover merits hearings in which fact and expert witness evidence are heard and oral submissions are made, but it can also be adapted for case management conferences where procedural and organisational matters are discussed. As with the Guidelines, the Protocol (or any part of it) may be adapted by the Parties and/or the Tribunal to the specific requirements of each case and, if necessary, implemented by the Tribunal in a procedural order.

The Guiding Principles

In Section A, the Protocol provides that the parties shall agree to conduct remote hearing in a manner that (a) is consistent with the principles of fairness, cooperation and good faith; (b) ensures the enforceability of any resultant arbitral award; and (c) ensures confidentiality.

Choice of Platforms and Service Providers for Remote Hearing

In Section B, the Protocol clarifies that the functional requirements for a remote hearing must comprise: (a) a video-conferencing system; (b) an electronic document management system; and (c) real-time transcript.

Speakers and Attendees

In Section C, the Protocol makes a distinction between ‘Speakers’ and ‘Attendees’. It clarifies that Speakers are the participants who can be both seen and heard by all other participants on any given day. Speakers comprise the Tribunal, advocates appearing for the parties, the testifying fact and expect witnesses, and an interpreter, if any.

The Protocol clarifies that Attendees are participants who are only able to see and hear the Speakers, but cannot themselves be seen or heard. Attendees are all the other individuals (other than Speakers), such as members of the legal team who are not appearing as lead counsel, party representatives or personnel, and any other permitted Participant(s) such as a secretary to the Tribunal.

The Protocol also affords the parties the right to object to any of the participants within 24 hours of the exchange of the list of participants.

Semi-Remote Hearing Arrangements

In Section J, the Protocol addresses situations in which several participants attend the remote hearing from the same physical room. The Protocol allows semi-remote hearing arrangements, but encourages the parties to agree on such semi-remote configuration in advance of the remote hearing.

Notwithstanding the foregoing, the Protocol recommends avoiding the following semi-remote arrangements: (a)The Tribunal and the legal team of one of the parties appearing in person, while the legal team of the other Party appears remotely; and/ or (b) The legal team of one of the parties examining an opposing party’s witness or expert in person, without the opposing party and/ or its legal team being also present in person.

Witnesses

Section L of the Protocol provides that fact witnesses must give an affirmation before giving their testimony in accordance with any applicable laws.

The Protocol encourages the parties to arrange for a hearing invigilator to attend at the same premises as the fact or expert witness, to ensure the integrity of the examination (e.g., ensuring there is no person or recording-device present that was not approved or agreed). The invigilator may inspect the room from which the witness is expected to testify to ensure that only authorised materials and equipment are present. The invigilator may also remain inside the room during the witness’s testimony to ensure that no one enters the room, and may observe that sequestration of the witness is maintained.

Alternatively, if the attendance of an invigilator is not possible, the Protocol requires witnesses to testify alone in a room containing a camera which provides a clear and reasonably complete view of the witness and the room he or she is in. The Protocol also provides that each fact witness must confirm the following at the start of his or her evidence:

  1. The witness can see and hear the other Speakers clearly;
  2. No other person other than those persons agreed by the Parties, or approved by the Tribunal, is in, or will enter, the room in which the witness is providing evidence;
  3. The witness does not have access to hard copy documentation other than his or her witness statement(s); and
  4. The witness will not and has no means to communicate with any person in any way while the witness’s examination is in progress, other than through the approved Platforms.

Confidentiality

Section I of the Protocol confirms that parties must take all steps necessary to ensure the confidentiality of the proceedings. It obliges parties to notify the Tribunal of any laws applicable at any participant’s location that may present an obstacle or issue of legal compliance with privacy, confidentiality, data protection and security requirements.

The Protocol encourages the parties to agree on a more detailed “cyber-protocol” prior to the remote hearing to ensure compliance with any applicable regulations and to protect the confidentiality of electronic communications within the arbitration proceedings and any platforms used for the remote hearing.

Recognition and Enforcement

For the purposes of recognition and enforcement of the arbitral award, Section T of the Protocol encourages the parties to agree in writing that remote video-conferencing constitutes a fair and acceptable means of holding hearings and taking of evidence by the Tribunal pursuant to the arbitration agreement and the applicable law and rules.

The Protocol also encourages parties to agree that the conduct of the remote hearing is consistent and compliant with the law of the seat, and that no party will seek to set aside or oppose the recognition or enforcement of any resultant arbitral award on the basis that the arbitral hearing was conducted by remote video-conferencing.

 

Commentary

Prior to the unwelcome arrival of the pandemic in early 2020, the use of technology was not novel in international arbitration. Parties and arbitrators had been accustomed to using modern means of communication to, for example, hold case management conferences, and utilise hearing room technologies such as real-time electronic transcripts. International arbitration had thus already shifted into a more technologically-oriented culture, albeit maintaining for the large part traditional in-person hearings.

The pandemic continues to shift the way hearings in international arbitration are conducted, such that they become routine. As a result, the Protocol is perfectly timed and helps complement ongoing efforts by arbitral tribunals in tailoring arrangements for remote hearings in procedural orders, protocols and/or agreements.

Having said that, and having reflected on the approaches of other institutions, we suggest the addition of the following three elements that would encourage the efficiency and effectiveness in the conduct of remote hearings.

In particular:

  • Guidelines requiring that each participant shall endeavour to (a) identify a lead speaker for each party, (b) speak one at a time and not while another participant is speaking, except if required to interpose an objection to a question asked or to alert of technical difficulties, (c) avoid using equipment that interferes with connectivity, (d) mute microphones when not in use to minimise audio disruptions, (e) eliminate any background noise, (f) avoid wasting time during the remote hearing, and (g) take whatever measures or practices necessary to support the procedural efficiency of the remote hearing. Similar ideas are included in other virtual hearing protocols recently released, for example, section D of the International Chamber of Commerce (ICC) Checklist for a Protocol on Virtual Hearing, and Section 6 of the Bahrain Chamber for Dispute Resolution – American Arbitration Association (BCDR-AAA) Guidelines on the preparation and conduct of online hearings administered by BCDR).
  • Regulating where one of the Speakers (i.e., party or arbitrator) loses connection to the platform or experiences a security incident by providing guidelines for a back-up plan to troubleshoot and deal with such incidents and, if necessary, to reconvene if technical challenges prevent the participants from continuing to participate in the remote hearing.
  • Providing for the pausing or termination of the remote hearing if the arbitrator determines that the platform is not working as anticipated, confidentiality or security are compromised, or the format is otherwise inadequate, prejudicial to any party or to the integrity of the remote hearing.

These suggestions could be adopted independently by parties and/or the tribunal in the procedural order. They may also be taken into account in any future revision of the Protocol.  However, leaving aside these quibbles, the Protocol will complement and bolster existing efforts to provide a framework for the conduct of remote hearings generally and on a case-by-case basis.  It confirms ADGM’s commitment regulating arbitration to an international “best practice” standard.

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Interlocutory Judicial Review of Challenge Decisions of Arbitrators Under the Model Law: A Flawed Procedure in Need of Reform

Sat, 2021-06-19 01:08

Under Article 13(3) of the UNCITRAL Model Law, a party challenging an arbitrator may ‘appeal’ a decision of the tribunal or other body hearing that challenge to a court or other authority (the “Challenge Appeal Mechanism”). The purpose of the Challenge Appeal Mechanism is to make the arbitral process more efficient by permitting judicial review immediately after denial of a challenge in order to avoid any delay and/or controversy that may arise as result of having a challenged arbitrator conduct an arbitration. However, as this post discusses, that is not how the appellate mechanism functions in practice. This post, therefore, examines why the Challenge Appeal Mechanism is flawed and how it should be reformed.

 

An Imperfect Understanding of the Arbitral Process

The process of drafting the Model Law commenced in the late 1970s. The final text was adopted in 1985 by the General Assembly of the United Nations. At the time, most States were unfamiliar with the concept of international commercial arbitration. Indeed, it was only four years earlier, in 1981, that France became the first State to enact a law specifically addressing international commercial arbitration.1)C. A. Fleischhauer, Foreword of the Guide to the 1985 UNCITRAL Model Law, in H. M. Holtzmann and J. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (1989), p. v. jQuery('#footnote_plugin_tooltip_37713_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It is perhaps little wonder, then, that the Model Law reflects an imperfect understanding of how an appellate procedure ought to function. There are, in particular, three key deficiencies in the appellate procedure as set out in the Model Law.

First, the Challenge Appeal Mechanism is inefficient. While the applicable time limit under Article 13(3) stipulates that the challenging party must submit any appeal within 30 days of having received notice of the decision rejecting the challenge, the judicial review process of challenge decisions is unregulated and takes considerable time in many jurisdictions due to court backlogs and tactical delays by parties.2)See M. A. Gomez, Article 13: Challenge Procedure, in I. Bantekas et al (eds.), UNCITRAL Model Law on International Commercial Arbitration: A Commentary (2020), pp. 250-251. jQuery('#footnote_plugin_tooltip_37713_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The Challenge Appeal Mechanism, therefore, fails to achieve its principal purpose of settling challenges quickly.

Second, the Challenge Appeal Mechanism unwisely restricts the ability to appeal challenge decisions to the challenging party only. Unlike a rejected challenge, a sustained challenge will severely disrupt the arbitral process as the proceedings are unable to continue until the challenged arbitrator has been removed and replaced, absent special circumstances permitting a truncated tribunal to proceed with the arbitration (in the case the tribunal consists of three or more members).3)See G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.07. jQuery('#footnote_plugin_tooltip_37713_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The present wording of Article 13(3) prevents courts from correcting erroneously sustained challenges even though the impact on the proceedings and the need for the courts to act as a safety valve is greater in such circumstances rather than in situations in which a challenge has been rejected.

Third, the Challenge Appeal Mechanism prima facie breaches the principle of equality of arms by providing the parties with unequal rights to seek judicial review of challenge decisions.

In addition to the above, as courts can be expected to accord challenge decisions by arbitration institutions considerable deference, and rarely remove arbitrators in cases where the institution has rejected the challenge, the appellate mechanism is, by and large, redundant in administered arbitration.4)G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.06[B][1]. jQuery('#footnote_plugin_tooltip_37713_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Indeed, the Challenge Appeal Mechanism may be considered superfluous in both ad hoc and administered proceedings as parties are able to have challenge decisions reviewed by courts under the Model Law in the context of either an application to set aside an award or by request to resist enforcement of an award.5)See Model Law, Arts. 34(2) and 36(1). jQuery('#footnote_plugin_tooltip_37713_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The foregoing notwithstanding, interlocutory judicial review of challenge decisions serves a purpose. It is highly unsatisfactory for parties to be forced to participate and incur costs in proceedings with manifestly biased arbitrators. The Challenge Appeal Mechanism provides parties with another opportunity to have such arbitrators removed. Accordingly, any reform of the Challenge Appeal Mechanism should retain judicial review of challenge decisions in certain circumstances.

 

A French-inspired Solution

National courts support arbitration in one of two ways, by ’helping’ or ‘protecting’ the proceedings.6)E. Gaillard, The influence of French legal thinking on the development of arbitration law, Paris Arbitration Week 2019, 4 April 2019, https://www.youtube.com/watch?v=O3nYCp_FgK4 (last accessed 11 May 2021). jQuery('#footnote_plugin_tooltip_37713_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The former is the ‘English way’, in which courts take a more active role in the arbitral process and seek to ‘help’ arbitration, e.g., English courts may, on the application of a party to arbitral proceedings determine any question of substantive jurisdiction of an arbitral tribunal7)English Arbitration Act 1996, Art. 32. jQuery('#footnote_plugin_tooltip_37713_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, while the latter is the ‘French way’, in which courts will seek to ‘protect’ the arbitral process from any interreference, e.g., if a dispute arising under an arbitration agreement was brought before the French courts, the court would declare itself incompetent unless the arbitral tribunal had not yet been seized of the matter and if the arbitration agreement was manifestly void or inapplicable.8)French Civil Procedure Code, Art. 1448. jQuery('#footnote_plugin_tooltip_37713_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The two countries’ divergent policies for assisting the arbitral process are also reflected in their approaches to interlocutory judicial review of challenge decisions. Under English law, courts have the power to review challenge decisions in, but not limited to, international ad hoc and administered proceedings.9)English Arbitration Act 1996, Art. 24. jQuery('#footnote_plugin_tooltip_37713_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The French approach, by comparison, provides that a court may only decide a challenge in international ad hoc proceedings in the absence of an agreement by the parties.10)French Civil Procedure Code, Arts. 1456 and 1506(2). jQuery('#footnote_plugin_tooltip_37713_30_10').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The Challenge Appeal Mechanism is closer to the English than the French approach; however, in order to improve the appellate procedure it may be sensible to learn from the French in this regard. The Challenge Appeal Mechanism should be restricted to ad hoc proceedings only, but be available to both sides of a challenge (the “Reform Proposal”). This would increase the efficiency of administered arbitration by curtailing unnecessary court involvement while retaining judicial review in ad hoc proceedings to safeguard the arbitral process in the absence of an arbitration institution. By providing access to the Challenge Appeal Mechanism to both the challenging and the non-challenging party this approach would also remove the inherent unfairness in the current legal framework. Admittedly, this would remove interlocutory judicial review of challenge decisions in administered arbitration; but, bearing in mind that situations where such a review has a substantive impact on the proceedings is rare, it is, on the whole, more sensible to deal with any such situations through review of the final award at the end of the proceedings.11)See G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.06[B][4]. jQuery('#footnote_plugin_tooltip_37713_30_11').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_11', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Towards a Common Framework for International Commercial Arbitration Law

There is an old Brussels joke. How do you tell the difference between a British official and a French one? The Briton says ‘This idea works fine in theory but will it work in practice?’ while the Frenchman says ‘This idea works fine in practice but will it work in theory?’. Fortunately, although the Reform Proposal advocated above may be considered to be French-inspired, it nonetheless represents a solution which works both in theory and practice by incorporating features of both the English and French approach.

The proposal narrows the application of the Challenge Appeal Mechanism to ad hoc proceedings only in line with the ‘French-way’ of seeking to ‘protect’ arbitration from court interference; however, it also expands the parties’ ability to invoke the coercive, supportive and corrective powers of the courts at the appropriate juncture, if needed, during the proceedings by providing both sides of a challenge with the right to seek redress through the courts, in line with the ‘English way’ of seeking to ‘help’ arbitration.

Finally, by borrowing from both the leading common law jurisdiction and the civil law jurisdiction in the field of international commercial arbitration12)In the 2021 International Arbitration Survey: Adapting arbitration to a changing world by Queen Mary and White & Case, London, being a common law jurisdiction, is identified, together with Singapore, as the most preferred seats for international arbitration worldwide, while Paris is identified as the fourth most preferred seat for international arbitration worldwide and the highest ranked civil law jurisdiction. jQuery('#footnote_plugin_tooltip_37713_30_12').tooltip({ tip: '#footnote_plugin_tooltip_text_37713_30_12', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the proposal may gain acceptance among a wide variety of States with different legal, social and economic systems in accordance with UNCITRAL’s mission of harmonising and unifying international trade law.

References[+]

↑1 C. A. Fleischhauer, Foreword of the Guide to the 1985 UNCITRAL Model Law, in H. M. Holtzmann and J. Neuhaus, A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary (1989), p. v. ↑2 See M. A. Gomez, Article 13: Challenge Procedure, in I. Bantekas et al (eds.), UNCITRAL Model Law on International Commercial Arbitration: A Commentary (2020), pp. 250-251. ↑3 See G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.07. ↑4 G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.06[B][1]. ↑5 See Model Law, Arts. 34(2) and 36(1). ↑6 E. Gaillard, The influence of French legal thinking on the development of arbitration law, Paris Arbitration Week 2019, 4 April 2019, https://www.youtube.com/watch?v=O3nYCp_FgK4 (last accessed 11 May 2021). ↑7 English Arbitration Act 1996, Art. 32. ↑8 French Civil Procedure Code, Art. 1448. ↑9 English Arbitration Act 1996, Art. 24. ↑10 French Civil Procedure Code, Arts. 1456 and 1506(2). ↑11 See G. Born, International Commercial Arbitration (3rd ed. 2020), ¶ 12.06[B][4]. ↑12 In the 2021 International Arbitration Survey: Adapting arbitration to a changing world by Queen Mary and White & Case, London, being a common law jurisdiction, is identified, together with Singapore, as the most preferred seats for international arbitration worldwide, while Paris is identified as the fourth most preferred seat for international arbitration worldwide and the highest ranked civil law jurisdiction. function footnote_expand_reference_container_37713_30() { jQuery('#footnote_references_container_37713_30').show(); jQuery('#footnote_reference_container_collapse_button_37713_30').text('−'); } function footnote_collapse_reference_container_37713_30() { jQuery('#footnote_references_container_37713_30').hide(); jQuery('#footnote_reference_container_collapse_button_37713_30').text('+'); } function footnote_expand_collapse_reference_container_37713_30() { if (jQuery('#footnote_references_container_37713_30').is(':hidden')) { footnote_expand_reference_container_37713_30(); } else { footnote_collapse_reference_container_37713_30(); } } function footnote_moveToAnchor_37713_30(p_str_TargetID) { footnote_expand_reference_container_37713_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Why States Should Not Ratify, and Should Instead Denounce, the Hague Choice-Of-Court Agreements Convention, Part III

Fri, 2021-06-18 01:35

The 2005 Choice-of-Court Agreements Convention (“Convention”) has been widely promoted by the Hague Conference on Private International Law (“Hague Conference”) and others.  This post continues the discussion in two prior posts (Part I and Part II) in this series which argued that it was inappropriate to transpose the New York Convention’s basis structure and terms to the very different setting of national courts.  This post argues that the Convention also significantly dilutes essential protections that the New York Convention provides for both party autonomy and procedural fairness. In doing so, the Convention significantly exacerbates the risks that arise from the prevalence of judicial corruption and the lack of judicial independence and commercial expertise that exist in many legal systems. The Convention also departs radically from all previous proposals of global judgment recognition conventions, including the 1971 Hague Convention on the Recognition and Enforcement of Foreign Judgments and the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments. These and other instruments included mechanisms for dealing with the realities of judicial corruption and the lack of judicial independence (permitting states to provide for the mutual recognition of judgments on a bilateral, rather than global, basis). Strikingly, the Convention abandoned these mechanisms.

Most states have been reluctant to ratify the Convention. As discussed in this post, that reluctance is well-considered. Given the Convention’s serious defects, states should not ratify the Convention and, if they have done so, they should exercise their right to withdraw from it promptly.

 

The Convention’s Dilution of Safeguards for Party Autonomy

There is no dispute that the principles of party autonomy and consent are fundamental to contemporary private international law regimes and, in particular, to matters of international dispute resolution. Indeed, proponents of the Convention emphasize that it is intended to “protect party autonomy”1)Andrea Schulz, The Hague Convention of 30 June 2005 on Choice of Court Agreements, 2 J. Priv. Int’l L. 267 (2006). jQuery('#footnote_plugin_tooltip_37705_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and “remov[e] obstacles to productive commercial relations, which are best served by party autonomy.”2)Hans van Loon, The 2005 Hague Convention on Choice of Court Agreements – An Introduction, 18 Annals Fac. L.U. Zenica 12 (2016). jQuery('#footnote_plugin_tooltip_37705_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Party autonomy does not, however, mean giving effect to every alleged international arbitration clause or forum selection agreement.  Rather, respect for party autonomy means giving effect to those dispute resolution agreements that commercial parties have in fact validly concluded. As a consequence, the provisions of both the Convention and the New York Convention that govern the treatment of challenges to the existence, validity or scope of dispute resolution agreements – and hence the parties’ consent to a particular forum for adjudication – are of central importance. The Convention does not parallel the New York Convention’s treatment of party autonomy in this respect. Under the New York Convention, the existence, validity or scope of an arbitration agreement can generally be challenged at three stages: (a) in challenges to the validity of the arbitration agreement, in both the arbitral proceeding and litigation in the arbitral seat (and often elsewhere); (b) in challenges to an arbitral award in annulment proceedings in national courts which supervise the arbitral process in the seat of the arbitration; and (c) in challenges to the recognition of the award in proceedings in foreign courts outside the arbitral seat.  The results of any one of these challenges in a particular national court system (or the arbitral proceedings) will ordinarily not have preclusive effect in other jurisdictions.3)Gary Born, International Commercial Arbitration 3797-3808, 3995-4000 (3d ed. 2021). jQuery('#footnote_plugin_tooltip_37705_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  As a consequence, parties will not be required to arbitrate, nor be bound by an award, unless several independent inquiries into the existence and scope of valid consent to arbitrate have been satisfied, including inquiries by both the arbitrators themselves and by national courts in the recognition forum.

Significantly, the Convention dispenses with inquiries into the existence of valid consent to a choice-of-court agreement that would parallel those of the New York Convention. The existence and validity of a choice-of-court agreement may be challenged under Articles 5 and 6 of the Convention – generally paralleling Article II of the New York Convention. However, if such a challenge is made, and rejected by the putatively chosen legal system, then no further avenues for inquiry into the existence or validity of the agreement are possible in other forums. If the court putatively chosen by a choice-of-court agreement has decided that the agreement exists and is valid under the chosen court’s law, then Article 9(a) provides that the requested court must accept this decision: a judgment may be denied recognition if “the [choice-of-court] agreement was null and void under the law of the State of the chosen court, unless the chosen court has determined that the agreement is valid.”

Relatedly, Article 8(2) of the Convention also provides that “The court addressed [in recognition proceedings] shall be bound by the findings of fact on which the court of origin based its jurisdiction, unless the judgment was given by default.”  Thus, even if the chosen court has not decided on the existence and validity of the choice-of-court agreement, Article 8(2) makes its factual determinations binding in subsequent recognition proceedings.

The consequences of these provisions of the Convention are very significant.  Their effect is to give the national legal system putatively chosen in a choice-of-court agreement the sole authority to decide on the existence and validity of that agreement, without the possibility of review in recognition proceedings. That is a striking contrast to the New York Convention, where recognition courts are granted the authority by Article V(1)(a) to deny recognition based upon the absence of a valid arbitration agreement – notwithstanding an arbitral tribunal’s ruling that such an agreement existed and notwithstanding an annulment court’s decision to the same effect. Given the central importance of consent and party autonomy to both arbitration agreements and choice-of-court agreements, the Convention’s elimination of Article V(1)(a)’s safeguard is highly problematic: it creates a very real risk of parties being forced to litigate in, and bound to judgments by, courts to whose authority they never consented.

The Convention’s treatment of consent is also subject to additional serious criticisms. Under Article 9, there is no provision for denying recognition based upon the chosen court’s excess of authority, including by deciding disputes that are not within the scope of the parties’ choice-of-court agreement. In particular, there is no analog to Article V(1)(c) of the New York Convention, and parallel annulment provisions of national arbitration legislation, which permits a recognition court to deny recognition where the arbitral tribunal made an award that deals with issues not contemplated under the terms of the submission or decisions on matters beyond the scope of the submission to arbitration (ultra petita). However, the Convention eliminates Article V(1)(c)’s protections – leaving the chosen court, of any Contracting State, as the sole judge of the scope of its own jurisdiction. Again, this does not protect, but undermines, party autonomy.

Contrary to the assurances of its proponents, the Convention does not protect party autonomy; instead, it eliminates essential mechanisms for ensuring that the parties’ autonomy is validly exercised and genuinely respected. This is a particularly serious issue in jurisdictions with legal systems of doubtful integrity, independence and competence (in contrast to arbitral tribunals, where the opposite is true, and, in any event, where proceedings are supervised by the courts of the arbitral seat and recognition forums).

 

The Convention’s Dilution of Safeguards for Procedural Fairness

No less important than respect for party autonomy in international adjudication are requirements of procedural fairness, the basic elements of which include that the failure of a court or arbitral tribunal to respect these principles constitutes a denial of justice and deprives its rulings of both validity and legitimacy.

Again, contrary to its proponents’ commentary, the Convention does not parallel the New York Convention’s treatment of procedural fairness.  Under the New York Convention, an award may be denied recognition if “the party against whom the award is invoked was not given proper notice of the appointment of the arbitrator or of the arbitration proceedings or was otherwise unable to present his case.”  Moreover, many aspects of the procedures in international arbitration are a product of the parties’ consensual arrangements, with the New York Convention again providing for non-recognition of awards if these procedural agreements are not complied with. These protections complement the parties’ rights to “equality of treatment” and a “full opportunity to be heard” under virtually all national arbitration legislation and the availability of annulment of awards for violations of these guarantees of procedural unfairness.4)Born, at 3822-3, 3829. jQuery('#footnote_plugin_tooltip_37705_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  These protections also parallel the protections that are available in most jurisdictions against foreign judgments rendered in procedurally unfair proceedings.

Together with the parties’ role in the selection of the arbitral tribunal, Articles V(1)(b) and V(1)(d) of the New York Convention and analogous provisions in annulment proceedings provide effective protections for the parties’ due process rights in international arbitration. At both the annulment and recognition phases, the procedural decisions of the arbitrators are subject to scrutiny by national courts – in order to ensure that the proceedings were conducted fairly.

Importantly, the Convention does not replicate these safeguards for procedural fairness. Article 9(d) of the Convention permits non-recognition of a judgment where it was “obtained by fraud in connection with a matter of procedure,” defined as “deliberate dishonesty or deliberate wrongdoing,”5)Trevor Hartley & Masato Dogauchi, Hague Conference on Private International Law Convention of 30 June 2005 on Choice of Court Agreements Explanatory Report 831 (2005). jQuery('#footnote_plugin_tooltip_37705_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  Although important, this provision is directed only to deliberately fraudulent conduct – not to other denials of procedural fairness, including through incompetent, negligent, inadvertent or biased decision-making by a national court: the provision does not replicate the New York Convention’s protections for due process rights.

In addition, Article 9(e) of the Choice-of-Court allows a court to deny recognition of a judgment if “recognition and enforcement would be manifestly incompatible with the public policy of the requested State, including situations where the specific proceedings leading to the judgment were incompatible with fundamental principles of procedural fairness of that State.”  Article 9(e) provides more extensive protections than Article 9(d), but it too does not provide the safeguards that exist under the New York Convention.

First, Article 9(e) treats procedural unfairness as a subcategory of the public policy of the requested state, prescribing an elevated and two-pronged standard of proof – that recognition of a judgment be “manifestly incompatible” with a state’s public policy – and requiring that the “specific proceedings leading to the judgment” have been “incompatible with fundamental principles of procedural fairness.” By treating procedural unfairness solely as a sub-set of public policy, Article 9(e) dilutes the specific procedural protections that are provided under Articles V(1)(b) and V(1)(d) of the New York Convention.

Second, Article 9(e) of the Convention also limits non-recognition to cases where “the specific proceedings leading to the judgment” were procedurally unfair. By so doing, the Convention forbids inquiry into the fairness and independence of the legal system of the Contracting State whose courts rendered the judgment in question.  In the words of one commentator:

“[Article 9(e)’s] words were chosen with care.  Review may be had in the court addressed of something which may have occurred in the particular case leading to the particular judgment for which recognition and enforcement is sought.  Article 9(e) is not an invitation to a broad scale attack on the nature, character, or alleged conduct of the foreign judicial or legal system as a whole.”6)Ronald A. Brand & Paul M. Herrup, The 2005 Hague Convention on Choice of Court Agreements: Commentary and Documents 118 (3d ed. 2008) (emphasis added). jQuery('#footnote_plugin_tooltip_37705_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

This approach is seriously flawed in an instrument aspiring to be a global convention: Article 9(e) mandatorily requires recognition of judgments rendered by judicial systems that lack basic guarantees of independence, integrity and competence – which is a characterization that, as discussed above, describes a substantial number of states. Efforts to detect, and prove, judicial corruption are notoriously challenging and seldom successful. Demonstrating corruption in an individual foreign judicial proceeding is even more challenging, because of the difficulties in obtaining evidence, language and other obstacles (i.e., cost, risks of official interference and the like). Likewise, proving governmental interference in individual proceedings is extremely difficult. As a consequence, the Convention’s provisions regarding procedural fairness are virtually certain to prove inadequate as safeguards against the types of misconduct that are endemic in far too many jurisdictions.

The Convention’s treatment of procedural fairness also significantly dilutes the protections that are available under national law in many jurisdictions. Under both common law and civil law standards in most states, courts may deny recognition of awards rendered by legal systems that lack independence or impartiality. The vital importance of these procedural protections is underscored by the U.S. Supreme Court’s classic treatment of common law standards in Hilton v. Guyot:

“Where there has been opportunity for a full and fair trial abroad before a court of competent jurisdiction, conducting the trial upon regular proceedings, after due citation or voluntary appearance of the defendant, and under a system of jurisprudence likely to secure an impartial administration of justice between the citizens of its own country and those of other countries, and there is nothing to show either prejudice in the court, or in the system of laws under which it was sitting, or fraud in procuring the judgment, or any other special reason why the comity of this nation should not allow it full effect, the merits of the case should not, in an action brought in this country upon the judgment, be tried afresh.”7)Hilton v. Guyot, 159 U.S. 113, 202-03 (1895) (emphasis added). jQuery('#footnote_plugin_tooltip_37705_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37705_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Guarantees of procedural fairness in other jurisdictions are worded differently but are very similar in substance.

These safeguards, paralleling those of Article V(1)(b) of the New York Convention, are not incidental or merely “nice to have”: they are essential attributes of any ruling that is to be given binding effect in a developed legal system. Despite that, the Convention very significantly dilutes the procedural protections of both existing private international law rules in most jurisdictions and the New York Convention. Even if the New York Convention model were considered appropriate for litigation, however, it is extremely difficult to accept the proposition that its procedural protections should be materially diluted for foreign judicial proceedings.

 

Conclusion

The Convention aspires to be a worldwide charter governing international forum selection agreements and national court judgments and is promoted as a significant milestone in the development of international civil procedure.  Despite these ambitions, there are fundamental defects in the Convention’s structure and terms, making it unsuitable for ratification by jurisdictions committed to the rule of law.

The Convention purports to transplant principles from the New York Convention to cross-border choice-of-court agreements, notwithstanding decisive differences between the international arbitral process and proceedings in national courts.  Moreover, the Convention dilutes critical safeguards that the New York Convention guarantees for both the parties’ autonomy and the procedural integrity of the adjudicative process.  In doing so, the Convention again suffers from serious flaws which makes it unsuitable for adoption on a global scale.

On other occasions, the Hague Conference has acknowledged that judiciaries in many countries lack the integrity, independence, and competence to justify recognition of their judgments, even where those judgments were made pursuant to a legitimate jurisdictional base.  The 1971 Hague Convention on the Recognition and Enforcement of Foreign Judgments included, in Article 21, a provision that the Convention would apply only where two Contracting States had agreed to its application on a bilateral basis.  Similarly, the 2019 Hague Convention on the Recognition and Enforcement of Foreign Judgments included, in Article 29, a provision allowing states to opt-out of the Convention’s application as to any other Contracting State.

In both cases, these provisions applied even where jurisdiction over the judgment-debtor was undisputed, including where it was established by consent.  The reason for these provisions was pervasive doubts about the integrity, independence, and competence of courts in many countries – which led to insistence on provisions allowing Contracting States to opt out of application of the Convention as to such states.  The same conclusions apply equally under the Convention: notwithstanding a valid choice-of-court agreement, there is no justification for recognizing judgments from courts whose integrity and independence are suspect.

Given the grave defects in the Convention, states that have not already adopted the Convention – like the United States, India, Brazil and China – should not ratify it.  States that have already done so, like Singapore and Mexico, should reconsider and, utilizing Article 33, should withdraw from it.  Doing so is necessary to preserve the rule of law and the security of international trade and investment.  Failure to do so will inevitably result in gross procedural and other unfairness to innocent parties and will deter, rather than promote, cross-border trade and investment.

References[+]

↑1 Andrea Schulz, The Hague Convention of 30 June 2005 on Choice of Court Agreements, 2 J. Priv. Int’l L. 267 (2006). ↑2 Hans van Loon, The 2005 Hague Convention on Choice of Court Agreements – An Introduction, 18 Annals Fac. L.U. Zenica 12 (2016). ↑3 Gary Born, International Commercial Arbitration 3797-3808, 3995-4000 (3d ed. 2021). ↑4 Born, at 3822-3, 3829. ↑5 Trevor Hartley & Masato Dogauchi, Hague Conference on Private International Law Convention of 30 June 2005 on Choice of Court Agreements Explanatory Report 831 (2005). ↑6 Ronald A. Brand & Paul M. Herrup, The 2005 Hague Convention on Choice of Court Agreements: Commentary and Documents 118 (3d ed. 2008) (emphasis added). ↑7 Hilton v. Guyot, 159 U.S. 113, 202-03 (1895) (emphasis added). function footnote_expand_reference_container_37705_30() { jQuery('#footnote_references_container_37705_30').show(); jQuery('#footnote_reference_container_collapse_button_37705_30').text('−'); } function footnote_collapse_reference_container_37705_30() { jQuery('#footnote_references_container_37705_30').hide(); jQuery('#footnote_reference_container_collapse_button_37705_30').text('+'); } function footnote_expand_collapse_reference_container_37705_30() { if (jQuery('#footnote_references_container_37705_30').is(':hidden')) { footnote_expand_reference_container_37705_30(); } else { footnote_collapse_reference_container_37705_30(); } } function footnote_moveToAnchor_37705_30(p_str_TargetID) { footnote_expand_reference_container_37705_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Why States Should Not Ratify, and Should Instead Denounce, the Hague Choice-Of-Court Agreements Convention, Part II

Thu, 2021-06-17 01:35

The 2005 Convention on Choice-of-Court Agreements (“Convention”) has been vigorously endorsed by the Hague Conference on Private International Law (“Hague Conference”) and others as an alternative to the New York Convention, appropriate for ratification by all states. The first post in this series discusses the Convention’s drafting history and proponents’ claim that the Convention ensures respect for party autonomy by giving effect to forum selection agreements and maximizes efficiency by permitting the recognition and enforcement of foreign judgments relatively easily.

As discussed in this second and the forthcoming third post, the Convention is gravely flawed and is not suitable for ratification, either generally or for the vast majority of states around the world. First, the Convention seeks to transpose the New York Convention’s basic structure and terms, which were designed for the international arbitral process, into the very different context of forum selection clauses and national court judgments; in doing so, the Convention would expose commercial parties, in their litigation, to very substantial risks of procedural unfairness and arbitrary or corrupt adjudicative proceedings. Second, the Convention also significantly dilutes essential protections that the New York Convention provides for both party autonomy and procedural fairness.

 

The New York Convention is an Unsuitable Model for A Choice-of-Court Agreement Convention

It is unwise to attempt to transpose the New York Convention from international arbitration to cross-border litigation. International arbitration is a consensual process. It is based on party consent and the entire arbitral process is dominated by the parties and arbitral institutions, not by national courts; it is the parties and the arbitral institutions who have the authority to select the arbitrators who will decide individual disputes; in practice, parties and institutions use this freedom to select arbitral tribunals that are both independent and expert in the subject matter of the parties’ dispute. Equally important, it is the parties and arbitrators who have the authority to design the procedures for resolving those disputes, exercising that autonomy to adopt procedures that are efficient and tailored to individual disputes. At the same time, the arbitral process is regulated by relatively strict guarantees of independence, impartiality and fairness, applied by national courts in annulment, recognition and other proceedings at the conclusion of the arbitral process. These aspects of the arbitral process serve to safeguard both the parties’ autonomy, ensuring that parties actually did agree to arbitrate with one another, and the fairness and integrity of the adjudicative process, guaranteeing that the arbitral proceedings are untainted by corruption or gross procedural unfairness.

In contrast, even in cases involving forum selection agreements, national court litigation is predominantly a non-consensual process, taking place within a single legal system, with very limited external scrutiny. Parties have virtually no role in the selection of the judges that decide their cases, with both the decision-makers and the adjudicative procedures applied in litigation contexts imposed by governmental authorities in the dispute resolution forum. As a consequence, the parties have little opportunity to ensure either that the judge(s) that resolve their dispute are independent or expert in the subject matter of the dispute, or that the litigation procedures which the judge(s) apply are fair and appropriate. Rather, the identities of the decision-maker(s) and the content of the litigation procedures are determined almost entirely by local government decisions.

It is critical to consider these differences between the arbitral and the litigation process in the context of contemporary realities of cross-border litigation. It is an unfortunate, but undeniable, fact that a substantial number of national judicial systems are highly unsuitable forums for the resolution of international commercial disputes. There is a wealth of evidence demonstrating that, in many jurisdictions – amounting to well more than half of the countries that are potential candidates for ratification of the Convention – basic standards of integrity, independence and competence are seriously compromised.

These conclusions are uncomfortable, but they are demonstrated by a wealth of empirical evidence from neutral, non-partisan sources (summarized below). They are also confirmed by consistent reports by experienced international counsel: the stark reality is that, in many litigation contexts, you get what you pay for. It is essential not to ignore this reality in evaluating the Convention.

 

Judicial Integrity

First, litigants in a very large number of jurisdictions report direct experiences with judicial corruption in between 25% and 75% of all cases. Transparency International reports that, 30% of respondents from all jurisdictions in 2017 regarded “most” or “all” judges as corrupt, with higher percentages in Africa, Latin America and Russia; the United Nations Development Programme reports that 24% of respondents worldwide reported having paid bribes to the judiciary in the preceding year; and the International Bar Association reports that more than one third  of respondents (in a global study) had direct or indirect, recent experience with judicial corruption.

 

Judicial Independence

Second, and relatedly, reports by non-governmental organizations conclude that, in an alarming number of countries, judicial independence is entirely or largely lacking.  Indicia of judicial independence have been falling, rather than increasing, in recent years.1)World Justice Project, Rule of Law Index 2017-2018 (2018) (annual report on rule of law); Heritage Foundation, Index of Economic Freedom, (2021) (annual report on economic freedom, including judicial integrity and independence); Freedom House, Freedom in the World 2018 (2018) (annual report on good governance, including rule of law). jQuery('#footnote_plugin_tooltip_37703_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37703_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  The increasing role of state-owned or state-related enterprises in international trade and investment, as well as the re-politicization of international trade relations, exacerbates the risks resulting from the increasing lack of judicial independence.

 

Judicial Competence

Third, and again relatedly, basic levels of competence are demonstrably lacking in numerous court systems. In many jurisdictions, judges are poorly trained, badly compensated and under-resourced, while confronted with intolerable caseloads. The lack of judicial competence is frequently associated with increased corruption: as an EU study reported, “another substantial cause of corruption practices in courts is the low level of the judges’ professional education, prior corruption experience or lack of real practical experience.”

Although not addressed by either the Hague Conference or the Convention’s proponents, these considerations are vitally important in assessing the wisdom and suitability of the Convention. The lack of judicial integrity, independence and competence in many legal systems provide powerful arguments against permitting choice-of-court clauses and foreign judgments to be readily recognized and enforced.  Those factors mean that, in a substantial number of cases, enforcing a forum selection clause or recognizing a foreign judgment means giving effect to serious denials of justice and procedural unfairness or, at a minimum, recognizing judgments lacking in elementary attributes of diligence and quality.

In this respect, it is fundamentally wrong to claim that the New York Convention and the international arbitral process provide a suitable paradigm for the recognition of judgments and choice-of-court clauses. That is because the international arbitral process contains a number of highly important safeguards against the risks of denials of justice and procedural unfairness. These protections are not present in either national court proceedings or the regime established by the Convention.

Thus, in contrast to national court proceedings, where judges are selected by local officials or randomly, international arbitral proceedings are conducted by arbitrators chosen by or for the parties in individual cases. The parties’ role in selecting the decision-makers in individual cases makes the risk of foreign government interference highly unlikely; the parties themselves are able to police the selection of decision-makers. The parties’ involvement in the selection of the arbitrators also significantly reduces the risks of corruption or lack of substantive competence: parties are able to select arbitrators who have both integrity and competence (particularly given that arbitrators are virtually always selected after a dispute arises, when the expertise relevant to resolving the parties’ dispute is known). As a consequence, despite the substantial numbers of international commercial and investment arbitrations that have been conducted over the past 70 years, there are virtually no recorded instances of corruption by arbitrators.

Moreover, all leading international arbitration regimes provide robust and effective mechanisms for ensuring the independence and impartiality of individual arbitrators. Both commonly used institutional arbitration rules and virtually all national arbitration legislation uniformly require that arbitrators be “independent and impartial,” while providing effective procedural mechanisms requiring disclosure of potential conflicts by arbitrators and permitting challenges of arbitrators by parties. The New York Convention and virtually all national arbitration statutes also provide for the possibilities of both annulment and non-recognition of awards rendered by arbitral tribunals lacking independence and impartiality.2)Gary Born, International Commercial Arbitration 1857-61 (3d ed. 2021). jQuery('#footnote_plugin_tooltip_37703_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37703_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Relatedly, the conduct of international arbitral proceedings is subject to the parties’ procedural autonomy, with the arbitral tribunal exercising procedural authority only in the absence of agreement by the parties. That again empowers the parties and arbitrators, insulating the arbitral process from either governmental corruption or interference. Moreover, the New York Convention as well as most, if not all, national arbitration legislations require that arbitral procedures satisfy basic due process standards and to comply with the parties’ procedural agreements – with annulment and non-recognition of awards again available as sanctions for violation of these requirements.3)Id. at 1769-75, 1787, 2296-2300 and 2318-2330. jQuery('#footnote_plugin_tooltip_37703_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37703_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The above characteristics of the arbitral process are essential to the New York Convention’s facilitation of the recognition of arbitral awards. The guarantees inherent in the arbitration process provide reliable assurances as to the independence of the arbitral tribunal and the underlying procedural fairness of the arbitral process; they also provide effective external protections, administered by decision-makers outside the arbitral process, in the (rare) event that these assurances are not realized.  This contrasts significantly with a very substantial number of national court systems and proceedings, which are characterized by the lack of such assurances, the presence of endemic corruption and incompetence.

Put simply, in recognizing an arbitral award under the New York Convention, a court gives effect largely to the parties’ own agreements and actions, taken at critical stages throughout the arbitral process, not to the rulings of a foreign state or government official.  In contrast, in recognizing a judgment under the Convention, a court gives effect almost entirely to the rulings of a foreign governmental organ – which, as discussed above, is subject to grave doubts as to independence, impartiality and competence in a very substantial number of cases.

The desire of the Convention’s drafters to “level the playing field” between international arbitration and litigation has a surface rhetorical appeal.  But that objective, of levelling the playing field, in fact counsels away from accepting the logic of the Convention. International arbitration is a consensual process, dominated by the parties and regulated by enforceable guarantees of independence, impartiality and fairness, applied as external checks on the arbitral process by both annulment and recognition courts; national court litigation is predominantly a non-consensual process, taking place within a single legal system, with uncertain and frequently unreliable assurances of independence, integrity or fairness, as well as endemic levels of corruption in many jurisdictions. Levelling the playing field does not mean treating these two processes the same; it should instead mean treating them differently.

Put concretely, why should American, Canadian, Australian, Singaporean, Swiss, Ghanaian, Uruguayan or other courts commit to recognize all foreign judgments – including judgments of courts in Russia, China, Venezuela, Iran, the Congo, and Nicaragua – in the same basic way that they recognize international arbitral awards? In the latter case, courts give effect to largely independent, expert and fair decisions concerning commercial disputes, made by arbitral tribunals whose members are selected by the parties themselves, applying procedures also chosen by the parties themselves; a robust, pro-enforcement legal framework makes eminent sense in that context, as nearly 70 years of experience under the New York Convention has demonstrated. In the former case, courts would be required to give effect to judgments that are frequently rendered by courts that are neither independent, competent nor fair, and that, at the same time, are subject to no external scrutiny; the historic safeguards of private international law rules in most states, which only permit recognition of foreign judgments after reasonable careful scrutiny of their fairness, make eminent sense in these circumstances.

Exporting the New York Convention to national court litigation is not levelling the playing field; it is subjecting the players to arbitrary, incompetent and corrupt decisions by foreign referees. This conclusion alone should be sufficient to dissuade states from ratifying the Convention. But, as discussed in the third and final post in this series, there are further reasons arguing for the same result: in fact, in transposing the New York Convention to the context of foreign court proceedings, the Convention significantly dilutes the protections that are provided for the arbitral process, further exacerbating the risks of procedural irregularities and further undermining safeguards for party autonomy.

References[+]

↑1 World Justice Project, Rule of Law Index 2017-2018 (2018) (annual report on rule of law); Heritage Foundation, Index of Economic Freedom, (2021) (annual report on economic freedom, including judicial integrity and independence); Freedom House, Freedom in the World 2018 (2018) (annual report on good governance, including rule of law). ↑2 Gary Born, International Commercial Arbitration 1857-61 (3d ed. 2021). ↑3 Id. at 1769-75, 1787, 2296-2300 and 2318-2330. function footnote_expand_reference_container_37703_30() { jQuery('#footnote_references_container_37703_30').show(); jQuery('#footnote_reference_container_collapse_button_37703_30').text('−'); } function footnote_collapse_reference_container_37703_30() { jQuery('#footnote_references_container_37703_30').hide(); jQuery('#footnote_reference_container_collapse_button_37703_30').text('+'); } function footnote_expand_collapse_reference_container_37703_30() { if (jQuery('#footnote_references_container_37703_30').is(':hidden')) { footnote_expand_reference_container_37703_30(); } else { footnote_collapse_reference_container_37703_30(); } } function footnote_moveToAnchor_37703_30(p_str_TargetID) { footnote_expand_reference_container_37703_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Why States Should Not Ratify, and Should Instead Denounce, the Hague Choice-Of-Court Agreements Convention, Part I

Wed, 2021-06-16 01:34

Over the past decade, the 2005 Convention on Choice-of-Court Agreements (“Convention”) has been vigorously promoted by the Hague Conference on Private International Law’s Permanent Bureau, the European Union and others.  The Convention has been endorsed as a global instrument, appropriate for ratification by all states, that establishes an alternative to international arbitration for the resolution of international business disputes in national courts.  Among other things, the Convention is said to ensure respect for party autonomy (by giving effect to forum selection agreements) and to maximize efficiency (by permitting relatively easy recognition and enforcement of foreign court judgments).

Despite these promotional efforts, there has been virtually no critical assessment of the Convention. This post is the first in a three-part series that seeks objectively to assess the costs and benefits of the Convention. This post summarizes the drafting history and basic terms of the Convention. The following two posts discuss the principal defects of the Convention (Part II and Part III), focussing on its failure either to protect the parties’ autonomy in commercial matters or the procedural integrity of international dispute resolution. In sum, this series of posts argues that the Convention is gravely flawed and is not suitable for ratification, either generally or by the vast majority of states around the world.

As a preliminary matter, the Convention seeks to transpose the New York Convention’s legal regime, which was designed specifically for international arbitration, to the very different context of forum selection clauses and national court judgments. By seeking to do so, the Convention first ignores the realities of endemic corruption among various judiciaries and inexperience and lack of independence in many judicial systems, thereby exposing litigants to very substantial risks of procedural unfairness and arbitrary or corrupt adjudicative proceedings. Second, the Convention also significantly dilutes important protections that the New York Convention provides: party autonomy and procedural fairness. Those dilutions materially exacerbate the risks that arise from the Convention’s basic structure and terms.

Apart from a few outliers, most states have been reluctant to ratify the Convention. A previous post on the Convention’s reception touches upon some of the issues that will be discussed in this post. As discussed in this and the following two posts, that reluctance is wise.  Given the Convention’s grave defects, states should not ratify the Convention and, if they have done so, they should exercise their right to withdraw from it promptly.

 

A Summary of the Convention

The Convention’s Background

The Convention was drafted under the auspices of the Hague Conference on Private International Law (“Hague Conference”).  The Convention was the product of a hasty two-year process (between 2003 and 2005), which sought to produce at least a limited measure of success for the Hague Conference following the failure of negotiations on a global jurisdiction and judgments convention. Broadly speaking, and as detailed below, the Convention’s drafters sought to replicate the basic terms of the New York Convention, but in the context of forum selection clauses, providing for the presumptive validity and enforceability of choice-of-court agreements and the presumptive enforceability of national court judgments where jurisdiction was based on such a forum selection provision.

The Convention was opened for signature in June 2005. To date, the Convention has been acceded to only by Mexico (in 2007), the European Union (in 2015), Singapore (in 2016), Denmark (in 2018), Montenegro (in 2018), and the United Kingdom (in 2020). Like its failed predecessor (the 2001 jurisdiction and judgment convention), the Convention is almost entirely an European undertaking. Apart from Mexico and Singapore, other states have either ignored or distanced themselves from the Convention.

 

Subject Matter of The Convention  

The Convention applies only to “exclusive choice of court agreements,” or put differently, exclusive forum selection clauses, thereby excluding both arbitration agreements and non-exclusive choice-of-court clauses.1)Art. 1(1). jQuery('#footnote_plugin_tooltip_37701_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37701_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The Convention also applies only to “civil” or “commercial” matters that arise in “international cases.”2)Id. jQuery('#footnote_plugin_tooltip_37701_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37701_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  Although the details are complex, these terms are generally defined broadly, aimed at giving the Convention an expansive scope.

The Convention includes a number of subject matter exclusions from its scope.  Among other things, Article 2 of the Convention provides that it does not apply to choice-of-court agreements in consumer and employment contexts, as well as to issues of personal status, legal capacity of natural persons, maintenance obligations and other family law matters, wills and succession, insolvency, in rem rights in immovable property, internal corporate matters, validity and infringement of intellectual property rights, various maritime matters, “antitrust (competition) matters,” and various tort claims.

 

Three Basic Rules

Article 3 of the Convention prescribes three basic rules regarding choice-of-court agreements. First, Article 3(b) provides that a choice-of-court agreement is deemed to exclude the jurisdiction of all courts other than the chosen court unless the parties agree otherwise. Second, Article 3(c) imposes a rule of formal validity, requiring that a choice-of-law agreement be “concluded or documented” either “in writing” or “by any other means of communication which renders information accessible to be usable for subsequent reference.”  Third, Article 3(d) codifies the separability doctrine, providing that a choice-of-court agreement shall be “treated as an agreement independent of the other terms of the contract.”

 

Jurisdiction

Chapter 2 of the Convention sets out jurisdictional rules, addressing the validity and enforceability of choice-of-court agreements that are subject to the Convention. Chapter 2 contains two sets of rules providing for: (1) the exclusive and mandatory jurisdiction of a court chosen by a valid exclusive choice-of-court agreement; and (2) the lack of jurisdiction of other courts, not chosen by such a choice-of-court agreement.

Thus, Article 5(1) states that the court of a Contracting State that is designated by a valid exclusive choice-of-court agreement possesses exclusive jurisdiction, which it is mandatorily required to exercise (subject to minor exceptions). “The court or courts of a Contracting State designated in an exclusive choice of court agreement shall have jurisdiction to decide a dispute to which the agreement applies, unless the agreement is null and void under the law of that State.”

Article 5(1) includes a positive grant of jurisdiction, coterminous with a valid choice-of-court agreement, providing for jurisdiction of the parties’ chosen court, as well as a choice-of-law provision, selecting the law of the chosen State to govern the validity of the choice-of-court agreement. Relatedly, Article 5(2) prohibits the chosen court under a valid choice-of-court agreement from declining jurisdiction.

Article 6 provides that a court in a Contracting State other than the court chosen in a valid choice-of-court agreement shall suspend or dismiss cases to which the agreement applies. Article 6 provides: “A court of a Contracting State other than that of the chosen court shall suspend or dismiss proceedings to which an exclusive Choice-of-Court agreement applies,” subject to specified exceptions. Article 6’s most important exception provides that a court is not obligated to dismiss or suspend a case if the agreement is null or void under the law of the State of the chosen court (paralleling Article 5(1) of the Convention and prescribing the same choice-of-law rule).  Additionally, Article 6(b) provides that a court need not give effect to a choice-of-court provision where a party lacked capacity under the law of the court seised, including its choice-of-law rules, while Article 6(c) provides that a seised court may exercise jurisdiction after determining that giving effect to the agreement will lead to a manifest injustice or would be manifestly contrary to the public policy of the State of the court seised.

In turn, Chapter 3 of the Convention, provides some parallels to Articles III and V of the New York Convention, by addressing the recognition of judgments rendered by a chosen court in another Contracting State.  In Article 8, the general rule is that judgments rendered by courts designated in exclusive choice-of-court agreements shall be recognized in all other Contracting States, without any review of the merits of such judgments, subject only to limited and defined exceptions that are set out under Article 9.

 

Exceptions to Recognition

Article 9 prescribes an exclusive list of seven exceptions to the obligation to recognize judgments by a chosen court.  Article 9(a) provides that recognition may be denied where a choice-of-court agreement is null and void, paralleling Article V(1)(a) of the New York Convention. Importantly, however, Article 9(a) provides that, if the chosen court has determined that a choice-of-court agreement is valid under its law, the requested court must accept this decision: a judgment may be denied recognition if “the [choice-of-court] agreement was null and void under the law of the State of the chosen court, unless the chosen court has determined that the agreement is valid.”

Article 9 also permits non-recognition of a judgment where the judgment-debtor was not properly notified of proceedings in the chosen court. First, Article 9(c) permits non-recognition if the document that instituted proceedings was not notified to the judgment-debtor in sufficient time and in a manner to permit a defence. Second, Article 9(d) permits non-recognition of a judgment where “the judgment was obtained by fraud in connection with a matter of procedure.” Finally, Article 9(e) also allows a requested court to deny recognition of a judgment if “recognition and enforcement would be manifestly incompatible with the public policy of the requested State, including situations where the specific proceedings leading to the judgment were incompatible with fundamental principles of procedural fairness of that State.”

 

The Convention Has Serious Defects

The Convention’s advocates have high aspirations for it. The Convention is said to be one of the most significant private international law treaties of the century, destined to “supplant the New York Convention as the norm for resolving international commercial disputes.”3)Jeffrey Talpis & Nick Krnjevic, The Hague Convention on Choice of Court Agreements of June 30, 2005: The Elephant That Gave Birth to A Mouse, 13 Sw. J. L. & Trade Am. 1, 35 (2006). jQuery('#footnote_plugin_tooltip_37701_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37701_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });  Despite its drafters’ high aspirations, and the European Union’s promotional efforts, there are substantial grounds for doubting the wisdom of the Convention.

First, the Convention would replace existing private international law rules, in virtually all countries, governing the recognition of forum selection provisions and foreign judgments, with new rules assertedly modelled on the New York Convention. This objective is pursued by the Convention’s drafters notwithstanding substantial differences between the international arbitral process, on the one hand, and proceedings in (many) national courts, on the other hand. These differences raise serious doubts as to the benefits of the Convention’s basic structure: put simply, the legal framework and rules that are appropriate for international arbitration are not suitable for national court litigation.

Second, and relatedly, the Convention also omits significant safeguards for the parties’ autonomy and important guarantees of procedural fairness. This is in contrast to the New York Convention, as well as national arbitration legislation, which incorporate such safeguards for the recognition of international arbitration agreements and arbitral awards. By omitting these safeguards, the Convention threatens, rather than protects, the autonomy of commercial parties and mandates recognition of judgments notwithstanding significant unfairness in the national court proceedings that produced them.

These related defects in the Convention are detailed in the remaining two posts in this series (Part II and Part III).

References[+]

↑1 Art. 1(1). ↑2 Id. ↑3 Jeffrey Talpis & Nick Krnjevic, The Hague Convention on Choice of Court Agreements of June 30, 2005: The Elephant That Gave Birth to A Mouse, 13 Sw. J. L. & Trade Am. 1, 35 (2006). function footnote_expand_reference_container_37701_30() { jQuery('#footnote_references_container_37701_30').show(); jQuery('#footnote_reference_container_collapse_button_37701_30').text('−'); } function footnote_collapse_reference_container_37701_30() { jQuery('#footnote_references_container_37701_30').hide(); jQuery('#footnote_reference_container_collapse_button_37701_30').text('+'); } function footnote_expand_collapse_reference_container_37701_30() { if (jQuery('#footnote_references_container_37701_30').is(':hidden')) { footnote_expand_reference_container_37701_30(); } else { footnote_collapse_reference_container_37701_30(); } } function footnote_moveToAnchor_37701_30(p_str_TargetID) { footnote_expand_reference_container_37701_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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A Swiss “(R)Evolution”: SCAI Becomes the Swiss Arbitration Centre and Enacts New Arbitration Rules

Tue, 2021-06-15 01:23

Undoubtedly, the date of 1 June 2021 will remain a milestone for the Swiss (and international) arbitration community. This is the date when (i) the Swiss Chambers’ Arbitration Institution (SCAI) became the Swiss Arbitration Centre (the Centre), and (ii) the revised Swiss Arbitration Rules entered into force (the 2021 Swiss Rules).

The 2021 Swiss Rules, on which this post will mainly focus, constitute a welcome refinement of the existing provisions, with limited substantial amendments. Key changes include more detailed provisions on multi-party and multi-contract proceedings and several other light-touch amendments to streamline and modernise the proceedings, while reinforcing the role of the institution. A number of changes were also made to improve the Swiss Rules’ terminology and structure with a view to facilitating their use in practice.

 

Institutional Change: Exit SCAI, Welcome Swiss Arbitration Centre

In 2012, the Chambers of Commerce and Industry of Basel, Bern, Geneva, Lausanne, Lucerne, Lugano, Neuchâtel and Zurich established SCAI as a not-for-profit organisation to administer arbitrations under the Swiss Rules. As of 1 June 2021 however, SCAI has become the Swiss Arbitration Centre. The Centre is a Swiss company whose shareholders are the Swiss Arbitration Association (ASA) and the Swiss Chambers of Commerce participating in SCAI. The Board of Directors of the Centre is composed of four members nominated by ASA as well as three members nominated by the Chambers of Commerce. SCAI’s website (now: https://www.swissarbitration.org/) has been updated accordingly with a new visual and integration of the ASA website.

Despite this institutional change, arbitration clauses referring to SCAI remain valid and binding and will be recognised by the Swiss Arbitration Centre. That being said, all users are now advised to refer in any contract concluded from 1 June 2021 to the “Swiss Rules of International Arbitration of the Swiss Arbitration Centre“.

 

The 2021 Swiss Rules

After their adoption in 2004, the Swiss Rules were revised a first time in 2012 to introduce an emergency arbitrator procedure and, more generally, to reinforce the efficiency of arbitration proceedings.

In 2021, the creation of the Centre prompted a detailed review of the Swiss Rules in light of past practical experience and recent developments in international arbitration. This process, led by a drafting committee composed of eminent arbitration specialists, included a broad consultation of both practitioners and users. This process led to the 2021 Swiss Rules, which entered into force on 1 June 2021.

As is immediately apparent, the approach adopted by the drafting committee was to give the Swiss Rules a welcome refresh. As the adage goes, “if it is not broken, don’t fix it“. With that in mind, the underlying idea of the revision was not to revolutionise but to upgrade the Swiss Rules and streamline arbitration proceedings under these new rules.

 

Modernisation, Digitalisation and Cyber-Security

The 2021 Swiss Rules contain new provisions facilitating the online management of arbitration proceedings. For instance:

  • Articles 3(1) and 4(1) 2021 Swiss Rules provide that paperless filings are the new standard, while hard copies are only required under specific circumstances;
  • Article 27(2) 2021 Swiss Rules also clarifies that any hearing may be held “remotely by videoconference or other appropriate means“. On this point, it should be noted that unlike other arbitration rules, Article 25(4) of the 2012 Swiss Rules already referred to videoconference in the context of witness examination. As such, according to commentators, the language of that provision already granted tribunals with sufficient flexibility to order remote hearings;
  • Article 19(2) 2021 Swiss Rules now provides that the parties and the tribunal shall discuss issues related to cybersecurity at an early stage of the proceedings. Since the start of the pandemic and the rise of remote hearings, this provision was a much-needed clarification.

Amongst the other amendments to modernise the arbitration proceedings, one can also think of the enhanced requirements for independence and impartiality of arbitrators and related disclosures (Article 12 2021 Swiss Rules), the appointment of a tribunal’s secretary (Article 16(3) 2021 Swiss Rules), the possibility for a tribunal to “oppose the appointment of a new representative where this would risk jeopardising the impartiality or independence of the arbitral tribunal” (Article 16(4) 2021 Swiss Rules), and the newly-introduced obligation for the tribunal to hold a case management conference “as soon as practicable after receiving the file from the Secretariat” (Article 19(2) 2021 Swiss Rules).

 

The Reinforcement of the Role of the Institution

Under the 2021 Swiss Rules, the Centre will play a more prominent role. For instance, it is now for the Secretariat (and not the tribunal as was the case under the 2012 Swiss Rules) to hold the deposit to be paid by the parties (Appendix B, Section 4.1). Also, the Secretariat shall now receive electronic copies of all communications (Article 16(2) 2021 Swiss Rules), and it is the Secretariat (and not the tribunal as this was the case under the 2012 Swiss Rules) who will notify the originals of the arbitral award to the parties (Article 34(5) 2021 Swiss Rules).

The gate-keeping function of the institution when deciding whether a case may proceed is also now clarified. Under Article 3 of the 2012 Swiss Rules, if the Respondent did not submit an Answer to the Notice of Arbitration, or if the Respondent raised an objection to the arbitration being administered under the rules, the Arbitration Court of the Centre (the Court) had to administer the case, unless there was manifestly no agreement to arbitrate referring to the rules. Under Article 5 of the 2021 Swiss Rules, in addition to the standard prima facie review whether there is manifestly no arbitration agreement referring to the Swiss Rules, this new article provides that the Court shall also determine whether the arbitration agreements are “manifestly incompatible” if more than one contract is invoked. However, and this is a crucial point, when the Court decides to administer the case, the tribunal retains the full power to rule on any jurisdictional issue, including an objection that claims brought under different arbitration agreements should not be determined together (Article 23(1) 2021 Swiss Rules).

 

Multi-party and Multi-contract Arbitrations

Provisions on multi-party and multi-contract arbitrations were amongst the most discussed issues by the drafting committee.

Regarding the issue of joinder, Article 4(2) of the 2012 Swiss Rules, which was already a very innovative feature at the time it was adopted, focused almost exclusively on the tribunal and its power to decide on a request of joinder made by one or more third persons. This provision has now been replaced by Article 6 of the 2021 Swiss Rules, which addresses the situations where, for example, a respondent raises claims against another co-respondent (cross-claim) or an additional party (joinder), or where an additional party seeks to participate in the proceedings by bringing claims against an existing party (intervention).

Article 6(1) 2021 Swiss Rules further requires the submission of a separate notice of claim against the targeted party. Before the constitution of the tribunal such notice of claim shall be submitted to the Secretariat (Article 6(2) 2021 Swiss Rules), which will then proceed to a prima facie review if the party sought to be joined raises an objection (within 15 days). The tribunal remains however in charge of deciding on the admissibility of a request submitted after its constitution (Article 6(3) 2021 Swiss Rules). For its part, Article 6(4) 2021 Swiss Rules contemplates the possibility for a third person to participate in the proceedings “in a capacity other than an additional party“, allowing tribunals to “decide on whether to permit such participation and on its modalities“.

This new regime is intended to ease the organisation of the proceedings and the constitution of the tribunal at the outset of the case, but it does not entail any consequences for jurisdiction, which remains a matter for the tribunal to decide.

Regarding the issue of consolidation, Article 7 of the 2021 Swiss Rules replaces Article 4(1) of the 2012 Swiss Rules, without any substantive changes. Decisions on the consolidation of proceedings are still exclusively taken by the Court.

 

Settlement Facilitation / Mediation

While, like the 2012 Swiss Rules, the 2021 Swiss Rules provide for the tribunal’s potential role as settlement facilitator (Article 19(5) 2021 Swiss Rules), the revised Swiss Rules now expressly provide that, at any time during the arbitration proceedings, the parties may agree to resolve their dispute, or any portion of it, by mediation, including under the Swiss Rules of Mediation, or any other forms of alternative dispute resolution. To facilitate this process, and unless the parties agree otherwise, the arbitration proceedings will be stayed during that period (Article 19(6) 2021 Swiss Rules).

 

Costs of Arbitration

In order to reflect the increased workload of the Secretariat under the 2021 Swiss Rules, the revised Schedule of Costs in Appendix B provides for slightly higher administrative costs only charged for amounts in dispute above CHF 300,000 and capped at CHF 75,000 for disputes above CHF 250 million. This increase in administrative costs is however counterbalanced by a scale providing for slightly reduced fees for arbitrators.

 

What You Will NOT Find in the 2021 Swiss Rules

Rightly or wrongly, and this is a matter for the arbitration community to discuss, several other ideas were considered by the drafting committee but were eventually not introduced into the 2021 Swiss Rules. For instance, the 2021 Swiss rules:

  • do not dispense with the requirement of notifying original copies of the award.
  • do not provide for an early dismissal / early determination of claims’ mechanism.
  • have not increased the CHF 1 million threshold for expedited proceedings.

 

Conclusion

The creation of the Swiss Arbitration Centre is a welcome improvement. Although SCAI and ASA have long been complementary forces, the division between SCAI, on the one hand, and ASA, on the other, was not always very well understood by the arbitration community. The future cooperation between these two institutions under the umbrella of the Centre offers very promising perspectives for the development of Switzerland as a global arbitration hub. It is therefore unsurprising that the creation of the Centre made it to the GAR Awards 2021 nomination list for “Best innovation”.

While they have not undergone any major revolution, the 2021 Swiss Rules have been refreshed and modernised but have also retained their essential character. The 2021 Swiss Rules will undoubtedly enhance the efficiency of any arbitration proceedings while maintaining party autonomy, flexibility and cost-effectiveness. In that regard, the 2021 Swiss Rules convey a message of continuity of an alternative dispute resolution system that has proven very satisfactory in many years of practice.

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How Sacred is the Right to be Heard in Arbitration?

Mon, 2021-06-14 01:12

In CBS v CBP [2021] SGCA 4 the Singapore Court of Appeal upheld the High Court’s ruling in CBP v CBS [2020] SGHC 23, being a rare example of the Singapore Courts setting aside an award. The arbitrator’s decision not to allow a hearing for oral witness evidence was found to be a breach of natural justice in the absence of clear powers to do so (sometimes known as “witness gating” powers) despite the challenging party refusing to submit any written witness statements. Although swinging largely on an interpretation of the applicable Singapore Chamber of Maritime Arbitration (SCMA) Rules, the impact of the decision is potentially much further reaching. At first glance it is at odds with common procedural practices in international arbitration generally, and the Singapore Courts’ well-established reputation for deferring to tribunals’ discretionary procedural powers. But is this the case on closer scrutiny?

 

Key Facts

The underlying claim concerned non-payment by an Indian company (the buyer) for coal which it had agreed to purchase from a seller who had assigned the debt to a Singapore bank (the bank).

Critically, Rule 28.1 of the SCMA Rules provided that:

Unless the parties have agreed on a documents-only arbitration or that no hearing should be held, the Tribunal shall hold a hearing for the presentation of evidence by witnesses, including expert witnesses, or for oral submissions. (emphasis added)

With an eye on Rule 28.1 the bank confirmed that it did not wish to call any witnesses and submitted that the arbitration should proceed on a documents only basis, while the seller confirmed that it wished to call 7 witnesses to give “oral testimony” at a hearing. In response – and which would ultimately prove fatal – the arbitrator directed:

Before I rule on whether the arbitration will be on documents only [sic] or an oral hearing is necessary I require the following: a. Detailed written statements from each of the witnesses [the buyer] plans to call…

The buyer refused to provide any written witness statements. The arbitrator then directed that a hearing would take place pursuant to SCMA Rule 28.1 for oral submissions only, and no witnesses would be presented at the hearing given the buyer had “failed to provide [written] witness statements or any evidence of the substantive value of presenting witnesses [at a hearing]”.

The buyer did not attend the hearing and the bank’s claim was allowed in full, including on the basis that the arbitrator rejected the buyer’s case regarding an alleged oral agreement.

The buyer then applied successfully to the High Court for the award to be set aside on the ground that the arbitrator’s decision “to deny the Buyer its right to call” witnesses represented a breach of natural justice. The bank appealed.

 

Court of Appeal

The Court of Appeal identified the applicable rule of natural justice as the “full opportunity to be heard” (including Article 18 of the Model Law) and the key test as being whether the arbitrator’s conduct fell within the range of what a reasonable and fair-minded tribunal in the circumstances might have done.

The first key bone of contention concerned the interpretation of SCMA Rule 28.1. In essence, whether – as argued by the bank – the final  “or” means the rule should be interpreted “disjunctively”, such that in the absence of an agreement between the parties as to a documents-only procedure or there being no hearing, the arbitrator is only obligated to hold a hearing for oral evidence or for oral submissions.

The Court of Appeal agreed with the High Court’s “holistic” interpretation, however – in favour of the buyer – that “..r 28.1 has to be read as a whole and it does not give the tribunal the power to choose what type of hearing to hold in the absence of an agreement” (emphasis added). Thus, in the absence of an agreement for “a documents-only arbitration or that no hearing should be held”, the arbitrator did not have the ‘witness gating’ power to disallow the buyer’s request for a hearing for oral witness evidence.

On the second key issue, the Court of Appeal accepted that tribunals do have the power to limit oral witness evidence as part of their broad, discretionary case management powers (and that the arbitrator in this case had this power under SCMA Rule 25) in certain circumstances; for example, where “evidence from multiple witnesses are repetitive or of little or no relevance to the issues”. However, this power is not absolute and is subject to the fundamental rules of natural justice.

The Court of Appeal found that on the facts, the arbitrator’s rejection of the buyer’s proposed oral witness evidence and the imposing of a condition to show that this had “substantive value” before deciding whether to allow it at a hearing fell outside the range of what a reasonable and fair-minded tribunal might have done, and so represented a breach of natural justice.

 

Analysis & Impact

The arbitrator’s conduct was not the most obvious breach of natural justice, and this was not a straightforward decision.

This is highlighted by the very fine distinction the Court of Appeal drew between two, similar scenarios. First, the Court suggested that if the arbitrator had requested written witness statements with a view to further oral witness evidence being presented at a hearing, but had then not allowed oral witness evidence as a result of the buyer’s failure to comply and to provide witness statements, this “might be warranted” under its broad procedural powers. Yet, in this case, “Where the arbitrator fell into error was by suggesting that whether a hearing for witness testimony would be convened would be determined based on the Buyer’s witness statements, which had to be submitted beforehand. As we have noted above, this was not an option open to the Arbitrator…”

This distinction is significant because it is common in practice for arbitrators to direct that written witness statements are required and will represent evidence in chief, and that only witnesses who have provided written statements may appear to be examined and to provide oral evidence at a hearing. This approach has significant upsides in terms of procedural efficiency and avoiding any perception that a party is being blindsided by new evidence adduced orally for the first time at a hearing.

Rather than cutting across this practice, the decision emphasises that great care needs to be taken when considering the applicable arbitral rules and factual circumstances, and it is dangerous to make any assumptions based on practices or experiences under different rules or facts. SCMA Rule 28.1 is ostensibly very similar to many other institutional rules – including Article 24.1 of the 2016 SIAC Rules and 17.3 of the UNCITRAL Rules, for example – such that the decision could have some impact on arbitrations under those rules. However, the challenges in this case arose largely from SCMA Rule 28.1’s particular idiosyncrasies and the absence of a clear, express “witness gating” power to limit oral witness evidence (unlike under Article 25.2 of the SIAC Rules, for example).

The Singapore Courts might also have been expected to place more emphasis on the buyer’s refusal to comply with procedural directions, including the direction to submit written witness statements.

The Court of Appeal held that if the buyer had complied with procedural directions, “it might be taken to have agreed with the arbitrator that he had the power to decide whether or not to deny their request for a hearing…”. However, regarding the key question of whether any prejudice was actually caused, the Court found that “…the alleged oral agreement at the December 15 meeting was a critical component of the Buyer’s defence…When the witness evidence of the Buyer in relation to that meeting was shut out altogether, it is plain that the Buyer was prejudiced”. This is difficult to follow in circumstances where the buyer was directed and given many opportunities to submit written witness evidence which could have covered the alleged oral agreement, but it refused to do so.

It would be a stretch, however, to suggest that the approach represents a departure for the Singapore Courts. The Court’s reasoning flowed from an interpretation of the – problematically drafted, at best – SCMA Rule 28.1, and a robust approach to respecting the fundamental right to be heard when navigating the difficult balancing act between this and arbitrators’ broad procedural powers. Ultimately, the decision makes clear that arbitrators who do not allow hearings for oral witness evidence in the absence of very clear powers to do so – even where a party has refused to submit written witness statements – do so at their own peril.

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