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New Technologies and the UAE Federal Arbitration Law

Mon, 2021-05-24 01:00

There is at least one commonality between new technologies and arbitration in that they both aim to make processes more accessible to users.  Indeed, the two should go hand-in-hand.  After a brief overview of the interplay between technology and arbitration in general, this post focuses on the position in the United Arab Emirates (UAE).  It considers how Federal Arbitration Law No 6 of 2018 (the FAL) addresses the use of technology, and whether it is sufficient to allow arbitrations seated in the UAE to run their course efficiently in the wake of the new realities triggered by the COVID-19 pandemic.

 

I. Technology and arbitration

Technology is already widely used in arbitration whether in the form of video-conferencing, hearing-room technologies (presentations, recording, real-time electronic transcripts or electronic organisation and presentation of evidence during the hearing) or cloud-based data storage.  In 2018, the Queen Mary University international arbitration survey highlighted that arbitration users believe an increased use of technology would lead to more efficiency in the conduct of arbitration proceedings.

The COVID-19 pandemic has served as a catalyst to hasten the wider awareness and acceptance of technology in arbitration.  With heavy restrictions on travel, meetings, and counsel working from home with limited availability of printers and other reprographic equipment, the use of technology in arbitration has become essential.  The 2021 Queen Mary University international arbitration survey recently revealed that while the use of hearing room technologies, videoconferencing and cloud-based storage remained relatively consistent with the 2018 findings, there has been an ‘explosion’ in the use of virtual hearing rooms. This trend also aligns with the Campaign for Greener Arbitrations which aims to reduce the carbon footprint of the arbitration community, and which received the 2020 GAR Award for Best Development.

 

II. Technology and the FAL

The FAL came into force on 16 June 2018.  It replaced Articles 203-218 of the UAE Federal Civil Procedure Code that applied to arbitration (the CPC).  The FAL applies to arbitrations seated in the UAE except for those seated in special jurisdictions that are governed by separate regimes (i.e., the Dubai International Financial Centre – DIFC – and the Abu Dhabi Global Market – ADGM).  The FAL generally follows the UNCITRAL Model Law 2006 (the Model Law) with certain changes relevant to the UAE legal and commercial landscapes.  The key provisions of the FAL relating to the use of technology are outlined below.

 

A. Form of the arbitration agreement

Like its predecessor, the FAL requires arbitration agreements to be “in writing”.  Under the old regime, UAE courts generally interpreted this strictly, requiring an arbitration agreement to be included in the original contract or in a subsequent agreement.  Unlike its predecessor, Articles 7.1-7.2 of the FAL now allow for agreements to be concluded via electronic communications, or via an “electronic message”.  This change is in line with Article 7.4 of the Model Law.

The FAL, however, does not include any definition of “electronic message”.  On its natural reading, and in line with the definition contained in the Model Law, arbitration agreements contained in e-mails should now fulfil the requirement of being in writing.

In a region which thrives on the use of text messaging services for business communications, it would not be surprising if arbitration agreements were also made via such means.  A confirmation from the UAE courts that electronic arbitration agreements (including through messenger systems) also pass the form requirements would be welcome.

 

B. Notices

The arbitration chapter of the CPC did not regulate notices, leaving parties in certain circumstances (such as when the respondent was not participating in the proceedings) no choice but to rely on traditional notice methods (e.g., couriers which could provide delivery receipts).  This is now resolved by Article 24 of the FAL which allows for notice by e-mail or fax for any written communications in arbitrations.  This offers a way to reduce costs and improve efficiency.  It is proving particularly important during the ongoing COVID-19 pandemic which limited the availability of courier services.

 

C. Use of technology for evidentiary purposes

The FAL expressly allows for certain arbitral procedures to take place via modern means of communication and electronic technology, including:

  • hearings (Articles 28.2 and 33.3);
  • questioning of fact or expert witnesses (Article 35); and
  • arbitral deliberations (Article 28.2(b)).

The new provisions in the FAL regarding electronically conducted hearings and cross-examinations should lead to savings and efficiencies for arbitral users.

Previously, absent parties’ agreement, there was uncertainty whether cross-examinations of witnesses or experts using video-conferencing facilities were permissible.  That was because Articles 42.1 and 43.2 of UAE Federal Law No 10 of 1992 (the UAE Evidence Law), which address the failure of a witness to appear at a hearing, empower UAE courts to progress a case either by means of adjourning the hearing, striking out the evidence or “going to” the witness.  It was sometimes argued that Articles 41 and 65 of the UAE Evidence Law also required oaths to be administered in person.  In turn, Article 212 of the CPC, which related to arbitral proceedings, provided that tribunals were not bound by any procedures other than those related to arbitration in the CPC, as well as those pertaining to summons of the parties, hearing of their pleas and enabling them to submit documents.  As such, it was often argued in annulment proceedings that the UAE Evidence Law applied to arbitration by virtue of Article 212.  Coupled with Article 211 of the CPC, which required arbitrators to take the oath of the witness, arbitration awards have been set aside by the UAE courts due to non-compliance with the oath administration requirements.

For those reasons, hearings and cross-examinations typically took place in person.  Where parties had submitted witness statements, but decided to proceed based on the submitted documents only, dispensing with a hearing, they nonetheless were required to hold an in-person hearing purely for administering an oath for the witnesses.  These practical limitations were unfortunate both because they forced parties to incur unnecessary travel and hearing expenses but also because they often led to protracted discussions between the parties and/or procedural applications to seek permission to examine witnesses who could not be physically present.  Parties also risked annulment of any ensuing award whenever the tribunal ordered for witnesses to be cross-examined by video-conference.  Since the FAL no longer requires witnesses to swear an oath, and indeed expressly permits virtual hearings, it is expected that these limitations relating to witness examinations and oaths no longer apply.

The FAL does not, however, define the permitted electronic technology for hearings.  It is hoped that the courts will interpret the term widely.  That said, at least VoIP services (such as Skype), in respect of which availability and suitability is still subject to some controversy in the UAE, may not be acceptable.  Judicial clarification of this issue would be welcome.

Another area that would benefit from clarification relates to security and management of electronically-stored information.  The FAL does not provide any guidance.  Since the majority of information is nowadays stored in an electronic format, relevant guidance, in particular in the context of disclosure, would be welcome and could set the UAE (as well as regional arbitral institutions) apart in the race for modernisation.

 

D. Awards signed by electronic means

Article 41.6 of the FAL allows awards to be signed by electronic means.  Previously, Article 212.4 of the CPC stated that domestic arbitration awards had to be issued in the UAE to be considered a domestic award and benefit from domestic enforcement proceedings.  While that provision was somewhat unclear (because it referred to the issue of an award, and not its signature), it was generally interpreted to mean that arbitrators had to be physically present in the UAE when signing the award.  On occasion, the UAE courts considered the failure to sign the award in the UAE a procedural irregularity sufficient to refuse recognition and enforcement of the award.

Notwithstanding the new provisions, it is understood that in an unreported judgment issued in June 2020, the Dubai Court of Cassation overturned a Court of Appeal judgment on the ground that the FAL still required the tribunal to sign all the pages of the award.  It is hoped that this decision will remain an outlier and future judicial clarification on the topic remains welcome.

 

III. The impact of the COVID-19 pandemic

The COVID-19 pandemic saw governments around the world take measures to restrict movement in an effort to limit the spread of the virus.  The restrictive measures also affected the functioning of courts.  In the UAE, courts adapted relatively quickly.  They took advantage of the digital court system introduced in mid-2018 allowing various court processes to be digitalised to transition to a more virtual setting.

By end of March 2020, the Abu Dhabi courts issued an administrative decision providing that all court procedures, court hearings and notary public ratifications be conducted electronically.  By end of April 2020, it was reported that the Abu Dhabi Commercial Court conducted 579 videoconference hearings since the activation of the remote work plan of the Abu Dhabi Judicial Department.  The position is analogous in Dubai where, following a temporary postponement of court hearings from 22 March 2020 to 16 April 2020, the courts implemented a videoconference hearing system on 19 April 2020.  The courts in the DIFC and the ADGM were already well-versed in conducting hearings via videoconferencing.  In practice, the court system has worked well, particularly with respect to urgent cases such as obtaining injunctive relief or other forms of protective measures.

For international arbitrations conducted in the UAE, the FAL, digitalisation and videoconferencing have typically allowed proceedings to continue.  That said, and despite the provisions in the FAL, where proceedings are administered by regional arbitration centres, the restrictions on movement imposed by the pandemic have, at times, created hurdles.  An example is mandatory service through hard copies that caused some regional arbitral institutions to encourage tribunals to stay proceedings to allow notification procedures to be undertaken in accordance with the respective rules after the lockdown has eased (despite the new provisions of the FAL allowing for electronic notification).  This affected service of documents (including requests for arbitration) but also delivery of final awards thus creating potential issues with expiration of time-frames for issuing final awards.

 

IV. Conclusion

The FAL provides a basic framework allowing the use of technology in arbitrations seated in the UAE.  However, some questions remain unanswered.  It is hoped that the UAE courts will provide guidance on how some of the new mechanisms in the FAL should be implemented in practice.  It is also imperative for arbitral institutions in the region to build upon the provisions in the FAL and modernise their rules to fill in the gaps and ensure arbitrations can remain efficient.

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India’s Arbitration And Conciliation (Amendment) Act, 2021: A Wolf In Sheep’s Clothing?

Sun, 2021-05-23 01:49

The Arbitration and Conciliation (Amendment Act), 2021 (“2021 Amendment”) is the most recent intervention in, what appears to be, the Indian Parliament’s endless attempts to tinker with the scheme and intent of the Arbitration and Conciliation Act, 1996 (“1996 Act”). The 2021 Amendment, which was passed into law on 10 March 2021 follows the Arbitration and Conciliation (Amendment) Ordinance, 2020 promulgated by the President of India in November 2020.

This post discusses the changes brought about by the 2021 Amendment to Section 36 of the 1996 Act dealing with the “enforcement” of an arbitral award. The authors contend that the 2021 Amendment represents a retrogression in the pro-arbitration regime sought to be fostered in India. Firstly, the 2021 Amendment alters the scheme of the 1996 Act by creating new hurdles to the enforcement of arbitral awards. Secondly, by limiting the discretion of courts to tailor relief to the attendant circumstances, the 2021 Amendment has undone the enforcement-friendly changes to the 1996 Act. Lastly, the introduction of ill-defined standards for enforcing arbitral awards (a) throws a spanner in the wheel of enforcement and (b) creates grounds to resist enforcement which are divorced from the grounds that are available to challenge an award. Viewed in this light, the 2021 Amendment has the potential to distort the arbitration framework in India, negatively impacting the rights of award-holders.

 

Alters the Scheme of the 1996 Act

The over-cautious approach under the Arbitration Act, 1940, where the imprimatur of the Court was a pre-requisite to the enforcement of an arbitral award, was done away with by the 1996 Act. In fact, in conferring direct enforceability upon arbitral awards, the 1996 Act went a step further than the UNCITRAL Model Law (“Model Law”) which allowed an award-debtor to resist the award at both the challenge stage (Article 34) and at the enforcement or recognition stage (Article 36). At the outset is evident that the 2021 Amendment undermines this trajectory.

By the 2021 Amendment, disposal of a Section 36 application would (in most cases) require the Court to form a prima facie view that there has been no fraud or corruption in securing the contract or in the making of the award.  The fact that such a finding shall nonetheless be subject to the eventual decision in the Section 34 application does not mitigate the hurdle since, on average, the final disposal of such proceedings (including appeals to the Supreme Court) which may be expected to take up to six years (See Paragraph 3 of the HCC Case). In this manner, the 2021 Amendment reintroduces the hurdle to enforcement (in cases of alleged fraud or corruption), representing a retrogression in the arbitral regime.

 

Nullifies the 2015 Amendment

Even within the realm of Section 36 proceedings, the 2021 Amendment could cause substantial mischief.

One of the major reasons for bringing in the 2015 Amendment was the observation of the Supreme Court in National Aluminium Company,  that the automatic stay jurisprudence left “no discretion in the court to put the parties on terms” which defeated “the very objective of the alternate dispute resolution system”. This grievance found succour with the 246th Law Commission Report as well, which recognised the paralytic effect of the same and recommended changing the law.

The legislative antidote to allay such concerns was to confer upon the Court powers to deal with enforcement claims akin to those conferred upon civil courts under Order 41 Rule 5 of the Civil Procedure Code, 1908 (“CPC”) (See Proviso to Section 36 of the 1996 Act inserted by the 2015 Amendment). The exercise of such powers to stay enforcement of an award under the CPC is well-established and requires illustration that “substantial loss may result to the party applying for stay of execution unless the order is made” (See Order 41, Rule 5(3)(a), CPC).

With the 2021 Amendment Act, the illustration of a prime facie case would entitle the party to procure an “unconditional” stay, thereby obliterating any discretion to balance the competing equities which would doubtless vary from case to case in staying the enforcement of an arbitral award. In this respect, the 2021 Amendment re-introduces the stultification of judicial discretion resulting in ‘paper awards’, which led to the 2015 Amendment in the first place.

Further, the 2021 Amendment includes grounds such as ‘fraud’ and ‘corruption’ which are not explicitly contemplated under the CPC for staying a decree. These additional grounds now relate exclusively to arbitral proceedings, suggesting a fundamental distrust in the arbitral process, thereby creating inexplicable discrimination between civil proceedings and arbitral proceedings. Such discrimination has already by decried by the Supreme Court in the HCC Case where the Court observed:

“[…] The anomaly, therefore, of Order XLI Rule 5 of the CPC applying in the case of full-blown appeals, and not being applicable by reason of Section 36 of the Arbitration Act, 1996 when it comes to review of arbitral awards, is itself a circumstance which militates against the enactment of Section 87 […].” (Para 50).

 

Standards are Vague and Arbitrary

With the inclusion of new grounds to resist the enforcement of awards, it may be expected that parties who are dissatisfied with the outcome of arbitral proceedings shall make every attempt to contend that their contract or the award is vitiated by fraud or corruption.

In Swiss Timing Ltd. v. Commonwealth Games, the Supreme Court held that allegations of fraud in the contract would not undermine the arbitration agreement and that a conjoint reading of Section 15 and 16 of the 1996 Act illustrated “all matters including the issue as to whether the main contract was void/voidable can be referred to arbitration”. Similarly, in both A. Ayyasamy v. A. Paramasivam and Avitel Post Studioz Ltd. v. HSBC PI Holdings (Mauritius) Ltd., the Supreme Court drew a distinction between “fraud simpliciter” and “serious allegations of fraud,” which permeate the entire contract causing damage in the public domain, holding that only in the latter case would the dispute fall outside the competence of an arbitral tribunal.

It appears that the 2021 Amendment did not deal with these complexities and failed to identify which particular claims falling under the nebulous concept of ‘fraud’ will cross the threshold to merit the grant of an ‘unconditional stay’ of an arbitral award. Similar questions are likely to arise in the case of corruption as well.

It is useful to note the above decisions only relate to the arbitrability of fraud and not its assessment following a decision by an arbitral tribunal, that would have conducted a detailed examination of the evidence. In this respect, the legislature has “passed the buck” to the judiciary (without any legislative guidance) to clarify:

  • ability of the court to examine new evidence or to engage in a de novo assessment of evidence de hors the analysis of the arbitral tribunal;
  • the scope of “fraud” and “corruption”;
  • the degree to which the conclusions in the award can be examined or differed with; and
  • the effect of failure to raise such allegations before the arbitral tribunal or in Court proceedings.

It is the authors’ view that such issues would require fresh analysis to evolve standards that hitherto have been absent in both CPC and the 1996 Act. Much confusion will be caused in the interim, particularly given the retrospective application of the 2021 Amendment.

 

Interferes with Section 34 of the 1996 Act

Readers will note that the Supreme Court has consistently viewed Section 36 of the 1996 Act to be an intermediate process to balance equities between the parties during the pendency of the Section 34 proceedings. In this respect, the following difficulties are a cause for concern:

Firstly, under Section 34(2)(a)(ii) an award may be set aside if the ‘arbitration agreement’ (not the ‘contract’ alone) is invalid in law, which may be on account of fraud or corruption. Under the amended Section 36, enforcement may be unconditionally stayed even if the ‘contract’ was induced by fraud or corruption.

As noted above in the cases of Swiss Timing Ltd, A. Ayyasamy and Avitel Post Studioz Ltd, fraud in procuring a contract would not necessarily affect the arbitration agreement, which is severable in law.

Secondly, Explanation 1(i) to Section 34(2)(b) of the 1996 Act states that an award would be contrary to the public policy of India, and liable to be set aside under Section 34, only if the “the making of the award” was induced or affected by fraud or corruption.

However, Section 36 as amended by the 2021 Amendment, proscribes enforcement additionally in cases where “the arbitration agreement or contract which is the basis of the award” was based on fraud or corruption.

In this respect, it is relevant to note that a ‘stay’ of the award continues to be within the realm of the Section 34 Court to grant considering the merits of the award-debtor’s plea for interim relief. However, the 2021 Amendment now pushes the Court to take a view on the merits of the matter under Section 36 (in relation to allegations of fraud or corruption) independent of the legal standards in Section 34. It is also noteworthy that the grounds of fraud and corruption were already available to award-debtor as grounds for staying an arbitral award under the unamended Section 36 read with Section 34. In view of the same, it is unclear if there exists a justifiable reason for providing a distinct ground for the same and thereby limiting the ability of the Court to engage in a holistic evaluation of the arbitral award and render justice that may befit the unique facts of the case.

Complications may also arise from a procedural standpoint. It is settled law that Section 34 is in the form of a summary procedure, where the Court is not to reappreciate evidence, record new evidence or minutely examine the arbitral award only to take a differing view (See Ssangyong Engineering & Construction Co. Ltd. v. NHAI). Whereas no prima facie case of fraud can be made out in the absence of material evidence to substantiate the allegations in the pleadings (See Svenska Handelsbanken v. Indian Charge Chrome). Given that the scope of interference is limited under Section 34, it is difficult to fathom how any prima facie case can be made out under the amended Section 36 without offending the standards or impinging the jurisdiction under Section 34. Needless to state, respective appellate proceedings may also run into conflict.

 

On Retrospectivity

The BCCI Case held that the changes to Section 34, in altering the ground to challenge an arbitral award, related to the substantive rights and could not be retrospectively applied to Section 34 applications filed prior to the Cut-Off Date. However, so far as Section 36 was concerned, the Court held that the “execution of a decree pertains to the realm of procedure” and no vested right “to resist enforcement” under the un-amended Section 36 can be claimed by a party. Accordingly, the Court held that the amended Section 36 would apply even in relation to Section 34 applications filed prior to the Cut-Off Date.

On the contrary, the 2021 Amendment alters the enforceability of the award (as opposed to a right to resist enforcement). In other words, while the 2015 Amendment negatively affected the right of the award-debtor by doing away with the Automatic Stay, the 2021 Amendment negatively affects the rights of the award-holder, making the award unenforceable without the need for providing security. In this sense, the 2021 Amendment revives the “clog” in the right of the award-holder, and in this respect, it is not only procedural but also affects the substantive rights of an award-holder.

 

Conclusion

Given the substantial overhaul of the scheme of the Arbitration Act, the mere reiteration of the provisions of the 2021 Amendment in the Statement of Objects and Reasons does not inspire confidence. It appears that the Parliament has not fully comprehended these difficulties.

The 2021 Amendment expresses a fundamental distrust of the arbitral process that does not bode well for the Indian arbitration regime, particularly with India’s sordid ranking at No. 163 out of 193 in the enforcement of contracts. The mantle now falls upon the judiciary to ensure that the delicate balance between the integrity of contracts and the enforcement of awards is maintained.

 

Mr. Ashish Dholakia is a Senior Advocate (Designated by the High Court of Delhi). Mr. Ketan Gaur is a Counsel at Trilegal and Mr. Kaustub Narendran is an Associate at Trilegal.

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Mexico’s Efforts to Undo the 2013 Energy Reform: Substantives and Procedural Protections for “Covered Investments” under the USMCA

Sat, 2021-05-22 01:00

Since his inauguration in December 2018, Mexican President Andrés Manuel López Obrador (AMLO) has endeavored to reverse the liberalization of the energy market achieved by his predecessor. In the last few months, actions to resume government control of Mexico’s free energy markets have intensified with the adoption and proposal of regulation affecting investor’s rights and the value of projects. In consequence, dozens of constitutional protection lawsuits (“Amparo”)1)Amparo is an extraordinary constitutional appeal, which may be filed in federal court for several purposes such as a defense of the individual guarantees provided in the Constitution, and against unconstitutional laws. jQuery('#footnote_plugin_tooltip_37419_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37419_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); have been filed against these measures and the Government has made itself target of potential claims in international fora. In this post, I will analyze the measures affecting both the power and hydrocarbons sector, as well as the local and international remedies available to affected investors.

 

Background

In 2013, Mexico adopted a constitutional reform (the “Reform”) that liberalized the national energy industry. The Reform put an end to decades of State-run monopolies governing the petroleum and power industries, led by PEMEX (Petróleos Mexicanos) and the CFE (Comisión Federal de Electricidad), respectively. Through the Reform, Mexico opened its energy sector, allowing and incentivizing private (domestic and foreign) investment in all segments of the oil & gas industry, as well as in the generation and commercialization of electricity.

Given Mexico’s prolific natural resources, the Reform boosted foreign direct investment (FDI). Indeed, following the Reform, Mexico has received over USD 32 billion in investments (see here and here), and expects to obtain at least USD 25 billion more in coming years.

 

Policy Shift: Changing the Rules of the Game

Since AMLO took office in late 2018, he has enacted a policy shift by resuming Government control of Mexico’s energy industry, quoting sovereignty and national security concerns.

 

Petroleum sector

In the upstream realm, only a week into its term, the AMLO Administration ordered the suspension of pending exploration and production (E&P) licensing rounds and announced a revision of the legality of 107 E&P contracts awarded between 2015–2018 to private companies, such as Murphy Oil, Chevron, Fieldwood Energy, ExxonMobil and Talos Energy.

In the last few months, the government has also attempted to change the rules of the game applicable to the mid- and downstream sectors. In December 2020, the Ministry of Energy (SENER) issued the new Hydrocarbon and Fuel Import and Export Rules (the “Petroleum Import/Export Rules”), which sought to limit the ability of private companies to import and export fuel and hydrocarbons hence, strengthening PEMEX’s market position. Specifically, the Rules establish a summary proceeding mechanism to revoke existing import/export permits and shorten the validity of new permits from 20 years to 5 years. The Rules also contain provisions potentially hindering applicants’ opportunities to obtain new permits. Namely, the Rules: 1) require applicants to demonstrate that the export of hydrocarbons will not impact domestic supply in the mid and long term; 2) establish that applications are deemed rejected if SENER fails to issue a resolution within 12 business days; and 3) allow SENER to consult with State-owned companies, such as PEMEX, to determine the convenience of granting permits.

On top of the Rules, on May 4, 2021 the Mexican Government passed an amendment – sponsored by AMLO in March and approved by Congress in late April – to the Hydrocarbons Act, that modified certain key provisions.  The amendment grants State-owned entities a greater role in the mid- and downstream sectors. Specifically, it grants the Government the power to suspend or revoke permits on vague grounds such as “national and energy security” or the “security of the national economy.” Following the suspension of a permit, the amendment also allows the Government to occupy the corresponding facility and delegate their operation to State-owned entities, such as PEMEX.

 

Power sector

Before the Reform, Mexico had a traditional industry model where the CFE was responsible for developing all activities of the power industrial chain. The Reform created a free power market, and sought to incentivize private investment in power generation. Some of the incentives included: 1) priority access to the grid for the most cost-efficient generators, usually wind and solar energy generators; 2) allowing renewable energy plants built from 2014 onwards to obtain and sell Clean Energy Certificates (CEL), that companies in Mexico can use to meet local renewable energy requirements; and 3) requiring the CFE to purchase electricity by auction to get the cheapest offer available.

In early March 2021, Congress passed a bill amending Mexico’s Electricity Industry Law (the “Electricity Bill”). Similar to the measures mentioned above, the Electricity Bill aims to resume State control of the national power market.

The Electricity Bill reversed all the aforementioned incentives. Specifically, this amendment 1) grants grid priority access to CFE plants, regardless of their cost or environmental efficiency; 2) allows CFE pants to obtain CELs, regardless of their age; and 3) eliminates the obligation of the CFE to purchase electricity by auction, which in practical terms allows the CFE to buy it from its own plants instead of from cheaper power private plants. The Electricity Bill also mandates the CFE to revise and, if applicable, terminate any long-term purchase contracts with private generators and grants the Energy Regulatory Commission (CRE) broad power to revoke self-supply permits.

 

Challenges before Domestic Courts

The measures mentioned above impact Mexico’s energy sector profoundly, and have the potential to affect several investments made in reliance on the Reform. Hence, it is not surprising that dozens of companies have already challenged the constitutionality of those measures by filing Amparos before local courts.

In late February 2021, a federal judge ordered the suspension of the Petroleum Import/Export Rules, concluding that they violate the constitutional right of free competition and favored PEMEX over other market actors. Likewise, the amendment to the Hydrocarbons Act was also suspended on constitutional grounds, barely a week after its adoption.

In regard to the Electricity Bill, over 30 Amparos have been filed challenging its constitutionality, specifically alleging that it violates several constitutional rights, e.g., free competition, the competitiveness of the power sector, and environmental protection. In consequence, in mid-March, a federal judge granted an injunction halting the effects of the Electricity Bill for every potentially affected company, until a final decision is reached by a federal court. All suspensions are temporary, pending a final decision of the local courts.

In the face of a potentially long judicial battle, the AMLO Administration is considering a constitutional amendment of the energy sector, aimed at removing any grounds for challenges to its attempts to dismantle the Reform. The constitutional amendment could take place after June’s midterm elections, provided that AMLO’s party – Morena – obtains the two-thirds super majority needed to change the constitution.

 

Remedies through International Arbitration

Mexico has signed and ratified – at least – thirty-six bilateral investment treaties (BITs), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), and the United States-Mexico-Canada Agreement (USMCA). These treaties subject Mexico to a number of commitments in favor of international investors, for example, allowing the latter to bring arbitration claims against the former. Mexico is also party to the ICSID Convention.

The changes to Mexico’s power and petroleum sector might be deemed a violation of some investment protections established in the aforementioned treaties. For example, Mexico might be found to be expropriating investments (directly or indirectly), taking arbitrary and discriminatory measures and/or failing to provide international investors with fair and equitable treatment (FET).

While each of these instruments offers unique procedural avenues and legal protections, it is worth noting that FDI flowing to Mexico comes – disproportionately – from the United States. As such, this section focuses on potential claims arising out of the USMCA.

For disputes brought against either the US or Mexico2)Canada is not included in the investor-State dispute settlement mechanism of the USMCA. The CPTPP, however, does provide for ISDS for Canadians and Mexicans investing in Mexico and Canada respectively (see here and here). jQuery('#footnote_plugin_tooltip_37419_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37419_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });, the USMCA provides for two distinct dispute resolution frameworks which apply based on the type of investor. Specifically, covered investments – which include highly regulated activities, such as oil and gas and power generation projects – are afforded certain benefits that other investments are not.

First, covered investors have more grounds under which they can bring arbitration claims. Generally, USMCA only allows claims for direct expropriation, and breach of the national treatment and most favored nation principles. Covered investors can bring claims on additional grounds, including indirect expropriation and failure to provide FET, which usually includes a prohibition for states to act in an arbitrary or discriminatory fashion.

It is important to highlight that the USMCA limits the scope of FET and establishes that it only includes the obligation not to deny justice and to act in accordance with due process. It also excludes any action or omission that is inconsistent with investors’ legitimate expectations. This is relevant because the concept of legitimate expectations might be central for investors to assert that the AMLO’s reforms breach Mexico’s FET obligations. As previously reported on the Blog here and here, investors’ legitimate expectations were the central issue of 28 recent arbitrations brought against Spain, Italy and the Czech Republic for an issue somewhat similar – but also different in various aspects – to  Mexico’s Electricity Bill, i.e., the removal of incentives to attract investments in renewable energy. Granted, some tribunals concluded that the existence of legitimate expectations is not necessary for a violation of FET to exist, but this seems to be so in only a handful of cases.3)See, e.g., Tecmed v. Mexico, ICSID Case No ARB (AF)/00/2, Award 29 May 2003. jQuery('#footnote_plugin_tooltip_37419_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37419_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Second, the USMCA has an asymmetrical fork-in-the-road clause that states that US investors  “may not submit to arbitration a claim that Mexico has breached an obligation under this [Treaty] . . . if the investor or the enterprise, respectively, has alleged that breach of an obligation under this [Treaty] in proceedings before a court or administrative tribunal of Mexico.” This clause should not prevent companies that filed Amparos from initiating arbitration proceedings under USMCA for at least two reasons. On the one hand, the Amparos were based on breach of Mexico’s constitution, not the USMCA. On the other, the fork-in-the-road clause does not apply to previous actions seeking injunctive relief, not monetary compensation.

Third, the USMCA states that investors must first obtain a final decision from the local courts of final appeal or defend their claims in local courts for 30 months before initiating arbitration, unless such action would be “obviously futile”. This period of time runs concurrently with a four-year statute of limitations for asserting any claim through investment arbitration. Claims arising from covered investments, however, are exempted from this limitation and can be brought directly before an arbitration tribunal.

Fourth, it is important to remember that, although, the USMCA allows the submission of some legacy claims under Chapter 11 of the North American Free Trade Agreement (NAFTA), this prerogative is not extended to covered investments. This is relevant because NAFTA did not have the restrictions mentioned before, i.e., the limited scope of FET.

Finally, investor claims could also be based, not on treaties, but on commercial contracts between them and Mexican Government entities. Mexico’s model contract for E&P activities, for example, allows investors to submit claims to arbitration with seat in The Hague, under UNCITRAL Rules. By the same token, local regulation allows private generators dispatching power to the grid to agree to arbitration in Mexico, under the ICDR Rules.

 

Conclusion

The attempted reforms to the petroleum and power sectors would certainly impact the economics of private projects deeply. It could be months until federal courts reach a final decision on the constitutionality of these measures. The Administration’s plan to amend Mexico’s constitutions add even more uncertainty to the energy sector. At this stage, companies would be well advised to start studying avenues other than Amparos to resist or mitigate Government action. The USMCA, as well as other dozens of investment treaties ratified by Mexico, provides them the substantive and procedural means to achieve it. In the case of investors starting or planning to start Amparos, who are also eligible to bring claims under the USMCA, it is important to define the scope of the former, in a way that does not impede their future ability to present the latter.

References[+]

↑1 Amparo is an extraordinary constitutional appeal, which may be filed in federal court for several purposes such as a defense of the individual guarantees provided in the Constitution, and against unconstitutional laws. ↑2 Canada is not included in the investor-State dispute settlement mechanism of the USMCA. The CPTPP, however, does provide for ISDS for Canadians and Mexicans investing in Mexico and Canada respectively (see here and here). ↑3 See, e.g., Tecmed v. Mexico, ICSID Case No ARB (AF)/00/2, Award 29 May 2003. function footnote_expand_reference_container_37419_30() { jQuery('#footnote_references_container_37419_30').show(); jQuery('#footnote_reference_container_collapse_button_37419_30').text('−'); } function footnote_collapse_reference_container_37419_30() { jQuery('#footnote_references_container_37419_30').hide(); jQuery('#footnote_reference_container_collapse_button_37419_30').text('+'); } function footnote_expand_collapse_reference_container_37419_30() { if (jQuery('#footnote_references_container_37419_30').is(':hidden')) { footnote_expand_reference_container_37419_30(); } else { footnote_collapse_reference_container_37419_30(); } } function footnote_moveToAnchor_37419_30(p_str_TargetID) { footnote_expand_reference_container_37419_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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The Proper Law of the Arbitration Agreement: A Comparative Law Perspective: A Report from the CIArb London’s Branch Keynote Speech 2021

Fri, 2021-05-21 01:51

On 21 April 2021, the CIArb’s London Branch hosted its annual Keynote Speech, which was held online this year. In her speech on “The Proper Law of the Arbitration Agreement”, Professor Dr. Maxi Scherer discussed the different approaches taken by jurisdictions worldwide in determining the law governing the arbitration agreement. She further compared those approaches against the solution adopted by the U.K. Supreme Court’s landmark decision in Enka v. Chubb [2020] UKSC 38 (“Enka”). Professor Scherer also unveiled her recent comparative research—discussed below—on the different approaches followed in 80 jurisdictions worldwide for determining the proper law governing the arbitration agreement, highlighting the lack of a clear, uniform answer to this fundamental question. Professor Scherer noted that, historically, Article V(1)(a) of the  New York Convention favors the law chosen by the parties or the law of the seat (in the absence of the parties’ agreement) as the applicable law to the arbitration agreement. However, diverse interpretations and applications of this article have resulted in a lack of a harmonized, uniform approach.

 

The Approach Adopted in Enka for Determining the Proper Law Governing the Arbitration Agreement

Enka was a subcontractor for the construction of a power plant in Russia. The applicable contract contained an arbitration agreement for ICC arbitration with its seat in London but did not specify the law governing the arbitration agreement. Furthermore, the parties’ contract did not expressly prescribe the governing law for the contract itself. Following a fire at the power plant in 2016, Chubb paid out US$400 million in respect of damage caused by the fire to its insured, the other party to the Contract. Chubb asserted that it was subrogated to the counterparty’s claims and sought to recover from Enka in the Russian courts regarding the sums Chubb had paid out, arguing that Enka’s defective works had caused the fire.

Against this background, in 2019, Enka made an urgent ex parte application for interim relief to English courts, seeking a declaration that Chubb was bound by the arbitration agreement which covered Chubb’s claims. The English Court of Appeal concluded that the arbitration agreement was governed by English law based on the parties’ choice of London as the seat for their arbitration. On this ground, the Court decided that the parties had impliedly chosen that the arbitration agreement is governed by the law of the seat, i.e., English law.

By a majority of 3-2, the Supreme Court upheld the Court of Appeal’s conclusion that the arbitration agreement was governed by English law but departed from its reasoning on that same issue. The Supreme Court found the parties have neither expressly nor implicitly chosen any law to govern the arbitration agreement. Applying the closest connection test, the Court concluded that this test led to applying the law of the seat, i.e., English law.

Professor Scherer noted that the Supreme Court further outlined several broader directions regarding the law governing arbitration agreements. First, where parties have expressly selected a specific law, that law will govern the arbitration agreement. Second, where parties have not selected any laws regarding the contract or the arbitration agreement, the fallback is the closest connection test, i.e., the seat of the arbitration. The third situation is where parties have chosen the seat of the arbitration and the law governing the contract but omitted the selection of the law governing the arbitration agreement. In that case, the presumption is that the law governing the contract will also apply to the arbitration agreement. This presumption is not displaced in favor of the seat by the mere fact that parties have chosen a seat somewhere else. (Enka ¶170)

However, the Supreme Court outlined two exceptions to this presumption. The first exception is when the lex contractus invalidates the arbitration agreement—the principle of validation. Thus, if the lex contractus leads to the invalidation of the arbitration agreement, the presumption is displaced in favor of the seat. The second exception applies if “any provision of the law of the seat which indicates that, where an arbitration is subject to that law, the arbitration [agreement] will also be treated as governed by that country’s law.” (Enka ¶170) Here too, the presumption is displaced in favor of the law of the seat.

Professor Scherer commented that the solution adopted by the Supreme Court yields a complicated process. This complication arises when parties have chosen a seat for their arbitration and a law governing their contract different from the seat. In such circumstances, the English judge will need to ascertain the content of two foreign laws, under the two exceptions above, to determine the law governing the arbitration agreement.

 

Comparative Research on the Different Approaches Taken by Jurisdictions Around the World to Determining the Law Governing the Arbitration Agreement

Professor Scherer’s comparative research tests the Supreme Court’s suggestion in Enka that international authorities favor the lex contractus approach in determining the proper law governing the arbitration agreement. The underlying factual hypothesis of the map below is the case where parties expressly have selected the seat of the arbitration and the law governing the contract but have not selected the law governing the arbitration agreement specifically. In such cases, courts in 80 jurisdictions have adopted different solutions.

 

 

Analyzing this map, Professor Scherer made several comments:

First, comparative analysis shows no majority view at the international level for the lex contractus approach (colored in green on the map), contrary to what seems to have been suggested by the Supreme Court in Enka. The map shows that 51% of the countries favor the law of the seat, compared to only 34% favoring the lex contractus.

Second, major arbitration jurisdictions (including England, France, Switzerland, and the U.S.) are divided as to which approach to take in determining the proper law governing the arbitration agreement. Notably, none of these popular jurisdictions adopt the majority approach of the law of the seat. While England and the U.S. apply the lex contractus approach, Switzerland and France apply the validation approach and an a-national approach, respectively. Overall, the data shows that there is no clear preference for any given of the four approaches.

Third, concerning the French a-national approach (colored in yellow on the map), Professor Scherer explained that its main advantage is the direct application of international principles by analyzing the common intent or will of the parties. Under this approach, absent an express choice of law by the parties, there is no need to analyze what laws govern the arbitration agreement. In Professor Scherer’s view, there are two significant problems with this approach. First, this approach leads to important uncertainty regarding the validity of the arbitration agreement. Beyond the statement of looking into the common intent or will of the parties, it is unclear what would happen if the parties’ common intent itself is unclear. Second, whether this approach can even be called an approach of international principles since this approach was shaped by, first and foremost, the French courts.

Fourth, regarding the Swiss validation approach (colored in orange on the map), Professor Scherer prized this approach as a well-established principle of interpretation in many countries. However, the main problem with this approach is that it cannot provide a solution to all questions relating to the arbitration agreement (such as validity, both formal and substantive, scope, interpretation), all of which are required to determine the law governing the arbitration agreement. Nonetheless, this approach works well for the validity of the arbitration agreement. It allows us to choose from the relevant laws (law of the seat, lex contractus, lex fori), the law that leads us to the validity of the arbitration agreement.

Fifth, Professor Scherer further mentioned that another part of her comparative research indicates most case law deals with questions of determining the proper law of the arbitration agreement deal with formal or substantive validity of the arbitration agreement.

The table below represents 200 published court decisions worldwide that deal with the law governing the arbitration agreement. (These are randomly selected decisions from approximately 30 jurisdictions. The data does not include arbitral tribunals’ decisions.) The results in the table show the underlying issue that triggered the question of the law governing the arbitration agreement. Notably, around 60% of cases deal with substantive or formal validity of the arbitration agreement when determining the law governing the arbitration agreement. This figure indicates that in most cases where the question of the governing law comes up, the validation approach helps to find a meaningful solution.

 

 

In conclusion, it is extraordinary that there is much uncertainty globally regarding this fundamental question of the proper law governing the arbitration agreement. One way out of this uncertainty could be applying Article V(1)(a) of the New York Convention. The solution provided by this article is straightforward and also eliminates and evacuates some of the current existing uncertainties.

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LIDW 2021: Challenges and Opportunities in Investor-State Dispute Settlement

Thu, 2021-05-20 01:26

The Investor-State Dispute Settlement regime is at the centre of a long-standing debate, subsequent reform efforts, and, more in general, great innovation. In this context, on 14 May 2021, a LIDW member-hosted event – organised and co-hosted by Clifford Chance, EFILA, Herbert Smith Freehills, Queen Mary University’s School of International Arbitration, and White & Case – discussed some of the most topical challenges and opportunities in investor-state dispute settlement. Loukas Mistelis moderated the first panel of speakers who focused on the relationship between the European Union and the United Kingdom post-Brexit (see also here on this topic). David Goldberg moderated the second panel of speakers who gave an overview of general trends and developments concerning investment treaties globally. For coverage of earlier sessions of LIDW 2021, please see here and here.

 

Session 1: The EU-UK relationship post Brexit

The Trade and Cooperation Agreement

In the first session, Jessica Gladstone considered the legal nature of the Trade and Cooperation Agreement (TCA), concluded between the European Union and the United Kingdom. She commented that the TCA is unique and, as with all Free Trade Agreements (FTAs), reflects a unique balancing of the parties’ objectives, flexibilities, and sensitivities at a particular point in time). Indeed, as she mentioned, there is no ‘single FTA’ model. States’ approaches on certain issues (including Investor State Dispute Settlement (ISDS) – and the very concept of ‘trade issue’ – are constantly evolving. This is clear, for example, if one considers areas now at the heart of modern trade negotiations that would never have been regarded as core ‘trade issues’ in the Uruguay Round of WTO negotiations, such as digital trade, privacy, and to some extent, investment protection. Further, she pointed out that while the TCA does not diverge radically from other trade agreements in terms of structure and style, it has some unique features, such as in-depth provisions on broader issues of law enforcement and judicial cooperation, and more extensive level playing field commitments than are typically included in FTAs, including on environmental protection. Concerning the absence of ISDS provisions in the TCA, she commented that this is not surprising for many different reasons. Amongst others, she mentioned, for example, the European Union’s insistence that an investment court system should deal with investment protection matters, and the practical issue of timing, given the delays and risks associated with domestic constitutional ratification processes. As to the investment protection standards included in the TCA, she noted that these tend to focus on market access rather than traditional investment protection standards.

 

 

UK-EU Bilateral Investment Treaties.

Crina Baltag then evaluated the fate of bilateral investment treaties (BITs) concluded between the United Kingdom and Member States of the European Union (UK-EU BITs). In doing so, she pointed out that there is no reference to them in the TCA, although it contains references to other bilateral instruments. For example, amongst others, she referred to Article FINPROV.2 – on the relationship between the TCA with other agreements – which provides that:

this Agreement and any supplementing agreement apply without prejudice to any earlier bilateral agreement between the United Kingdom of the one part and the Union and the European Atomic Energy Community of the other part. The Parties reaffirm their obligations to implement any such Agreement.

Furthermore, she touched upon the topic of termination of intra-EU BITs, and in particular, she made reference to the October 2020 infringement proceedings started by the European Commission against the UK, where the former stated that

without a satisfactory response from the United Kingdom within the next two months, the Commission may decide to refer the case to the Court of Justice of the European Union.

Commenting further on this point, she considered whether the TCA is the “satisfactory response” that the European Commission requested. Finally, she reflected on whether – provided that they are still applicable – we could consider the UK-EU BITs as extra-EU BITs. Finally, she touched upon the future of the Energy Charter Treaty (ECT). Indeed, while it has not been affected by Achmea judgment, modernisation process has started. Further, one must also keep an eye on Court of Justice of the European Union (CJEU) further developments on this matter, with a view of the Advocate General opinions in Republic of Moldova v Komstroy and Joined Cases C‑798/18 and C‑799/1 (but not developed further in the Judgment of 15 April 2021). In this regard, she noted that it is likely that companies in the energy field may look to structure their investments through the United Kingdom to get access to the European Union.

 

The TCA and Sustainable Development

Nikos Lavranos pointed out that the TCA contains a specific sustainable development chapter, covering labour and the environment, including specific provisions concerning climate change; and how to reach the targets established by the Paris Agreement. Indeed, the TCA reaffirms the EU/UK’s joint ambition to achieve economy-wide climate neutrality by 2050. In his view, this agreement is arguably the first FTA providing such a specific connection between trade, investment and environmental/climate aspects. However, he noted that in terms of dispute settlement provisions, the TCA might create some problems.  For instance, it contains three different types of enforcement and dispute settlement tools and bodies. This proliferation increases the risk of fragmentation and potentially conflicting outcomes. In addition, not giving private parties – businesses and NGOs – the right to challenge a party’s non-compliance with their obligations is unfortunate. Finally, he also reflected on whether the TCA is the appropriate tool to enforce environmental/climate protection goals.

 

UK’s investment framework

Andrew Cannon considered more closely the UK’s investment framework and noted that the UK is party to a large number of BITs, together with its participation in the ECT. For this reason, the UK represents a favourable location for companies making outward investments. Also, he commented on the UK Supreme Court decision in Micula from early 2020. In this decision, the UK Supreme Court found that the duty of sincere cooperation under EU law did not preclude enforcement of an ICSID Convention (Convention) award against Romania. He noted that the UK, now being outside the EU, has free rein to develop and shape its own investment policy. The precise position it will adopt in this regard was not yet clear. In the 2019 HoC Trade Committee Report, Parliament raised questions of the Government in this regard, stating that the UK cannot go back to its pre-2009 position, and the Government’s response was that it continued to consider a wide range of options. He noted that insight could be gained from recent treaty negotiations. For example, on 4 March 2021, the UK and Singapore published a joint statement reaffirming their agreement to commence negotiations on “updated, high standard and ambitious investment protection commitments”. The UK is also continuing to pursue accession to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (the “CPTPP”), having made a formal application in February 2021.

 

Session 2: Developments on Investment Treaties Globally.

Criticisms to ISDS

In the second session, Epaminontas Triantafilou gave a broad overview of current issues in ISDS. He started by pointing out that many of the current criticisms of the system (transparency, excessive financial exposure of States) have been around for over 15 years. While those criticisms initially were being raised by academics and non-profit organisations, in time, they came to be reflected in the political will of several States, giving rise to ongoing reform efforts. Current criticisms include the consistency and coherence of arbitral decisions, the process for selecting arbitrators, transparency, and the regulation of third-party funding.  He concluded that some of the criticisms have foundation, as well as practicable solutions, and therefore justify efforts at reform.  It is important to recall in addressing any problems that the system overall has operated fairly well for decades, injecting the rule of law in an area previously governed by relative diplomatic influence or military might; and has been yielding fairly balanced outcomes. Reform, which is and should remain founded on deliberation and careful cost-benefit analysis, ultimately should be aimed at improvement, not cancellation.

 

Corporate Social Responsibility and ISDS

Hannah Ambrose discussed how States have addressed Corporate Social Responsibility (CSR) and environmental protection in investment treaties. In particular, she referred to State-State obligations, through which States generally only acknowledge the importance of CSR and commit to “encourage” CSR compliance. Further, she referred to provisions providing investor obligations on CSR or environment which either constitute “best efforts” or mandatory obligations. She acknowledged that such provisions are likely only to have a practical impact on investor conduct if they are enforceable, and she pointed out that even if treaties were to provide States with the possibility of bringing counterclaims or include a denial of benefits clause where CSR obligations are not met, such provisions would still require an investor to bring a claim first. In this context, she explored whether a solution might be for national courts of the host or home State to have jurisdiction to decide whether investors are in breach of treaty obligations. She concluded that there is opportunity to advance issues of CSR through the framework of investment treaties, but this requires the treaty to prompt a proactive change in investor behaviour. In her view, this requires States to address effective enforcement of CSR obligations in a manner independent of investor claims.

 

Personal Scope of Investment Treaties

Laura Halonen gave an overview of general trends on the personal scope of investment treaties. Generally, treaties provide nationals of the contracting States – either physical persons or juridical ones – with protection against the State where they invest (Host State). As she mentioned, through investment treaties a Host State aims at promoting investment from the other contracting party by offering it protection in their territory. However, this is not always the case. In some instances, nationals do find a way of effectively being protected against their own State. It is so in case of investors with dual nationality and round-tripping – according to which a national incorporates a company outside their own State to obtain protection under an investment treaty. Investment planning also does not meet the aim of promoting investment genuinely from the other contracting State. In discussing these instances, she gave an overview of how States address these issues in their treaties. For example, she referred to treaty provisions, expressly preventing dual nationals or companies controlled by nationals to bring claims. Another solution is through the denial of benefits clauses, whereby a Host State reserves the right to deny protection to companies owned by their own nationals.

 

Legality Requirements

Finally, Audley Sheppard examined the requirement of legality of investments under Host States’ law and reflected on whether this is an issue that goes to jurisdiction or admissibility or merits. Among others, he considered whether – absent any provisions prescribing such requirement – an arbitral tribunal can imply this requisite into investment treaties. For instance, he pointed out that this question is relevant when States include it in some treaties while deciding not to do so in other treaties – a question that the Tribunal in Cortec v. Kenya answered in the affirmative. Further, he considered whether such a requirement should be considered a jurisdictional requirement under Article 25 of the ICSID Convention as discussed in Phoenix v. the Czech Republic. In his view, absent an express provision in the relevant treaties, local law compliance should be considered as an admissibility and merits issue (together with State responsibility if public officials are implicated in any wrongdoing), save in situations of serious illegality going to the very existence of an investment. Where there is an express local legal legality requirement, he commended the proportionate analysis in Kim v Uzbekistan.

 

 Final remarks:

In both sessions, the discussion ended with several questions posed to the audience. The results of the polls to be reflected upon are below:

 

 

The author would like to thank Georgios Fasfalis and Maria José Alarcon, assistant editors of Kluwer Arbitration Blog.

 

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Party Autonomy Reigns Supreme: The Indian Supreme Court Rules that Two Indian Parties Can Choose a Foreign Seat of Arbitration

Wed, 2021-05-19 01:40

In a landmark ruling in PASL Wind Solutions Private Limited v. GE Power Conversion,1)Special Leave Petition (Civil) 3936 of 2021 (arising out of GHC judgment dated November 11, 2020), Supreme Court of India Judgment dated April 20, 2021. jQuery('#footnote_plugin_tooltip_37376_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37376_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); India’s Supreme Court rejected the argument that the designation of a foreign seat between two Indian parties was contrary to public policy, and instead, ruled affirmatively that there was nothing in the (Indian) Arbitration & Conciliation Act, 1996 (‘Act’) that precluded Indian parties from arbitrating in a foreign seat and that party autonomy and freedom of contract must be upheld.

The foregoing principle of law has vexed the legal fraternity for years, with conflicting rulings from various High Courts – Is there a preclusion in the Act, against an arbitration involving only  Indian parties opting a foreign seat?  Is such a contract so violative of the public policy of India, that party autonomy, one of the mainstays of arbitration, cannot extend to the freedom to choose an arbitral seat outside India?

The critics have argued that such a contract would indeed be contrary to public policy and would render the ensuing award liable to be set aside or refused to be enforced by an Indian court and has accordingly been used as a routine defence in such cases. Indeed, this has resulted in conflicting rulings from various High Courts across India.  While the Madhya Pradesh and the Delhi High Courts have ruled that such a choice is permissible (Sasan Power and GMR Energy), the Bombay High Court has ruled that having a seat outside India is impermissible and contrary to public policy (Sah Petroleums and Addhar Mercantile).

The Supreme Court held that in the present case, the Award, made in Zurich as the seat of the arbitration, between two Indian parties, was a foreign award enforceable under the Act.

 

Background

This arbitration emanated out of disputes between two Indian companies, viz. GE and PASL under a Settlement Agreement, which itself resolved earlier disputes, and which provided for resolution of disputes by arbitration in Zurich, in accordance with ICC Rules. PASL invoked arbitration in 2017, claiming damages of about USD 175 million, from GE.  On the merits, the Sole Arbitrator passed a final award dated April 18, 2019, rejecting all of PASL’s claims and awarding costs of the arbitration along with interest thereon to GE (the “Award”).

 

Proceedings in the Gujarat Courts

GE applied for enforcement of the Award as a foreign award (under Part II of the Act), which deals with NY Convention awards). Simultaneously, it also applied for interim relief (under Section 9).

On the other hand, notwithstanding the foreign seat, PASL challenged the Award in a Gujarat Court.  PASL argued that the Award should be treated as a domestic award because it resolved a dispute between two Indian parties.

The Gujarat High Court (“GHC”) in its judgment dated November 3, 2020 upheld the right of Indian parties to select a foreign seat of arbitration and ruled that the Award was a foreign award enforceable under the Act.

Insofar as GE’s application for interim relief was concerned, the High Court ruled that only parties to an “international commercial arbitration” could approach Indian courts for interim reliefs meaning that at least one of the parties should be a foreign entity. The Court ruled that GE’s application for interim relief was not maintainable as both parties to the arbitration were Indian entities and the arbitration was not an “international commercial arbitration”.

PASL applied to the Indian Supreme Court for special leave to appeal against the judgment of the GHC.

 

The Supreme Court’s Judgment

The Indian Supreme Court in April 2021 judgment ruled on several principles fundamental to arbitration law in India.

  • Party autonomy is the guiding spirit of arbitration

The Court acknowledged the critical role of party autonomy in arbitration, referring to it as, “the brooding and guiding spirit of arbitration”, relying on its previous decision in BALCO In the context of the issue in the case, the Court held that “Nothing stands in the way of party autonomy in designating a seat of arbitration outside India even when both parties happen to be Indian nationals….”

  • The territoriality principle holds sway under Part II of the Act and the NY Convention

In detailed reasoning, the Supreme Court ruled that what was relevant to ascertain whether an award was a foreign award enforceable under the Act, was the ‘territoriality principle’, i.e., the territory in which the award was made – the ‘seat’ of the arbitration (under Part II, Chapter 1 – NY Convention Awards).  The Court referred to travaux preparatoires of the NY Convention and noted that though many countries had advocated ‘nationality’ of parties being retained as a key condition (as mandated under the earlier Geneva Protocol & Convention)  ultimately the NY Convention was based only on the principle of the situs of the award/seat of arbitration, and thus, was party-neutral.

As such, merely the fact that the parties to the arbitration were both Indian entities, would not make an award passed in a foreign seated arbitration a domestic award – it would be a foreign award enforceable by an Indian court (subject to other relevant conditions being met – including that it was not contrary to Indian public policy).

  • Public Policy

PASL’s argument that the designation (of a foreign seat), was contrary to Indian public policy (by virtue of a contracting out of Indian law where it would otherwise apply), and therefore not permissible, was rejected. The Court held that “The balancing act between freedom of contract and clear and undeniable harm to the public must be resolved in favour of freedom of contract, as there is no clear and undeniable harm caused to the public in permitting two Indian nationals to avail of a challenge procedure of a foreign county when, after a foreign award passes muster under that procedure, its enforcement can be resisted in India.”.

The Court relied on an earlier decision in Atlas Export which had held that enforcement of a foreign award arising out of an arbitration between two Indian parties would not be contrary to Section 23 of the Indian Contract Act, 1872, which deals with contracts that are unlawful, including because they are opposed to public policy and restraint of legal proceedings restrictions.

The Court also dismissed the argument that if Indian parties could choose to arbitrate abroad, that would effectively allow them to circumvent mandatory Indian laws or transact in a manner contrary to Indian law. Protection existed against such a situation inasmuch as, if in the facts of a case it was found that two Indian nationals had, “circumvented a law which pertains to the fundamental policy of India, such foreign award may then not be enforced”.

While concluding that two Indian parties could choose a foreign seat of arbitration, the Court noted that a court must balance and weigh a private right against public order and where a private bargain does not cause harm to the public order, the court must allow for private bargain to flourish.2)The Court noted that unlike India countries such as the USA and China had specifically added proscriptions against domestic parties having a foreign seat of arbitration. jQuery('#footnote_plugin_tooltip_37376_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37376_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

  • Indian parties to foreign seated arbitration have recourse to Indian courts for interim reliefs

While upholding the judgment of the GHC (that the Award was enforceable as a foreign award), it set aside the dismissal of  GE’s application for interim relief. The Supreme  Court differentiated between the term ‘international commercial arbitration’ used in the Act, ruling that the term as defined in Section 2(1)(f) was concerned with the status of the parties and their nationality, whereas when used in Section 44 (which deals with foreign awards), it was concerned with territoriality, nationality being irrelevant.  therefore the proviso to Section 2(2) (which effectively entitles parties to an international commercial arbitration in a foreign seat to seek interim relief before an Indian court), should be read as referring simply to arbitrations seated outside Indian territory, such that parties thereto would have access to Indian courts for interim relief irrespective of their nationality.

 

Analysis

The position was comprehensively set to rest by the Indian Supreme Court, which has yet again walked the talk, demonstrating India’s pro-arbitration approach and recognizing a seminal principle of private law that in absence of public harm, party autonomy ought to be upheld.

Particularly for those multinationals with wholly-owned Indian subsidiaries, it is now open to them to mandate a foreign seat of arbitration, should they prefer a neutral territory.

It is important to note that the Court has been careful to not comment on whether, with the open choice of a foreign seat of arbitration, a choice of foreign substantive law is also permissible – since such an analysis would require further scrutiny and indeed a wider debate. No doubt, this will be another debate and another decision for another time.

 

Shaneen Parikh, Partner, Shalaka Patil, Partner and Surya Karan Sambyal, Senior Associate, at Cyril Amarchand Mangaldas, acted for GE Power Conversion in the arbitration and also the High Court and the Supreme Court proceedings. Views expressed are personal.

References[+]

↑1 Special Leave Petition (Civil) 3936 of 2021 (arising out of GHC judgment dated November 11, 2020), Supreme Court of India Judgment dated April 20, 2021. ↑2 The Court noted that unlike India countries such as the USA and China had specifically added proscriptions against domestic parties having a foreign seat of arbitration. function footnote_expand_reference_container_37376_30() { jQuery('#footnote_references_container_37376_30').show(); jQuery('#footnote_reference_container_collapse_button_37376_30').text('−'); } function footnote_collapse_reference_container_37376_30() { jQuery('#footnote_references_container_37376_30').hide(); jQuery('#footnote_reference_container_collapse_button_37376_30').text('+'); } function footnote_expand_collapse_reference_container_37376_30() { if (jQuery('#footnote_references_container_37376_30').is(':hidden')) { footnote_expand_reference_container_37376_30(); } else { footnote_collapse_reference_container_37376_30(); } } function footnote_moveToAnchor_37376_30(p_str_TargetID) { footnote_expand_reference_container_37376_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 Procedural Pandora’s Box: What Do Users Want from Arbitral Rules and Institutions Today?

Tue, 2021-05-18 01:47

The results of the 2021 QMUL-White & Case International Arbitration Survey were launched on 6 May 2021. The survey explores the theme of “Adapting Arbitration to a Changing World”: how international arbitration has adapted to changing demands and circumstances including the COVID-19 pandemic, and opportunities for the international arbitration community to adapt more and better. This is the 5th survey conducted by the School of International Arbitration, Queen Mary University of London, in partnership with White & Case. This blog focusses on adaptations to arbitral rules and by institutions; subsequent blogs will address other key topics from the survey.

A hallmark of international arbitration is its flexibility to develop and adapt in response to the changing needs of its users. The evolution of arbitration rules, both ad hoc and institutional, is an important mechanism to achieve that flexibility. The 2021 Survey revealed the ways in which drivers of change such as diversity and technology, coupled with the impact of the COVID-19 pandemic, have already been reflected in, and will continue to influence the development of, innovations in procedural rules.

This year’s survey confirmed a trend that we observed in our 2015 and 2018 QMUL-White & Case International Arbitration Surveys: when it comes to choice of procedural frameworks, whether provided by arbitral institutions or under ad hoc regimes, arbitration users appreciate a wide degree of choice but also tend to pick those they already consider to be ‘tried and tested’ options. We therefore asked respondents what adaptations would make other arbitral institutions or sets of arbitration rules more attractive to them.

Respondents were asked to choose up to three options from a list of indicative choices, as well as a free-text ‘other’ option. Some suggested adaptations related to provisions in arbitral rules, while others concerned the service offered by arbitral institutions and appointing or administering authorities. The responses signal changes in the nature and extent of the services that users would like administering entities and arbitral institutions to offer.

 

The top choice (selected by 38% of the total respondent pool and 32% of in-house counsel) was “administrative/logistical support for virtual hearings”, and 23% of users selected the related request for “provision for arbitrators to order both virtual and in-person hearings.” These results clearly reflect the need for arbitral practice to adapt to the challenges posed by the pandemic to holding hearings in-person, and the respondents’ call for the arbitral institutions to support that change.

Most arbitral institutions have not traditionally offered administrative support for virtual hearings per se. At the global launch event for the 2021 survey results, Dr Jacomijn van Haersolte-van Hof, Director General of the LCIA, explained that from the perspective of arbitral institutions, their role has been facilitative, ensuring that there is a rules framework that accommodates the practical conduct of arbitrations including, where appropriate or necessary, the use of virtual hearings and electronic communications.

White & Case partner Dipen Sabharwal QC, speaking at the same event, concurred that the provision of the physical infrastructure to conduct arbitrations, particularly hearings, has typically been the domain of third party providers rather than institutions. He noted that the switch to virtual settings should not necessarily change that. However, he also pointed out that history shows the adaptability of arbitral institutions and other rules providers in response to needs articulated by arbitration users. For example, the lowest ranking adaptations selected by respondents were “provision for summary determination/dismissal of unmeritorious claims” (18%) and “provision of emergency arbitrator facility” (13%). In our previous surveys, respondents expressed interest in having these procedural mechanisms available to them.1) See, e.g., 2015 QMUL-W&C International Arbitration Survey, Chart 25: 93% of respondents favoured the  inclusion of emergency arbitrator provisions in procedural rules. jQuery('#footnote_plugin_tooltip_37290_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37290_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Many widely used sets of arbitration rules now include these features. Mr Sabharwal suggested that those mechanisms were given lower priority by the respondents to the 2021 survey precisely because the market of institutions and rules providers have already responded to user demands for these adaptations. As Mr Sabharwal reflected, in light of both the wishes expressed by respondents to our 2021 survey and the historic trend he identified, arbitral institutions may start to provide some degree of practical support for virtual hearings.

An area in which many institutions and other rules providers have already started to adapt is the “provision of secure electronic filing and document sharing platforms” (chosen by 20% of respondents). The Arbitration Institute of the Stockholm Chamber of Commerce (SCC), for example, offers a secure digital platform for communications and file sharing between the parties and the tribunals in both SCC and, since May 2020, ad hoc arbitrations. Many institutions and administering bodies also provide electronic filing systems.

Dr van Haersolte-van Hof highlighted the swift response of institutions which have updated their rules, or are in the process of doing so, to accommodate changes that reflect the “new normal” brought about by the impact of the pandemic. She noted that the LCIA had been poised to launch updated rules in March 2020, but chose to delay their introduction in order to make further amendments to better reflect the change in circumstances. For example, a provision was inserted in the 2020 LCIA Rules to expressly allow for awards to be signed electronically (Article 26.2), and electronic means of communications are now the default (Article 4). She described the development across the arbitration community, and rules providers in particular, of a “consensus and acceptance” of new practices. The changes being implemented to procedural rules by providers in reflection of this consensus will, in her view, “be an important building block for allowing hearing centres and individual tribunals to accommodate new styles.”

Dr van Haersolte-van Hof also considered the link between the provision of electronic filing and document sharing platforms and responsibility for information security. In response to a question on cybersecurity measures, 40% of respondents thought “platforms or technologies provided or controlled by the arbitral institution” should be used. 41% also welcomed guidance or protocols from institutions.

 

Dr van Haersolte-van Hof agreed that the need to deal with cybersecurity becomes all the more essential as practices become increasingly digitalised. However, she cautioned that it is difficult to say how much institutions can or should provide these services. As with the consensus that has been reached in terms of facilitating changes resulting from the impact of the pandemic, she encouraged the arbitration community to do more to come to a consensus about what is needed and what standards should be applied. In this regard, she stressed the need to bear in mind the great diversity across users of international arbitration and their differing preferences and financial positions.

In our 2018 survey, 80% of respondents identified arbitral institutions, and 56% named “arbitration interest groups/bodies” as the stakeholders who are best placed to influence the evolution of international arbitration.2)2018 QMUL-W&C International Arbitration Survey, Chart 39. jQuery('#footnote_plugin_tooltip_37290_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37290_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The results of the 2021 survey and the history of adaptations of procedural rules confirm the role of rules providers in both reflecting and influencing change.

 

Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.

White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities. 

This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.

References[+]

↑1 See, e.g., 2015 QMUL-W&C International Arbitration Survey, Chart 25: 93% of respondents favoured the  inclusion of emergency arbitrator provisions in procedural rules. ↑2 2018 QMUL-W&C International Arbitration Survey, Chart 39. function footnote_expand_reference_container_37290_30() { jQuery('#footnote_references_container_37290_30').show(); jQuery('#footnote_reference_container_collapse_button_37290_30').text('−'); } function footnote_collapse_reference_container_37290_30() { jQuery('#footnote_references_container_37290_30').hide(); jQuery('#footnote_reference_container_collapse_button_37290_30').text('+'); } function footnote_expand_collapse_reference_container_37290_30() { if (jQuery('#footnote_references_container_37290_30').is(':hidden')) { footnote_expand_reference_container_37290_30(); } else { footnote_collapse_reference_container_37290_30(); } } function footnote_moveToAnchor_37290_30(p_str_TargetID) { footnote_expand_reference_container_37290_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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The Contents of the Yearbook Commercial Arbitration, Volume XLVI (2021), Upload 2

Tue, 2021-05-18 01:00

Subscribers to KluwerArbitration enjoy access to the ICCA Yearbook Commercial Arbitration.
A new upload of materials for the 2021 volume of the Yearbook is now available on the KluwerArbitration website.

This upload is entirely devoted to an update of court cases from the People’s Republic of China (PRC) on the application of the 1958 New York Convention, with 14 decisions dating from 2003 to 2020. Three decisions are particularly interesting.

In a decision from 2003, the Supreme People’s Court took a restrictive approach to public policy when it held that a dispute was arbitrable even though it concerned a futures trading contract. While the parties’ engagement in overseas futures trading without state approval contravened mandatory Chinese law, this contravention did not per se constitute a violation of Chinese public policy within the meaning of Art. V(2)(b) of the Convention.

In 2013, a majority of the Supreme People’s Court found that a clause for ICC arbitration in Shanghai was valid, against the minority opinion that the clause was null and void, even though the ICC was not an arbitration institution registered with the Chinese judicial administrative authorities as required by the Arbitration Law of the PRC.

Finally, in 2020, the Intermediate People’s Court in Guangzhou rendered a decision on how to distinguish between domestic and international awards in the PRC. It held that the New York Convention did not apply to an award rendered by an ICC tribunal seated in Guangzhou, even though the arbitration was between a US and a Chinese party, since the award’s nationality was to be determined by the seat of the arbitration.

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Award Rectification: Proposal on Solving the Functus Officio Problem

Mon, 2021-05-17 01:39

The Arbitration Committee of the New York City Bar Association has recently published a report titled: “The Functus Officio Problem in Modern Arbitration and a Proposed Solution” (the “Report”). In United States arbitration, the functus officio doctrine instructs that once an arbitrator finishes performance of her office, i.e., renders an award, her authority as an arbitrator is exhausted. The doctrine effectively establishes finality of arbitral awards by stipulating that arbitrators do not have the authority to alter an award after it was rendered (save for very narrow circumstances). The titular problem in the Report is that the contemporary application of the functus officio doctrine is surprisingly chaotic, which as a result undermines the finality of awards it was meant to protect. The proposal in the Report is to offer parties an opt-in rule, which would authorize arbitrators to rectify their award (i.e., make substantive corrections) within a strictly short timeframe after an award is rendered. The intended effect of the Report’s proposal is to allow parties to expressly decide on the scope of post-award review at the outset of proceedings to limit the risk of costly post-arbitration litigation.

The historical development of the functus officio doctrine follows a clash between finality and accuracy, in which the former slowly succumbs to the latter. At its inception in thirteenth century England, the doctrine was meant to serve as a deterrent for judges who would engage in a habit of altering their records. At that time, the doctrine was at its strictest and did not allow for any subsequent modification of judgments whatsoever. This, according to William Blackstone, led to a “great obstruction of justice” as judges were forced to follow even clearly erroneous judgments. (3 WILLIAM BLACKSTONE, COMMENTARIES 409-411 (1765).) When this doctrine reached United States arbitration in the nineteenth century, it was applied in a similar fashion. According to one early ruling, “If an arbitrator makes a mistake either as to law or fact, it is the misfortune of the party, and there is no help for it. There is no right of appeal, and the court has no power to revise the decisions of judges who are of the parties’ own choosing.” (Patton v. Garrett, 21 S.E. 679, 682 (N.C. 1895).)

At the turn of the twentieth century, the case law reflected some development towards allowing correction of at least some obvious clerical errors in awards. The Federal Arbitration Act (FAA) of 1925 provided a procedure for judicial correction of some evident mistakes. In 1967, the U.S. Court of Appeals for the Third Circuit explicitly recognized that arbitrators may correct apparent mistakes and clarify ambiguities. (La Vale Plaza, Inc. v. R. S. Noonan, Inc., 378 F.2d 569 (3d Cir. 1967).) Further practice specified that two generally recognized exceptions are (i) correction of an obvious typographical or computational error, and (ii) clarification of ambiguities that might prevent effective enforcement or party compliance. (2 DOMKE ON COM. ARB. § 26:2.) The latest development in the settled case law was recognition that the functus officio doctrine is merely a default rule which applies only if the parties do not agree otherwise. (Glass, Molders, Pottery, Plastics & Allied Workers Int’l Union, AFL-CIO, CLC, Local 182B v. Excelsior Foundry Co., 56 F.3d 844, 848 (7th Cir. 1995).)

Further evolution of the common law doctrine was halted by the rise of institutional providers of arbitration rules, which included their own provisions on correction and interpretation of awards, the so-called ‘slip rules’. The current practice is dominated by these slip rules, and the default functus officio doctrine is applied only on relatively rare occasions in which no slip rules are agreed between the parties. The content of the slip rules shares a common basis with the functus officio doctrine (as described in Domke above) by generally permitting the arbitrators to correct clerical, typographical or computational errors. A minority of these rules do not go beyond these three categories (e.g., R-50 of the AAA Commercial Arbitration Rules). The majority provides some additional maneuvering space for arbitrators by including an ‘other’ category of errors which may be corrected (e.g., Art. 36 of the ICC Arbitration Rules). Other relatively frequent features are possibilities for parties to request interpretation of an award or an additional ruling on matters which were omitted in the original award. Nevertheless, none of the rules provide much guidance on correction of more substantive errors, such as overlooking an important piece of evidence or misunderstanding of a key legal rule. The question arises: what should an arbitrator do in case such substantive error occurs?

Inspection of the applicable statutory rules does not provide clear guidance as regards correction of substantive errors either. The FAA provisions only offer the above-mentioned judicial correction of awards, which does not extend beyond clerical and computational errors and situations where arbitrators awarded upon a matter not submitted to them. The New York Civil Practice Law and Rules (CPLR) mirror this rule. More interesting is the case law interpreting the statutory provisions (particularly in vacatur cases), in which courts displayed a range of views on addressing ambiguous and erroneous awards. In a number of rulings, the courts recognized arbitrators’ power to interpret their awards (see more on this topic also here) and, in some vacatur cases, even remanded awards to arbitrators for clarification of ambiguities. (E.g., Weiss v. Sallie Mae, Inc., 939 F.3d 105, 111 (2d Cir. 2019).)

Another series of rulings, which took a liberal approach towards arbitrators’ powers to modify awards, concerned interpretation of the institutional slip rules. In the Dempsey Pipe case (T. Co. Metals v. Dempsey Pipe & Supply, Inc., 592 F.3d 329 (2d Cir. 2010)), the Second Circuit considered a case in which the arbitrator reduced an award of damages upon re-appreciation of certain evidence during award interpretation under the ICDR’s slip rule. Although this ‘interpretation’ included a substantive modification of the award and re-consideration of evidence, the court held that the parties delegated power to interpret the slip rule to the arbitrator by adopting the ICDR rules. Therefore, the arbitrator’s interpretation of the slip rule was not subject to judicial review. This approach was followed by the Fifth Circuit in the Southwestern Bell case (Communication Workers v Southwestern Bell Tel. Co., 953 F.3d 822 (5th Cir. 2020)) but not by the U.S. District Court for the Southern District of New York in the Black Diamond Capital case (Credit Agricole Corporate & Investment Bank v. Black Diamond Capital Management, 2019 WL 1316012 (S.D.N.Y. Mar. 22, 2019)), in which the judge did not discuss the Dempsey Pipe case and simply vacated the amended award on the basis of manifest disregard of the law. Furthermore, when considering comparable circumstances under default rules of New York arbitration law, the New York Court of Appeals held in favor of restrictive application of the slip rule. (American Int’l Specialty Lines Ins. Co. v. Allied Capital Corp., 35 N.Y.3d 64 (2020); see more on this topic here.)

The above overview shows that there is a significant lack of clarity as regards the extent of arbitrators’ powers to correct and interpret their awards after an award has been rendered. When an arbitrator identifies an error in her award that does not fall in the clerical, typographical or computational category, there is little to no clear guidance in the applicable slip rules or relevant jurisprudence. Such arbitrator can refuse to correct the error relying on the finality of the award and lack of rules that would allow the correction, which will result in the party aggrieved by the error attempting to request a judicial correction. Alternatively, the arbitrator can correct the error relying on circumvention of the restrictive wording of the applicable slip rule and the Dempsey Pipe case, which will likely result in the party aggrieved by the correction applying for vacatur. Either way, the finality of the award is compromised, and the parties are likely to engage in costly litigation that they tried to avoid in the first place by choosing arbitration to resolve their disputes. This shows that the status quo is unsatisfactory and requires further attention.

The Report proposes a solution to the above-described problem. Since the common law functus officio doctrine is unlikely to evolve further in a world of slip rules, the Report opines that the institutional rule providers should take the lead. Their slip rules should be amended to include a mechanism that would allow arbitrators to “correct any mistake affecting the outcome in the Underlying Award that the party claims arises from oversight, omission or misapprehension of a matter of fact or law presented by one or more of the parties” (the Report, p. 42) in a strictly limited timeframe after rendering of an award (the proposal works with 20 days). The mechanism, named award rectification, should be available on an opt-in basis to allow parties to decide whether this mechanism is useful for the particularities of their dispute. The opt-in would occur at the outset of the proceedings and would require both parties to agree. The Report does not discuss a specific mechanism of how the parties would engage in the opt-in, instead leaving this to be determined by the rule providers. At the earliest, the parties could be required to express their position on the opt-in the request for arbitration and the answer to the request, respectively. At the latest, this issue could be discussed at the case management conference and memorialized in a procedural agreement such the ICC’s Terms of Reference. Rejection of the opt-in may be interpreted as emphasizing that the arbitrators should follow the restrictive language of the standing slip rules. Therefore, either response would provide needed clarity on how an arbitrator should address substantive errors in awards and help parties to avoid post-award litigation.

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The Standard Applicable to Arbitrator Challenges under the MIAC Rules

Sun, 2021-05-16 01:43

In a field as competitive as arbitration, international reputation is earned, not created overnight. In 2021, various judgments of the Spanish Constitutional Court (see here, here and here) have done away with some case law by inferior Madrid courts which favoured an expansive review of awards and compromised the finality of arbitration (see here and here). Spain is back on track.

The creation over a year ago of the Madrid International Arbitration Centre (MIAC) further confirms this direction. Built on decades of experience of three well-established Spanish institutions (the Madrid Court of Arbitration, the Civil and Commercial Court of Arbitration and the Spanish Court of Arbitration), the MIAC consolidates the institutional infrastructure that is required to nourish a fertile arbitration ecosystem. The MIAC has an international mission and seeks to exploit Spain’s strategic location as a natural bridge between Europe and Latin America as well as Africa. It offers services in multiple languages (Spanish, English, French and Portuguese) and aims to be considered at par with other leading arbitral institutions worldwide. The involvement of well-known names in MIAC’s Appointment Committee, the Committee for the Preliminary Examination of Awards and the International Commission (such as Gabrielle Kaufmann-Kohler, Juan Fernández Armesto, Nigel Blackaby or Eduardo Silva Romero) is testament of its pursuit of excellence.

Yet, it is frequently said that an arbitration is only as good as its arbitrators; and it could be added that an institution is only as good as its arbitrations. It is for that reason that the MIAC Rules on appointment, duties and challenge of arbitrators adhere to the high standards followed by other major institutions and epitomised in the Code of Best Practices in Arbitration (2019) of the Spanish Arbitration Club.

This background is relevant to understand the MIAC’s rules on arbitrator challenges.

 

Lack of Independence and Impartiality – A Flexible Approach

According to article 13.1 MIAC Rules:

“Challenges to arbitrators based on a lack of independence, impartiality or any other reason are to be filed with the Centre in a written submission that specifies and substantiates the facts on which the challenge is based.”

A first reading of article 13.1 MIAC Rules could lead to the conclusion that a challenge in a MIAC arbitration will only succeed if supported by evidence that proves “actual” lack of independence or impartiality. This rigid reading, suggested elsewhere on this Blog, seems misconceived.

This post proposes an interpretation of the standard applicable to the challenge of arbitrators based on the high ethical standards and leading practices that inspire the MIAC’s endeavours. Standards and practices which do not support limiting the removal of arbitrators only to “actual” lack of independence and impartiality. Instead, it is generally understood that arbitrators may be disqualified when circumstances exist which give rise to “justifiable doubts” as to the arbitrator’s lack of independence and impartiality. Article 12.1 UNCITRAL Model Law and many arbitration rules expressly require this threshold (i.e., article 12.1 UNCITRAL Arbitration Rules, article 10.1 LCIA Rules or rule 14.1 SIAC Rules).

 

The MIAC Rules Adhere to Leading International Practice

The absence of an express reference to that standard in article 13.1 MIAC Rules does not necessarily mean that evidentiary requirements for the removal of arbitrators depart from, or are higher than, common international practice. Various reasons support this conclusion.

From a comparative point of view, article 14.1 ICC Rules equally omits any reference to the applicable standard to arbitrator challenges:

A challenge of an arbitrator, whether for an alleged lack of impartiality or independence, or otherwise, shall be made by the submission to the Secretariat of a written statement specifying the facts and circumstances on which the challenge is based.”

The ICC Secretariat’s Guide confirms that the mere reference to “lack of independence and impartiality” in the relevant provision is neither an oversight nor a decision to raise the standard. Rather, it is a voluntary omission to retain flexibility:

“The Rules do not provide any guidance on what is to be understood by independence and impartiality. Nor has the Court adopted internal regulations or guidelines on the application of these concepts. While the Court is aware of the importance of consistency in decision making, its main priority is to reach the most fair and effective solution on a case-by-case basis. In this field as in other fields of procedure, flexibility is essential, especially given the different regions and legal traditions involved in ICC arbitration.”1)The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-373. jQuery('#footnote_plugin_tooltip_37361_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Indeed, from a functional point of view, the flexibility built into article 13.1 MIAC Rules permits the consideration of the standard applicable under the law and place of arbitration, and avoids conflicting with them when they are considered mandatory. In fact, the ICC frequently welcomes that information as part of the submissions made by parties in the context of a challenge under article 14 ICC Rules.2)The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-560. jQuery('#footnote_plugin_tooltip_37361_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Similarly, the stage of the proceedings, the quantity and quality of information disclosed by the arbitrator prior to the challenge and even whether the challenged arbitrator was party appointed or not might also impact the institution’s approach to the removal of arbitrators. An adaptable framework like the one found in the ICC and the MIAC rules accommodates such flexibility.

This approach is further facilitated by the inclusion of “other reasons” in the text of article 13.1 MIAC Rules (along the lines of “or otherwise” in article 14.1 ICC Rules). While some might find this formulation too indeterminate, the catch-all clause affords parties the possibility to obtain protection of their due process rights when circumstances exist that might sit uncomfortably with a limited reference to the arbitrators’ duty to remain independent and impartial throughout the arbitration.3)This is also achieved through the addition in article 10.1 MIAC Rules of the requirement that arbitrators, besides remining impartial and independent, “cannot maintain any personal, professional or commercial relationship with the parties”. jQuery('#footnote_plugin_tooltip_37361_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); For instance, this could include an alleged violation of the obligation to disclose important circumstances relating to the arbitrator’s impartiality and independence, as required by article 10.3 MIAC Rules.4)The same applies in ICC Rules. See Herman Verbist, Erik Schäfer, et al., ICC Arbitration in Practice, 2nd edition, Kluwer Law International, 2015, p. 90. jQuery('#footnote_plugin_tooltip_37361_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Precisely because the evidentiary value of a failure to disclose in the context of an alleged lack of independence and impartiality remains a controversial question (see, for instance, the judgment of the UKSC in Halliburton v Chubb, paras. 117-118), the absence of a rigid standard in article 13.1 MIAC Rules, combined with the reference to “other reasons”, allows the MIAC to calibrate the test in light of the circumstances.

In addition, one would imagine that, in giving specific content to the rules on challenges, the MIAC will frequently resort to the standards set by the IBA Guidelines on Conflicts of Interests. While not binding on the Centre and applicable to disclosure rather than challenge, the Guidelines offer valuable assistance in any scenario where the impartiality and independence of arbitrators are doubted. Practice under leading arbitration rules such as the ICC, SCC or UNCITRAL confirms the frequent reliance on the IBA Guidelines5)Karel Daele, Challenge and Disqualification of Arbitrators in International Arbitration, Kluwer Law International, 2012, paras. 5.100-105; and Catherine Rogers, Ethics in International Arbitration, para. 2.86. For the specific case of the ICC, see The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-374. jQuery('#footnote_plugin_tooltip_37361_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and there is nothing to doubt that the MIAC will act any differently.

It is precisely for these common practices that previous comparative studies have concluded that reported disqualification decisions made under arbitration rules which do not clearly spell out the threshold applicable to arbitrator challenges, such as the ICC, are in line with decisions under the UNCITRAL and SCC Arbitration Rules, which explicitly stipulate a justifiable doubts threshold,6)Maria Nicole Cleis, The Independence and Impartiality of ICSID Arbitrators: Current Case Law, Alternative Approaches, and Improvement Suggestions, Brill, 2017, p. 143. jQuery('#footnote_plugin_tooltip_37361_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); so that “challenges based on comparable circumstances are not adjudicated more strictly across the board when a justifiable doubts threshold is applied”.7)Maria Nicole Cleis, The Independence and Impartiality of ICSID Arbitrators: Current Case Law, Alternative Approaches, and Improvement Suggestions, Brill, 2017, p. 185. jQuery('#footnote_plugin_tooltip_37361_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Finally, the fact that the standard of “justifiable doubts” is expressly referred to in the context of the arbitrators’ duty to disclose (article 10.2 MIAC Rules) vis-à-vis the less precise terminology in article 13 is not conclusive that a higher standard is applicable to challenge applications. The distinction is motivated by the willingness of the institution to adopt the most appropriate decision in each case.8)The Prologue of the IBA Guidelines on Conflicts of Interest in International Arbitration, p. iii, recognises expressly that “the standard for disclosure differs from the standard for challenge”. jQuery('#footnote_plugin_tooltip_37361_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_37361_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); To that end, a precautionary standard is applied to the duty to disclose so that parties, co-arbitrators and the institution are informed about all the relevant circumstances that can potentially compromise the arbitrators’ independence and impartiality, thereby avoiding the potentially high costs and significant delays associated with challenges. The rule on removal of arbitrators, in contrast, voluntarily omits the standard so that the appropriate decision, in more or less precautionary terms, can be adopted depending on the circumstances.

 

Conclusion

In conclusion, the MIAC Rules do not establish a higher evidentiary threshold for the successful challenge of arbitrators than the rules of other leading institutions. Nowhere can it be found that the ethos of the MIAC, and those in command thereof, would be satisfied with anything less than complete independence and absolute impartiality. The adaptable framework of the MIAC Rules permits the application of a justifiable or reasonable doubts test when the circumstances so require and is the most effective solution to earn the confidence of MIAC’s users and to contribute toward the legitimacy of arbitration.

References[+]

↑1 The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-373. ↑2 The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-560. ↑3 This is also achieved through the addition in article 10.1 MIAC Rules of the requirement that arbitrators, besides remining impartial and independent, “cannot maintain any personal, professional or commercial relationship with the parties”. ↑4 The same applies in ICC Rules. See Herman Verbist, Erik Schäfer, et al., ICC Arbitration in Practice, 2nd edition, Kluwer Law International, 2015, p. 90. ↑5 Karel Daele, Challenge and Disqualification of Arbitrators in International Arbitration, Kluwer Law International, 2012, paras. 5.100-105; and Catherine Rogers, Ethics in International Arbitration, para. 2.86. For the specific case of the ICC, see The Secretariat’s Guide to ICC Arbitration, 2012, para. 3-374. ↑6 Maria Nicole Cleis, The Independence and Impartiality of ICSID Arbitrators: Current Case Law, Alternative Approaches, and Improvement Suggestions, Brill, 2017, p. 143. ↑7 Maria Nicole Cleis, The Independence and Impartiality of ICSID Arbitrators: Current Case Law, Alternative Approaches, and Improvement Suggestions, Brill, 2017, p. 185. ↑8 The Prologue of the IBA Guidelines on Conflicts of Interest in International Arbitration, p. iii, recognises expressly that “the standard for disclosure differs from the standard for challenge”. function footnote_expand_reference_container_37361_30() { jQuery('#footnote_references_container_37361_30').show(); jQuery('#footnote_reference_container_collapse_button_37361_30').text('−'); } function footnote_collapse_reference_container_37361_30() { jQuery('#footnote_references_container_37361_30').hide(); jQuery('#footnote_reference_container_collapse_button_37361_30').text('+'); } function footnote_expand_collapse_reference_container_37361_30() { if (jQuery('#footnote_references_container_37361_30').is(':hidden')) { footnote_expand_reference_container_37361_30(); } else { footnote_collapse_reference_container_37361_30(); } } function footnote_moveToAnchor_37361_30(p_str_TargetID) { footnote_expand_reference_container_37361_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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Tricky Technical and Quantum Matters for Rising Arbitrators: RAI’s Conversation with Dr. Pablo T. Spiller

Sat, 2021-05-15 01:35

On 21 April 2021, members of the executive committee of the Rising Arbitrator’s Initiative (RAI) hosted a discussion and Q&A session with Dr. Pablo Spiller (Compass Lexecon), who has testified as expert in more than 150 arbitrations across a broad range of sectors over more than two decades. The discussion was led by Paul Tan (Cavenagh Law LLP, Clifford Chance Asia), and the Q&A was led by Flavia Mange (Mange & Gabbay).

Beyond providing attendees with a unique insight into the perspective of one of the world’s foremost economic experts in international arbitration, the discussion offered food for thought for rising arbitrators on not only the best practices that they should look to adopt in the generation and examination of expert evidence, but also on how international arbitration as an industry may benefit from implementing practices that hold experts, and the work they produce, to account.

 

Being ‘Straight’ with Headstrong Clients

The introductory theme of the discussion concerned the client-expert relationship, and its interrelation with the expert’s duties in an arbitration. On being retained for any given arbitration, Dr. Spiller explained that he does not lose sight of the two essential duties that he considers himself bound to: (i) a duty to the arbitral tribunal to be objective and independent, and (ii) a duty to the client to be truthful. On the latter, he explained that clients will commonly have exaggerated views and expectations, and that he is required to inform such clients that their expectations may be unachievable. This is rarely an easy process, given the often strong-headed nature of the individuals in senior roles in multinational industries or governments; however, a “mouthpiece” expert, in his view, will not last long in the industry. Dr. Spiller noted that the smooth collaboration with counsel is important in this effort of managing clients’ expectations.

Dr. Spiller further noted that it may be highly valuable for the client to be provided with an independent preliminary economic assessment, to the extent possible, before any legal proceedings are initiated.  Precisely because often clients have overly optimistic expectations about damages, an independent preliminary economic assessment by a damages expert can help counsel to manage such expectations. He noted that he has observed an increase in this practice since the 2008/2009 financial crisis, and recommended that counsel promote it, in lieu of launching disputes ‘gung ho’.

 

Optimizing the Quality of Expert Analysis

The discussion turned to the respective merits and pitfalls of the use of the ‘adversarial’ system of presenting expert evidence, as contrasted to the use of a sole, tribunal-appointed expert. Dr. Spiller is an advocate of the adversarial approach. In his view, a thorough adversarial process should be seen as akin to a brainstorming session, whereby multiple experts, their counsel, and the arbitrators, work collectively to generate the most comprehensive analysis possible. Dr. Spiller noted that the presence of the counterparty and their respective expert places a utile degree of pressure on each expert to ensure that their analysis is as sound – and therefore impervious to criticism – as possible. That incentive to prove one another wrong, he further noted, leads each side to undertake considerable efforts to produce credible supporting or countering evidence, which adds value to the overall brainstorming process.

A sole tribunal-appointed expert, he conversely considered, is by corollary not under the same pressure as a party-appointed expert to produce a solid, comprehensive analysis. Moreover, in Dr. Spiller’s view, there is simply too much at stake in most arbitrations for the task of presenting a comprehensive economic analysis to fall upon the shoulders of one individual. The “randomness” of the selection process of such expert, and the possibility that a tribunal-appointed expert will be comparatively less receptive to challenge or criticism than a party-appointed expert were other factors he considered to count against the practice of retaining a sole expert.  This, however, must be differentiated from a Tribunal retaining an expert to help the Tribunal on complex matters.

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2021/05/rai-analyzing.m4v

 

In terms of the presentation and examination of oral evidence, Dr. Spiller considered that party cross-examination is “fundamental” and, indeed, “the essence of a hearing”. In his opinion, there is a case to be made that direct examination could be avoided entirely; that is, that under some circumstances it could be more valuable to head straight to cross-examination. “Hot tubbing” can be important, in his view, however it requires a lot of active input from the tribunal to be used effectively. He analogized that often, passive tribunals allow “hot tubbing” to turn into “mud wrestling”, and that all this ultimately leads to is the spraying of mud into the tribunal’s eyes. Effective “hot tubbing”, he submits, is achieved where an active president of a well-prepared tribunal has carefully prepared specific questions and an organized structure for the session, focusing on the main areas of disagreements among the experts.

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2021/05/rai-hot-tubbing.m4v

 

However, for Dr. Spiller, the related concept of a joint expert report between the parties’ experts subsequent to the presentation of their individual reports is rarely illuminating, and seldom leads to a true meeting of the minds. Whereas insignificant divergences may be resolved in them, the central issues will hardly ever be. Moreover, Dr. Spiller noted that there is a risk that the joint expert report becomes a too summarized or incomplete version of the expert reports themselves, with the risk of the Tribunal misunderstanding the respective positions of the experts. Instead, he considers that experts should attempt to increase the quality of their reports by writing more succinctly and to the point (leaving all supporting analysis and material to footnotes and appendices), and clearly identifying the areas of agreements or disagreement with the opposing expert, so that such “joint report” is not required.

 

Greater Scrutiny for Experts?

As the discussion moved onto the pitfalls of the use of expert evidence in arbitration, Mr. Tan asked Dr. Spiller what he thought more arbitrators should be doing to get the most out of it. The key message from Dr. Spiller was that the arbitrator must optimally prepare for the hearing (“preparation, preparation, preparation”), as that is exactly what a good expert will have done. To best contribute to the collective brainstorming exercise, considerable time should be invested into the careful preparation of questions.

With respect to the shortcomings of the present system, Dr. Spiller considered a crucial issue to be the lack of sanctions for the presentation of baseless or untruthful expert evidence. In his view, given the sums usually at stake, it is unsatisfactory for evidence based exclusively on opinion to be presented without the potential for consequences. In this vein, Dr. Spiller suggested that the widespread adoption of a doctrine similar to the Daubert standard (as established in the 1993 US Supreme Court decision of Daubert v. Merrell Dow Pharmaceuticals Inc.) may be an important advancement for international arbitration. That is, Dr. Spiller submitted that international arbitration may benefit from the practice of being explicit when rejecting expert evidence because it considers it to lack scientific basis.

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2021/05/rai-daubert.m4v

 

His advice to arbitrators is not to shy away from giving their views on expert witnesses in their awards. Even if a tribunal’s conclusion is that it lost faith in an expert, Dr. Spiller considers that it would contribute to the advancement of the profession for that to be reflected in the award.

Dr. Spiller, in the subsequent Q&A session, also discussed cases where experts may undertake their economic analyses based on a presumption of a lesser or different liability to that which has been alleged by the claimant party.  That leads to expert testimonies “passing in the night” as each discusses a different claim. He observed, however, that aside from providing an opinion on the claim as presented, often it is best to present damages assessments based on different sets of instructions so as to assist the Tribunal should it decide to accept some claims and reject others.

In response to a question from Ana Gerdau de Borja Mercereau (Derains & Gharavi) concerning the saving of time and costs in situations where the experts adopt different assumptions and methods, Dr. Spiller mentioned that usually an integral part of the brainstorming process is for economic experts to consider and potentially present multiple methods as approaches to any given analysis, noting that there is usually no single foolproof method to tackle an economic question, and that all cases are different.

 

Conclusions

The RAI’s discussion with Dr. Spiller offered rare insights into the perspective of a seasoned economic expert witness in international commercial and investment arbitration. The overall impression left was that a system based on the adversarial process with opposing expert witnesses, that pits expert witnesses against one another, is no bad thing – indeed it is arguably essential to the integrity of the tribunal’s economic analysis. However, Dr. Spiller also warns that in order to ensure such integrity, the arbitrators must necessarily be well-prepared and active participants in the collaborative process. Perhaps most notably, he urges arbitrators not to shy away from criticizing experts in their awards when their work lacks scientific basis, a practice that would benefit the international arbitration practice akin to impact of the Daubert standard in US litigation.

 

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Interviews with our Editors: Crossing the Pacific with Kevin Nash and Adriana Uson of Singapore International Arbitration Centre

Fri, 2021-05-14 01:13

In December 2020, Singapore International Arbitration Centre (“SIAC”) launched its representative office in New York. In April 2021, SIAC announced in its Annual Report 2020 that United States (“US”) parties accounted for 545 of the approximately total 1,000 new cases filed in 2020. We, as Associate Editors for Southeast Asia and North America, are pleased to jointly interview Kevin Nash and Adriana Uson. Kevin is SIAC’s Deputy Registrar and Centre Director, and he assists with the administration of all cases filed with SIAC and the supervision of SIAC’s multinational Secretariat. Adriana is SIAC’s Head (Americas), and she oversees SIAC’s activities in North and South Americas.

 

KG: Thank you Kevin and Adriana for joining us, and hello from Washington D.C.! Please give us a few sentences introducing yourselves to our readers around the world.

KN: Thanks to you both. As a long-time reader of the Blog, it is really fun to get together for this discussion.

By way of background, I am a Canadian who has been based in Singapore and working with SIAC for nearly a decade. During that time, SIAC’s caseload has grown from 188 cases in 2011 to 1,080 cases in 2021. Looking back, I arrived at the most fortuitous time when SIAC’s caseload was ready to launch from the great work of all the founders. It has been an exciting journey for me and the time has passed very quickly.

AU: Thanks for inviting us. Prior to my current role as SIAC’s Head (Americas), I was a disputes lawyer at an international firm in Singapore where I advised and represented clients in international arbitrations and took sole arbitrator appointments. I was also a Case Counsel at the SIAC Secretariat where I administered cases and was involved in the drafting of the SIAC Rules and Practice Notes.

 

BL: What would you say to the observation that institutional rules, SIAC’s included, increasingly look alike? Can you give us any sneak peek at what SIAC is thinking of for its new rules? (*winks*)

AU: In my view, institutional rules are ‘same same, but different’. Institutional rules would inevitably have similarities because of the scope of services offered. There is also, without question, a great deal of institutional sharing and emulation. A good example of this is SIAC’s provisions on early dismissal, which were initially drawn from Rule 41(5) of the ICSID Rules and have thereafter become a standard feature across many sets of commercial rules. The same process occurred with the introduction of the modern emergency arbitrator provisions at ICDR (2006), SCC (2010), SIAC (2010), ICC (2012), HKIAC (2013), and LCIA (2014). That said, there are some differences among these rules depending on an institution’s philosophy on the best way to manage cases. Some institutions have a ‘light touch’ approach while others, such as SIAC, offer more structured administration with full oversight of the process from commencement to the scrutiny of the award. When we dive down into the details, there are also some appreciable differences under each set of rules. For instance, monetary threshold, time for rendering an award, and number of default arbitrator(s) for expedited procedure vary across institutions. Threshold requirements and timelines for appointment and issuance of an order or award also vary for emergency arbitrator provisions.

For any institution, there is always some risk with the promulgation of an entirely new provision but SIAC does have a history of being bold. As to the sneak peek into the future of SIAC Rules, Kevin is leading the SIAC Rules Revision Committee, and might be feeling daring.

KN: I have made this same observation when canvassing other sets of institutional rules and speaking with colleagues at other institutions. Convergence or divergence? Harmonisation or competitive advantage? These are important questions.

From my vantage point, there is an increasing amount of agreed best practice which is codified and given effect in institutional rules. This is a good thing. Of course, when we dive down into the details, as Adriana mentioned, there are some important differences under each set of rules which may be relevant depending on the colour and complexity of any transaction. For instance, Benson, if you are advising on a major infrastructure project, you might suggest SIAC on account of its consolidation provisions which do not require ‘identity of the parties’ across a suite of contracts. You might also propose SIAC and a three-member tribunal to preserve the option to apply for the expedited procedure before a sole arbitrator. No doubt, our friends at other institutions could make similar arguments with equal force.

SIAC’s charge is to strike a balance with these competing considerations in the 7th Edition of the SIAC Rules. We will, of course, find guidance and inspiration in the provisions that have been introduced by other institutions, particularly in view of the challenges brought on by the COVID-19 pandemic and the shift to the virtual space. But, because it’s SIAC, and with apologies for reading down to your question below, you can be sure that SIAC will have that iconic moment of ‘one more thing’ when introducing the 7th Edition of the Rules.

 

BL: SIAC regularly updates its Rules but businesses naturally like long-term certainty and predictability. Do you feel you are like Apple with its first iPhone insofar as you are making rule changes to create a need that users do not know exists or does not exist at all? Or are you addressing needs that don’t exist but are likely to surface in the near future?

AU: As a starting point, I should mention that I am typing this answer on a new iPhone which I firmly believe is both a want and a need. The SIAC Rules 2016 are enormously popular and have been used in the conduct of many thousands of arbitrations. We understand the value of stability and predictability for our users. The 7th Edition of the Rules will bring back many of the familiar features with amendments and tweaks to cater to increasingly complex disputes and the ever-changing commercial environment. Additionally, given the level of interest from the Americas, we are actively soliciting feedback from US, Canadian, and Latin American parties on the features to be included in the Rules (i.e., ‘must have’ and ‘nice to have’). Put differently, the Rules will ‘feel’ the same but will, hopefully, work even better.

KN: This is my fourth rules revision and my third time working with Adriana on the Rules. From this experience, and having reviewed thousands of comments along the way, the best way to draft rules is to listen and really hear what users want from an institution. It is really that simple. For instance, and without tipping our hand to any new provision, the preponderance of user feedback might show that parties would like the ability to commence a single arbitration under multiple contracts. Our job, when we take out our drafting pens, is to come up with a construction that gets to this outcome in a way that is resilient, workable across a range of applicable laws and ‘future proof’.

At a more philosophical, blog-worthy level, when addressing the distinction between wants and needs, and needs that have not yet been realised, many institutional innovations are ultimately designed to preserve and remain faithful to the core tenets of arbitration in an increasingly complex and competitive dispute resolution marketplace. Speedy. Flexible. Cost effective. Choose your deciders. Confidential. Limited avenues for appeal. International enforceability. We are drafting with these first principles in mind (but perhaps with an innovative ‘flourish’).

 

KG: Let’s cross the Pacific and talk about SIAC Americas. Wow! The increase in US parties in new SIAC cases has been particularly sharp! US parties started ranking amongst the top 5 users in 2018. Do you have any insights into the types of disputes or industry sectors where parties in the Americas are increasingly using SIAC Rules? What do you think are the reasons for the success in the past years?

AU: Indeed last year’s numbers were incredible: 1,080 new cases, 1,063 administered cases, 545 US parties. US parties ranked second in SIAC’s top foreign users.

As a global institution, SIAC administers a wide band of disputes including, among many others, international trade, corporate and commercial, construction and engineering, energy, maritime/shipping, banking and financial services, IP/IT, and treaty interpretation. In 2020, for American parties, many of whom operate through subsidiaries in Singapore, we received a high number of cases involving international trade, corporate, and commercial disputes with a range of counterparties from Asia-Pacific and beyond. Additionally, given Singapore’s status as an IP hub, we are receiving more tech cases and disputes arising out of cryptocurrency and fintech.

The reason for this success with American parties really starts and ends with the unique ‘Singapore recipe’ as one of the best and easiest places to resolve disputes.

KN: My first thought is the midnight clause in a conference room. While the institution does not have sight of the negotiation of the dispute resolution clause, it is easy to see how a transaction between an American party and an Asian party would gravitate towards Singapore and SIAC. Many of the US’ top trading partners are jurisdictions which are already frequent users of SIAC such as India, China, Japan and the ASEAN. Singapore is a pro-arbitration, common law jurisdiction with a nearly unrivalled reputation for neutrality and applying the rule of law without fear or favour. And, once we are all travelling again, it is 30 degrees in Singapore every day and there is a gorgeous hearing facility at Maxwell Chambers. Surely, these surroundings would result in at least a few settlements.

 

KG: It is a competitive space amongst arbitral institutions in Asia and North America. What will SIAC do to keep from complacency?

KN: Institutions are judged by the quality of their case management and complacency is a path to Article 34 (UNCITRAL Model Arbitration Law) or Article V (New York Convention). From the standpoint of the SIAC Secretariat, and at the risk of sounding cliché, we are 16 disputes lawyers who love arbitration and work every day to ensure the procedural propriety of SIAC arbitrations.

Many times the Secretariat’s work will be unseen and the takeaway from users is that SIAC arbitrations ‘just work’ and are ‘really efficient’. Other times, in high-value cases of consequence with complex interlocutory applications or novel case management issues, the skill and experience of the Secretariat will be front and centre as we work to keep the arbitration on track. In the fast-moving SIAC Secretariat, we’ve been too busy to think about being complacent and compete against ourselves and timelines.

AU: We don’t really see ourselves in competition with other institutions. For SIAC Americas, we want to be part of the arbitration community in the Americas and work with arbitration stakeholders on capacity building and training, developing best practices, new reforms and policy initiatives, and fine-tuning case management. This is with a view to ‘growing the pie’ for international arbitration and making a bigger tent for diverse participants. We are cognisant that, while the global business community has overwhelmingly selected international arbitration as the preferred mechanism to resolve cross-border disputes, as we move through the COVID-19 pandemic, the competition may come from other forms of dispute resolution such as litigation, mediation, adjudication, expert determination as well as various tiered mechanisms.

 

BL: Finally, finish the joke: “an arbitrator, SIAC counsel, and arbitration counsel walk into an American diner …” 

AU: They order, eat, and split the bill 15/2/83.

KN: As part of SIAC’s robust determination of cost process, I confirm that the Tribunal’s share and SIAC’s share would account for 17 percent of the tab (not including the tip which may be categorised as reasonable out-of-pocket expenses for the Tribunal).

 

Thank you Kevin and Adriana for your time!

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

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LIDW 2021: Corporate Counsel Roundtable on the Top Priorities when Navigating Global Disputes

Thu, 2021-05-13 07:57

In line with LIDW’s promise to deliver exceptional events focusing on international dispute resolution (and London) and give a voice to inhouse lawyers, its eleventh session – on 12 May 2021 – concentrated on corporate counsel’s priorities when navigating global disputes. Kai-Uwe Karl and Loukas Mistelis elegantly moderated the discussion. The speakers – Stephan Balthasar, Glenn Baumgarten, Teresa Garcia-Reyes, Alison Pearsall – brought to the table their views and practical insights on different topics. The discussion focused on litigation, arbitration, and mediation; how to streamline arbitration proceedings to reduce costs and delays; London as an arbitral seat, and whether Brexit might impact it.1) There was another session focusing on the relationship of the in-house lawyer with external counsel and several other sessions also had in-house lawyers as speakers. jQuery('#footnote_plugin_tooltip_37404_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37404_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

As a starting point, in a comparative fashion, the panel discussed the choice between arbitration and court proceedings. For example, Teresa Garcia-Reyes discussed arbitration proceedings’ flexibility and predictability. In terms of flexibility, she referred to the parties’ ability to agree on procedural aspects – the confidential character of the proceedings being a good case on point. Concerning predictability, she mentioned the possibility of using known procedures, which leads to predictable results.

Stephan Balthasar focused on what disputes might be more suitable for arbitration than court proceedings. For example, court proceedings might be more suitable for small and less complex disputes, while more complex and bigger cases might require arbitration and the expertise arbitrators bring about. He also noted that in some instances, when drafting contracts, arbitration may be the only common denominator between the parties, who are willing to avoid their respective national courts. Similarly, Alison Pearsall mentioned that parties consider whether arbitration proceedings might be the best option for any potential future disputes at the time of drafting contracts – with the important insight that most contracts are drafted by business teams and not by in-house dispute lawyers. The possibility of selecting arbitrators with expertise in certain industries would very much weigh in favour of arbitration.

The discussion then moved to the role of mediation in the context of arbitration and why, notwithstanding the confidentiality of mediation proceedings, it appears a great deal of work needs to be done further to promote mediation for the settlement of business disputes. The panel considered whether mediation is only a formal step and when parties should use it. In answering these questions, Glenn Baumgarten suggested that measuring the success of mediation is not an easy task and that the success of a mediation might at times occur at a later stage of the proceedings. Indeed, attempts to mediate disputes early in the process might prove very useful at a later stage. However, this is a result, which is not in line with the need of settling disputes efficiently. Further, he touched upon advocacy in mediations and briefly considered how to incentivise external counsel to conduct meditation successfully.

Picking up on this point, Alison Pearsall discussed whether in-house counsel would need external counsel to mediate; mediation, indeed, does represent the last opportunity for business teams to retain any control over the negotiations and the dispute. Further, she touched upon a further practical point: negotiating proposals with external counsel on their involvement in mediations. A thorough case analysis at the beginning of the dispute is necessary to understand the goal of the business. If the objective is to settle, then providing an uplift for external counsel to conduct mediation within a certain period might be the key to incentivising external counsel. More in general on the use of mediation, Stephan Balthasar pointed out that complex multitier clauses providing mediation are not necessarily the solution and, in fact, might derail the arbitration proceedings. Also, Teresa Garcia-Reyes stressed the importance of lawyers focusing on mediation at the training stage.

Then, the panel discussed whether there is a need to streamline and standardise arbitration proceedings. The speakers answered this question in the affirmative. They all agree on the possibility for arbitral institutions or other organisations to provide a standardised procedural order no 1. Such a solution might offer parties a baseline. For example, Teresa Garcia-Reyes pointed out that such a solution might help bridge the differences between common law and civil law approaches. Although experienced arbitrators might have procedural orders templates, more in general – as noted by Kai-Uwe Karl – such a practice might serve as a helpful starting point to streamline the proceedings, reducing time and costs. Perhaps more importantly, it would help when parties are not familiar with arbitration proceedings. Furthermore, in answering a question from the audience, the speakers agree that inclusion of the possibility of mediating during arbitration proceedings in procedural order no 1 might be a good idea – along the line of the practice before English courts. Loukas Mistelis also noted that standardisation would be a baseline and would not limit the capacity of parties and arbitrators to develop bespoke proceedings, where necessary. Standardisation is a move to more efficiency and transnationalisation of arbitration.

A final point which the panel touched upon was the relevance of London as a seat for arbitration proceedings and whether Brexit will impact it. In line with the findings of the recently published Queen Mary University’s International Arbitration Survey, they confirmed that companies do consider London as one of the main seats for arbitration proceedings. If any, Brexit might improve its relevance in this sense. For example, Glenn Baumgarten noted that Brexit might increase the perception of London as a neutral seat. Stephan Balthasar echoed this point by noting, for example, that parties will not be able to allege breaches of European law in their attempts to set aside arbitral awards before English courts. However, he pointed out that, in general, the selection of the seat of arbitration depends on different factors; for example, one approach might be to look at the rule of law index and select a jurisdiction rather than aprioristically choosing a seat. Even under such standards, London would look very attractive to most parties. Finally, it was noted that given the competitiveness of the dispute resolution market, it is important for London to continue to innovate and remain competitive.

The programme of LIDW is available here, and some sessions are free of charge.

References[+]

↑1 There was another session focusing on the relationship of the in-house lawyer with external counsel and several other sessions also had in-house lawyers as speakers. function footnote_expand_reference_container_37404_30() { jQuery('#footnote_references_container_37404_30').show(); jQuery('#footnote_reference_container_collapse_button_37404_30').text('−'); } function footnote_collapse_reference_container_37404_30() { jQuery('#footnote_references_container_37404_30').hide(); jQuery('#footnote_reference_container_collapse_button_37404_30').text('+'); } function footnote_expand_collapse_reference_container_37404_30() { if (jQuery('#footnote_references_container_37404_30').is(':hidden')) { footnote_expand_reference_container_37404_30(); } else { footnote_collapse_reference_container_37404_30(); } } function footnote_moveToAnchor_37404_30(p_str_TargetID) { footnote_expand_reference_container_37404_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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Germany: Frankfurt Court Permits a Tribunal’s Search for the Truth on the Internet

Wed, 2021-05-12 01:54

“I want the truth!  … You can’t handle the truth!” – Hollywood’s infamous shouting match in “A Few Good Men” may have forever ruined every client’s expectation of a measured cross-examination. But the struggle to ascertain the truth remains real in international arbitration. Tribunals and counsel frequently face the tough question of what exactly they may, or must not, do on their quest for finding the truth. A decision of the Higher Regional Court Frankfurt from 25 March 2021 (26 Sch 18/20) now provides practical guidance.

An Austrian pharmaceutical company specialising in orphan drugs (i.e. drugs for the treatment of particularly rare diseases) had applied for an award to be declared enforceable. The dispute with the defendant, a Taiwanese biotech company, arose from a license and manufacturing agreement regarding a drug for rare forms of blood cancer. In the ICC arbitration, the applicant sought lost profits due to delays in the drug’s approval and market entry. The tribunal found that the defendant had not validly terminated the agreement and ordered it to pay approximately €140 million in damages to the applicant.

In upholding the contested award, the Frankfurt court dismissed no less than seven allegedly grave violations of the defendant’s right to be heard, instructively setting out the German courts’ high standard of review: it is generally presumed that a tribunal has observed its duty to acknowledge and consider a party’s submissions even if it does not expressly address all individual aspects. Where, however, a tribunal does not address the essential core of a party’s submissions on an issue of central importance, there may be a violation, unless the tribunal deems that specific submission legally irrelevant or unsubstantiated.

Beyond that, the Frankfurt court’s decision merits attention because it carefully balances competing considerations of the right to be heard and efficiently establishing the truth: How to deal with late submissions in post-hearing briefs? Is a tribunal permitted to search for information on the internet? At which point does assessing damages turn from a legal into a (forbidden) equitable decision?

 

“I want the truth!” … even if it arrives late

The defendant alleged that the tribunal violated the defendant’s right to present its case when the tribunal ordered that a recently surfaced report questioning the drug’s added therapeutic benefit was not to be discussed at the hearing.

The court dismissed the defendant’s allegation, emphasising that the right to be heard did not encompass the right to be heard at the earliest opportunity, as long as such opportunity was eventually provided. As directed by the tribunal, the parties addressed the contentious report in the two rounds of post-hearing briefs. The court found that the tribunal had thereby preserved the parties’ right to be heard as well as the “equality of arms” principle, as the order had affected both parties in the same manner.

The defendant further argued that it should have been granted an opportunity to respond to a legal opinion on the contentious report, which the applicant had submitted with its rebuttal post-hearing brief.

The Frankfurt court held that it was not entitled to review whether the tribunal had wrongly admitted belated evidence. The court drew an analogy to a corresponding rule of civil procedure restricting such review of lower court judgments. The court explained the rationale for this analogy as follows: the admission of belated evidence serves the purpose of finding the truth; and the general interest in finding the truth trumps the general interest in observing procedural rules regarding delayed evidence. The court found that this reasoning should analogously apply to its review of the award, absent a divergent agreement of the parties.

At first sight, the court’s analogy could be seen to invalidate cut-off dates, and as doing a disservice to efficiency: one party could be incentivised to make belated submissions to save its case at the final hour; the other party might do the same expecting that its opponent’s belated evidence will not be struck.

But that is not the case: tribunals can address belated submissions with the tools already available to them, including rejecting any belated evidence. Yet, once belated evidence has been admitted, the reviewing state court cannot retroactively achieve the failed purpose of the delay rules. (Only) in this situation, the interest in a correct decision indeed outweighs adhering strictly to procedural timetables.

A more questionable aspect of the court’s reasoning is its suggestion that parties can escape the analogous application of domestic procedural law by agreement. In fact, parties to an arbitration agreement consent to applying the lex arbitri (e.g. the 10th book of the German Code of Civil Procedure, GCCP), but not other domestic civil procedure rules. It is thus neither legally necessary nor realistic that parties ever reach a more express agreement to not draw analogies. Ultimately, this additional safety valve provided by the court may be impractical, but it does not undermine an otherwise reasonable analogy.

 

“I want the truth!” … even if I have to search for it on the internet

Next, the defendant alleged that its right to be heard was violated because the tribunal had – more than a month after it had declared the proceedings closed (under Article 27(1) of the ICC Rules) – visited a website of a public health services association. In its damages assessment, the tribunal had then relied on information available on that website regarding “blended price”-calculations for orphan drugs.

The court rejected this objection, citing the tribunal’s mandate “to establish the facts of the case by all appropriate means” (Article 25 of the ICC Rules) and the tribunal’s statutory discretion on procedural rules absent an agreement between the parties (Section 1042(4) 1st sentence GCCP). The court thus confirmed that the tribunal had the power to conduct investigations on its own volition. Emphasising that the defendant itself had referred the tribunal to the website in its submissions, the court pointed out that it was neither alleged by the defendant nor otherwise apparent that the website’s content had changed in the meantime.

The court thereby affirms the power of tribunals to independently establish the facts, which is provided in many modern arbitration rules (see e.g. Article 28 DIS Rules), but is under-used and often overlooked. On close consideration, the Frankfurt court cannot be understood to have written a blank cheque for tribunals googling their reasonings on the internet. Where parties have not referred to a specific website, tribunals should carefully consider whether they need to reopen proceedings to allow parties to comment on their findings.

In fact, the defendant also complained that it had not been aware of the tribunal’s independent investigation and was not given an opportunity to respond. The tribunal’s damages determination should therefore be considered a “surprise decision” in violation of its right to be heard.

Again, the court was not sympathetic to the defendant’s position: a surprise decision could only be assumed where the tribunal had – without prior notice – relied on an aspect that even a conscientious and knowledgeable litigant ought not have expected. Such a litigant had to anticipate that the tribunal could rely on the “blended price”-concept in determining damages, because the concept had recently been recognised by Germany’s Federal Social Court.

Arguably, the reasoning by the Frankfurt court sets a high standard that requires counsel to be aware of all pertinent decisions by any of Germany’s five highest federal courts. The court emphasised that this standard applies regardless of whether either party mentioned that jurisprudence in any submission. The decision thus serves as a reminder to counsel to comprehensively research all relevant jurisprudence (if need be, by engaging local counsel).

 

“I want the truth!” … I do not want any guessing

Finally, the defendant also argued that by arbitrarily estimating damages, the tribunal had unlawfully rendered a decision in equity (rather than law). While the defendant acknowledged that estimating damages was in principle permissible, the estimate had to be grounded on robust and verifiable data – which, in its view, was not the case.

Although the court acknowledged that the parties’ express consent would be required to render an award based on equity (Section 1051(3) 1st sentence GCCP), it did not find the tribunal’s damages assessment to be an equitable decision: by considering all pertinent circumstances and explaining its approach over 19 pages, the tribunal had properly exercised its discretion to engage in fact-finding (Section 1042(4) 2nd sentence GCCP) and ultimately rendered a legal decision.

The court pointed out that the tribunal had methodologically proceeded in accordance with the corresponding rule of German domestic civil procedure that permits courts to estimate damages under certain circumstances (Section 287 GCCP). At the same time, the court confirmed that it was not entitled to further review whether the factual basis for estimating damages had been sufficient or whether the resulting damages were substantively correct.

By drawing this distinction, the court walked the fine line between the permissible review of unauthorised decisions in equity and the impermissible review of a tribunal’s factual and legal assessment. The message to tribunals is thus clear: As long as damages assessments are diligently reasoned and guided by legal principles, they will not be set-aside as decisions in equity.

In summary, the Frankfurt court has not only provided helpful guidance to practical issues but reaffirmed its pro-arbitration stance in enforcement and set-aside matters – that some had doubted after its recent obiter dictum on dissenting opinions (see prior Kluwer Arbitration Blog posts). We will continue to report, as the defendant has appealed the decision to the Federal Supreme Court (I ZP 21/21).

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Efficiency in Arbitration in Australia: A Many Faceted Approach

Tue, 2021-05-11 01:43

Efficiency in arbitration is an area that is discussed so often it almost feels inefficient to discuss it. Indeed, when the Australian Centre for International Commercial Arbitration (ACICA) (in conjunction with FTI Consulting, and with the support of the Australian Bar Association, Francis Burt Chambers and the WA Arbitration Initiative) launched the results of the inaugural Australia-wide arbitration survey, the Australian Arbitration Report (Report) on 9 March 2021, the primary intention was not starting a discussion focussed on efficiency in arbitration. It is the first empirical study of its kind on the use of commercial arbitration in Australia. The culmination of analysis of survey results yielded from information provided by 111 respondents, including data in relation to 223 unique arbitrations with an Australian connection comprising AU$35 billion in disputed value, a copy of which can be found here.

However, the data provides real insight into how Australian parties, arbitrators, legal representatives and companies with Australia-based projects are conducting arbitrations, drafting arbitration agreements, and their sentiments about arbitration. It is clear from the Report that many factors affect the overall efficiency of arbitration, and in turn, users’ sentiment of the arbitration process. The conclusions drawn from the Report and this article are not limited to Australia – they can apply to other jurisdictions.

 

Australian arbitration – increasing the regional focus

At the launch of the survey’s results, the Honourable Amanda Stoker, Assistant Minister to the Attorney General of Australia, noted the developments leading to Australia becoming an attractive seat for international arbitration in the Asia-Pacific region. The Report indicated that many of the users of arbitration with an Australian connection recommend seating their arbitrations in Singapore, London, Hong Kong and Australia, in that order. While some of this preference might be due to Australian-connected parties desire to choose a neutral seat, it may also be part of what is often called the ‘tyranny of distance’ that Australia faces due to its location.

The increased use of technology and virtual hearings arising out of the COVID-19 pandemic is enabling Australia to overcome this ‘tyranny of distance’. Together with Australia’s newfound accessibility, as Minister Stoker said, the Report highlights that ‘geopolitical developments have provided a pathway for Australia to increase its profile in the Asia-Pacific region’. Not only will the opportunity for Australia to better engage with its regional neighbours have a profoundly positive impact on its status as an attractive seat for international arbitration, it would also allow specialisation of Australian arbitration users in disputes of this kind.

 

The type of case – a key element of efficiency

The type of disputes most prevalent in Australia is likely influenced by the fact that Australia and some neighbouring nations have natural resources that are located at a distance from ports, requiring large construction projects to access them. As a result, the profile of Australian cases is often thought to be construction and engineering focussed. This is reflected in the data, with construction cases accounting for almost half of all the arbitrations reported by the respondents. However, the Report’s data reinforces the prevalent status of oil and gas, mining and resources, and transport expertise (Fig. 9).

Separately, the data shows that arbitration in the oil and gas industry consists of a relatively small number of cases with large values in dispute, while arbitrations in the construction industry consist of a relatively large number of cases with relatively smaller amounts in dispute.

For these disputes, parties with an Australian connection are using institutions and rules that are both global, like the ICC (~ $10 billion AUD) or UNCITRAL rules (~ $9 billion AUD), or more regional such as SIAC (~$8 billion AUD), ACICA (~$2 billion), HKIAC (~$1 billion AUD).

The characteristics of the arbitrations are important because they help to frame how parties and arbitrators conduct their disputes. The institution administering the dispute may have an effect on the composition of the tribunal.  Parties are influenced in how they run their dispute by the value (either monetary or otherwise). Certain industries have higher value disputes (among these being construction, oil & gas, which are both prevalent in Australia and the region).

 

The arbitration process – the effects of matter size

One of the outcomes that we learned from the Report was the relationship between mediation and settlement. The propensity to settle appears to correlate with the amount in dispute, whereby the probability of settlement substantially dropped as matters approached AU$100 million in disputed value. As there was a limited subset of data, the tendency of matters with smaller amounts in dispute to settle does not necessarily correlate to matters that are conducted through a mediation process having a greater likelihood of settlement. However, the data showed that mediation during the arbitration process did not correlate to settlement.

When parties did reach the award, for the most part, these awards were satisfied, at least partially.

Similarly, the Report indicates a correction between value of dispute and number of hearing days (with the average number of hearing days being less than two for a dispute worth $500,000 AUD, and an average of 15 for disputes worth $500,000,000 AUD. The number of hearing days correlates to costs, both tribunal costs, and external legal costs (which, according to the Report, account for almost half of the costs of arbitration). All of these factors are heavily influenced by who has been appointed as arbitrator.

 

Tribunal composition – the Tribunal’s influence on proceedings

Some of the respondents commented in the survey that they felt that the pool of arbitrators was too shallow. Additionally, respondents indicated that they chose arbitrators based on previous experience, familiarity, and reputation.

The Report also highlighted the room for improvement for diversity in arbitration, particularly as regards female arbitrators. While the data revealed an overwhelming proportion of party appointments going to male arbitrators, institutional appointments were substantially more likely than party appointments to be female arbitrators. The survey did not cover other points of diversity.

This choice is likely linked to the value of the dispute and type of dispute. The higher the value of dispute and or amount of factual analysis required, the more likely there will be numerous witnesses (expert and lay), thereby creating a longer hearing. The value in dispute will also make parties consider arbitrators with certain experience levels who they think can handle the voluminous material and complexity. Many of these arbitrators may be experienced in subject matter areas or be experts in legal analysis rather than arbitration procedure itself. If an arbitrator is not as familiar with the flexibility and options available within arbitration, then the choice in arbitrator likely impacts the length and cost of the overall proceeding.

 

User sentiment and the reasons why arbitration is chosen

Interestingly, the freeform comment field in relation to common complaints with arbitration indicated that arbitration too often resembled litigation.  By participating in such proceedings, respondents were losing one of the key values, flexibility, which they felt arbitration added.

This sentiment is consistent with the circumstances in which arbitration is chosen by users with an Australian connection. The Report indicated that respondents view the key benefits of arbitration to be enforceability, confidentiality, and flexibility (in that order). Arbitration has provided parties the autonomy to choose how and with whom they resolve their disputes, tailoring procedures to their requirements without compromising the fundamental principles of due process, natural justice, and finality. However, if the proceedings were more flexible and less expensive, then these factors might not have been as low on the list on why arbitration was chosen in the first place.

 

 Conclusion

The Report indicates that the issue of efficiency is one that spans the entire process of arbitration and is influenced not just by the choices parties make (eg how they run their case, who they choose as arbitrator) but also the market within which they operate.

What is incumbent upon arbitration practitioners is to search for efficiency in every matter that they are involved in: to try to minimise costs, encourage settlement and choose the right arbitrator for the dispute.

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LIDW 2021: London and the New, Decentralised Disputes Resolution Landscape

Mon, 2021-05-10 07:13

London International Disputes Week (LIDW) 2021 commences today and promises to deliver – in an online format, this time – a week full of exceptional events focused on dispute resolution (and London). As such, and as in 2019, LIDW focuses on more than just arbitration.

The second session of the first day of LIDW 2021, 10 May 2021, discussed London and the new, decentralised disputes resolution landscape and was chaired by Dame Elizabeth Gloster DBE. The speakers, Julian Acratopulo, Clifford Chance; Maria Gritsenko, VEON; Professor Dr Jacomijn van Haersolte-van Hof, LCIA; John Howell OBE, MP; Oliver McClintock, Opus 2, brought comprehensive and unique views on the topic. The discussion covered how litigation, arbitration, ADR and other dispute resolution methods have adapted to the new decentralised landscape. Furthermore, the panel explored whether the venue of the court, tribunal or seat matters and what, in particular, London offers to the global disputes community in the new, decentralised landscape.

One question to the panellists focused on the types of disputes heard or dealt with in London and the dispute resolution methods used. In answering this question, Jacomijn van Haersolte-van Hof highlighted that London is not only big, but also fragmented and there are various arbitration centres in London. For LCIA, the top three sectors that populate the arbitration case load are banking and finance, commodities and energy related disputes. This is partly because of the popularity of English law and secondarily of London as a seat of arbitration. Julian Acratopulo explained that when it comes to litigation, the English courts, in addition to the types of disputes mentioned before, see aviation and insurance related disputes, as well as M&A disputes, in particular in the context of covid-19 pandemics. London, Julian Acratopulo added, also remains the preferred choice for disputes involving CIS and former CIS countries. Jacomijn van Haersolte-van Hof added that the 2020 LCIA statistics, to be released soon, show that 1/3 of the cases involve Russian parties. Maria Gritsenko made the point that companies prefer London, irrespective of the type of dispute, and English law is also widely used. John Howell OBE referred to the Parliamentary Group on Alternative Dispute Resolution and the need to extend ADR to different areas, such as planning, as well as the implementation of conflict avoidance boards.

Another question addressed by Dame Elizabeth Gloster DBE to the panellists focused on the changes in the past months in the aftermath of Brexit and covid-19, and whether it is a change for better or for worse. Oliver McClintock referred to these changes as being to the better, at least from a technology point of view. There have been two major swifts in technology adoption: increased use of technology by legal teams and the wider adoption of virtual or hybrid hearings at an unprecedented scale. On the latter point, Oliver McClintock highlighted that the UK courts, at the early stages of the pandemic, committed to remain open and that proceedings would continue through the use of technology, including in complex trials. As a direct consequence of the increased use of technology, one could see in the past months significant investment in technology, from courts to arbitration centres and law firms, and also new hearing venues becoming fully prepared for online or hybrid hearings. The prediction is that smaller matters, such as case management conferences, will remain fully virtual, and that hybrid hearings, with few participants in the room and the majority joining remotely, will become the new normal. Because of this, venue or hearing centres will continue to be relevant and the sophistication of the venue becoming even more important, to be able to address the complexities of the technical requirements for this type of hearing. Nonetheless, larger, more complex hearings will be conducted in person. For Maria Gritsenko, some return to in person contact is important for meeting clients and experts, while work can continue remotely in most of its part. John Howell OBE highlighted the difference between arbitration and mediation in this online setting, mediation being more difficult to conduct, as it is a more intimate process in which the live, direct reaction of people is very important.

On the question of what London has to offer to the global disputes community and how this differs from other jurisdictions, Maria Gritsenko pointed out that London remains a preferred seat because of a combination of various factors, such as familiarity with London, the competence and integrity of London arbitration and courts, as well as the constant innovation of the processes. For John Howell OBE, the Parliament works to improve the position of London on the international disputes map, one example being the recent private international law act which would enable the UK to sign related international instruments, such as the Singapore Convention on Mediation. For Julian Acratopulo and Professor Dr Jacomijn van Haersolte-van Hof, it is important that London benefits from the support of the government and judiciary, in particular in developing arbitration and mediation.

 

The programme of LIDW 2021 is available here and some sessions are free of charge.

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Regulating Party-Appointed Experts: How to Increase the Efficiency of Arbitral Proceedings

Mon, 2021-05-10 01:46

Arbitration proceedings most often involve complex disputes, where technical issues require specific technical, scientific, legal or financial expertise, leading parties to appoint one or more experts to support their position and assist the arbitral tribunal. The 2018 LCIA Note on Experts in International Arbitration reported that, out of some 300 new arbitrations registered each year by the LCIA, “[m]ost, if not all, involve the use of experts”.

This post focuses exclusively on party-appointed experts and has been triggered by an observation of the lack of specific regulatory framework and the inefficiency to which it leads. The proposed solution is to have a series of specific duties and obligations applicable to party-appointed experts in order to enhance their role in international arbitration and increase said efficiency.

 

The Lack of a Regulatory Framework Applicable to Party-Appointed Experts

Most national laws and institutional arbitration rules set out specific provisions for tribunal-appointed experts but these rules do not apply to party-appointed experts.

Party-appointed experts are acknowledged by most arbitral institution rules, which either allow parties explicitly to appoint them or refer to this right implicitly, by reference to the possibility to have witnesses (e.g., Article 27(2) of the 2013 UNCITRAL Rules, Article 25(2) of the 2021 ICC Arbitration Rules, Article 20(1) of the 2020 LCIA Arbitration Rules, Article 33(1) of the 2017 SCC Rules, Article 25(1) of the 2016 SIAC Rules 2016). However, such acknowledgement is not accompanied by a list of duties and obligations of party-appointed experts, offering no guidance as to how experts should be managed effectively.

National laws do not contain more detailed provisions on party-appointed experts either. They solely refer to tribunal-appointed experts (the 2006 UNCITRAL Model Law 2006, the Singapore International Arbitration Act 1995, or the UK Arbitration Act 1996).

The notable exception is Rule 35.3 of the UK Civil Procedure Rules which expressly states that

1. [I]t is the duty of an expert to help the court on the matters within its expertise.

2. This duty overrides any obligation to the person from whom he has received instructions or by whom he is paid.

 

Although the guidance offered by this provision is limited, to the best knowledge of the authors it is the most detailed national provision to date.

 

A Multitude of Soft Law Instruments containing Specific Provisions applicable to Party-Appointed Experts

By contrast, the above vacuum within arbitral rules and national laws is not mirrored within soft law instruments. Indeed, there are several soft law instruments which include more detailed provisions applicable specifically to party-appointed experts.

Among the most relevant such instruments are the 2021 IBA Rules on the Taking of Evidence (IBA Rules), the 2006 ALI / UNIDROIT Principles of Transnational Civil Procedure (ALI/UNIDROIT Principles), the 2007 CIArb Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration (CIArb Protocol), the 2019 Code of Best Practices in Arbitration of the Spanish Arbitration Club (SAC Code).

Professional organizations to which experts belong have also been publishing code of conducts  setting out ethical rules for their members when serving as witnesses in dispute resolution proceedings. For example, the Academy of Experts, the Expert Witness Institute and Euro Expert, have jointly promulgated 2001 Code of Practice for Experts, which imposes duties on experts, whether tribunal- or party-appointed, of “impartiality, objectivity and integrity” as well as the duty to “take no act that would compromise the expert’s duty to the arbitral tribunal”. Also, the American Society of Civil Engineers, the American Institute of Certified Public Accountants, the American Society of Appraisers have all published such codes of conduct.

Some of the most often encountered duties and obligations of party-appointed experts provided for in these soft-law instruments are detailed below.

 

Duty of objectivity and independence

Art. 22(4) of the ALI/UNIDROIT Principles states that “[a]n expert, whether appointed by the court or by a party, owes a duty to the court to present a full and objective assessment of the issue addressed.” Equally, the Commentary to Article 3 of the CIArb Protocol, which closely follows the practice of the CPR Art. 35, states that “experts should be instructed by the parties that their overriding duty is owed to the tribunal and not to the instructing party”. Article 4 then goes on to state that “[a]n expert’s opinion shall be impartial, objective, unbiased and uninfluenced by the pressures of the dispute resolution process or by any Party”, and that “[a]n expert’s duty, in giving evidence in the Arbitration, is to assist the Arbitral Tribunal to decide the issues in respect of which expert evidence is adduced”.

The most elaborate provisions in this sense are found Arts. 133 – 134 of SAC Code which requires that “[e]xperts must be objective and independent”, explaining further that “[t]he qualities of objectivity and independence require that experts possess the willingness and capability to perform their role, are guided by the truth and report, not only aspects that are favourable to the party that has appointed them, but also those adverse to it, and maintain an objective distance from the appointing party, the dispute, and other persons involved in the arbitration”.

 

Duty to submit a declaration of objectivity and independence

Article 5 (2) of the IBA Rules lists the elements that should be contained in the expert report, among which, letter c) “a statement of his or her independence from the Parties, their legal advisors and the Arbitral Tribunal” clarified in the Commentary to the IBA Rules “for example in the sense that he or she has no financial interest in the outcome or otherwise has relationships that would prevent the expert from providing his or her honest and frank opinion”.

The template for the expert declaration in Article 8 of the CIArb Protocol also requires that the party-appointed expert submits a declaration attesting to the latter’s objectivity. The SAC Code also refers to the party-appointed expert’s ‘declaration of objectivity and independence’ (Article 137) and contains a template statement.

 

Duty of disclosure

Under Article 5.2(a) of the IBA Rules, a party-appointed expert is required to describe “his or her background, qualifications, training and experience”, and also to disclose “any and all relationships he or she may have with the parties, their legal advisers and the arbitral tribunal”. In similar terms, Article 4.4(b) of the CIArb Protocol also requires that the expert should “state any past or present relationship with any of the Parties, the Arbitral Tribunal, counsel or other representatives of the Parties, other witnesses and any other person or entity involved in the Arbitration”.

The disclosure obligations in SAC Code are particularly elaborate and are contained in Articles 139-145. Party-appointed experts must “disclose any circumstance which … may give rise to justifiable doubts as to their objectivity and independence” (Article 140). Such duty is “ongoing” (Article 141), requires that experts “carry out an inquire into their past and present relationships with the persons involved in the arbitration and with the dispute” (Article 144), and there is a preference in favour of disclosure should an expert be “unsure whether a circumstance can reasonably give rise to justifiable doubts about his or her objectivity and independence” (Article 143).

 

Mandatory elements to be included in the expert report

A minimum set of elements to be included in the expert report is identified in Article 4(4) of the CIArb Protocol (elements numbered from (a) to (l)), Article 5.2 of the IBA Rules (elements numbered from (a) to (i)), and Article 146 of the SAC Code (elements numbered (a) to (g)).

 

An obligation of confidentiality

An obligation of confidentiality is also imposed in Articles 152-153 of the SAC Code, which oblige party-appointed experts to “keep confidential any information that they learn in the arbitration proceedings”.

 

References to Fees

 The ALI/UNIDROIT Principles include the party-appointed expert’s fees in the costs of the arbitration which may be awarded to the winning party (Article 25.1). From a different perspective, Article 4(2) of the CIArb Protocol specifies that “[p]ayment by the appointing Party of the expert’s reasonable professional fees for the work done in giving such evidence shall not, of itself, vitiate the expert’s impartiality.”, while under Articles 150-151 of the SAC Code the professional fees which the parties pay to the party-appointed expert shall in no case “have a variable component that depends upon the outcome of the arbitration”.

 

Available Remedies against Party-appointed Experts

The role of party-appointed experts is to assist the arbitral tribunal in its reasoning and ultimately its decision-making process. Although one could assume that on technical issues there could hardly be any room for interpretation, in practice each party appoints an expert able to reach a different conclusion than the expert of the other party. Parties have an opportunity to test the other party’s expert during the cross-examination at the hearing, but the arbitral tribunal is left with the delicate and often challenging task of assessing the value of two wildly different professional opinions on the same nucleus of operative facts.

If a party intends to formally challenge an expert appointed by the other party, in the absence of any specific duties and obligations, the grounds upon which it may mount a successful challenge are unclear; it is ultimately left to the arbitral tribunal to assess the evidence brought by the parties and decide if a disqualification measure is appropriate. As a matter of fact, and to the best knowledge of the authors, there are no successful disqualifications of expert witnesses in the public record.

Among the grounds invoked by the parties in their requests are the following: access to confidential and privileged information (Bridgestone v. Panama, para. 8; Flughafen v. Venezuela, para. 13), and failure to disclose such access (Bridgestone v. Panama, para. 9), failure to disclose professional relationships (Italba v. Uruguay, para. 135, Bridgestone v. Panama, para. 6), bias (Luxtona Limited v. Russia (PCA), para. 14), lack of qualifications (Luxtona Limited v. Russia (PCA), para. 15; von Pezold v. Zimbabwe, para. 804), lack of independence (von Pezold v. Zimbabwe, paras. 804, 806; Mobil Exploration v. Argentina, para. 2), impartiality (Mobil Exploration v. Argentina, para. 2). The threshold of breach for each of these grounds is not yet clear, although in the case of challenges of bias, actual bias as opposed to apparent bias is required (Luxtona Limited v. Russia (PCA), para. 26).

Parties and tribunals found guidance in soft law instruments such as the IBA Rules Article 5(2)(a) and (c) (Italba v. Uruguay, paras. 135 and 156; Bridgestone v. Panama, para. 19) or reports – the claimant in Flughafen v Venezuela referred for example to the 2015 ICC report on Issues for Arbitrators to Consider Regarding Experts 2015 (Flughafen v. Venezuela, para. 18).

In practice, arbitral tribunals either acknowledge their competence to decide on disqualification requests (often on general provisions such as ICSID Convention Article 44) or decide to tackle this issue as part of the assessment of evidence presented by the parties. Tribunals have based their competence to decide on requests for disqualification of expert witnesses under Rules 19 and 34(1) of the ICSID Arbitration Rules (Flughafen v. Venezuela, paras. 22 and 34, see also Bridgestone v. Panama, endorsing the approach adopted by the tribunal in Flughafen v Venezuela, para. 13). However, one tribunal considered the disqualification of an expert witness to be a disproportionate measure (Mobil Exploration v. Argentina, para. 39).

Most tribunals have opted to consider any parties’ arguments related to party-appointed experts at the stage of  assessing the evidentiary value of  the experts’ reports (Bridgestone v. Panama, para. 16; von Pezold v. Zimbabwe, para. 807; Flughafen v. Venezuela, paras. 34 and 40). It is worth mentioning, at a different level, an interesting decision rendered by an ICSID Annulment Committee which annulled for the first time an award on grounds of improper constitution of the tribunal, finding that one of the arbitrators failed to disclose a relationship with the claimant’s damages expert, creating a manifest appearance of bias (Eiser Infrastructure Limited and Energía Solar Luxembourg S.à r.l. v. Kingdom of Spain, ICSID Case No. ARB/13/36, paras. 225, 228, 256). Importantly, the Committee abstained from expressing any view on whether the expert owed a concurrent duty of disclosure, since even if the expert had done so, this would not have relieved the arbitrator from his disclosure obligations as an arbitrator (para. 228). A similar application for annulment was made in the case of TECO Guatemala Holdings, LLC v. Republic of Guatemala, ICSID Case No. ARB/10/23, for which however the Annulment Committee’s decision has not yet been made public.

 

Concluding Remarks

A few conclusions may be drawn from the above:

  • the use of expert-witnesses is growing, as a result of the increased complexity and technicality of arbitral disputes;
  • the role of party-appointed experts is to assist the tribunal in reaching a decision on complex and technical issues beyond its expertise;
  • accordingly, experts – even when appointed by a party – should be objective and independent and present an unbiased view to the tribunal, otherwise tribunals risk grounding their decisions on flawed opinions or disregarding the expert report altogether;
  • just like tribunal-appointed experts, party-appointed experts should therefore conform to certain standards of conduct. Few provisions however refer to party-appointed experts and no clear duties and obligations could be identified in the institutional rules or national laws. By contrast, many soft law instruments exist;
  • as a result, the remedies against experts appointed by the parties are limited and tribunals are left with the delicate and often challenging task of assessing their competence to decide such issues, as well as assessing disqualification requests or the weight of two different professional opinions against no clear duties and obligations;
  • when in doubt, tribunals often prefer not to rely on experts’ testimonies or reports, thus rendering fruitless the parties’ efforts to resort to experts, both in terms of time and costs.

 

In this context, a clear body of rules addressing the duties and obligations of party-appointed experts would result in more remedies for the parties and as a consequence, strengthen their role and the value of their testimonies and reports which tribunals could safely rely upon.

 

 

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Costa Rican Supreme Court Enforces against Non-Signatory

Sat, 2021-05-08 01:42

On February 28, 2021, the First Chamber of the Costa Rican Supreme Court (“the Court”) confirmed a US$ 23 million ICC award won by Panama-registered Hidroeléctrica San Lorenzo S.A. against Saret de Costa Rica S.A.

When it comes to the recognition and enforcement of foreign arbitral awards, Costa Rica is party to relevant international conventions, but has also recently enacted domestic legislation that regulates this matter further. Costa Rica ratified the Inter-American Convention on International Commercial Arbitration (the “Panama Convention”) in 1998, and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention”) in 1988. Additionally, Costa Rica’s International Commercial Arbitration Law is based on the UNCITRAL Model Law with the 2006 amendments.

In 2018, Costa Rica enacted a new Code of Civil Procedure in which it included provisions related to the recognition and enforcement of foreign arbitral awards. These provisions added a thin layer of confusion to the legal interpretation because these new provisions seemed to forget the regime already in place via the instruments mentioned above.

The Costa Rican Supreme Court, as the judicial authority in charge of deciding all applications for recognition and enforcement of foreign awards, has the prerogative to decide how the interplay between all of these legal instruments will play out. In certain decisions, such as the one discussed here, the Court limited its analysis to the Civil Procedure Code, and did not mention the other (very) relevant instruments pertaining specifically to the enforcement of foreign arbitral awards.

 

Background to the Dispute

Hidroeléctrica San Lorenzo S.A. filed a request for arbitration in December 2014 for breach of contract against Saret de Costa Rica S.A. and Grupo Corporativo Saret de Panamá S.A. The case was decided by an ICC tribunal – sole arbitrator Fernando del Castillo – seated in Panama City.

Hidroeléctrica San Lorenzo (HSL) and Saret de Panamá entered into a contract to construct and exploit the San Lorenzo Hydroelectric Central located in the Fonseca River in the Province of Chiriquí, Panama. The dispute related to various claims for breach of contract.

Hidroeléctrica San Lorenzo alleged that the Respondents willfully breached the contract, intentionally harming HSL. Additionally, HSL submitted that Saret de Panamá and Saret de Costa Rica acted together in the execution of the works, which is why their actions should be considered as a unit.

On April 11, 2016, the tribunal issued a Partial Award on Jurisdiction (the “Partial Award”) in which it decided that it had jurisdiction and could hear claims against both Saret de Panama and Saret de Costa Rica. Saret de Costa Rica argued that it was not a party to the contract, and therefore, had not agreed to be bound by the underlying arbitration agreement.

In its decision, the tribunal explained that in general terms, Panama’s Arbitration Law expressly established the competence-competence principle. Additionally, the tribunal pointed that the “Sala Cuarta de Negocios Generales” of the Panamanian Supreme Court had previously allowed the extension of the effects of an arbitration agreement to non-signatories in other cases.

In particular, the tribunal decided that the following elements were necessary in order to determine its jurisdiction over Saret de Costa Rica: i) the existence of a corporate group, ii) the non-signatory’s participation in the preparation and negotiation of the contract, iii) the non-signatory’s participation in the drafting of the documents on which the dispute was based, iv) the non-signatory’s participation in the performance of the contract, and, if applicable, in its termination, and v) the presumption that the non-signatory had previous knowledge of the arbitration agreement. Ultimately, the tribunal considered that Saret de Costa Rica met all the requisites.

Saret de Costa Rica sought to set aside the Partial Award before the Supreme Court of Panama, but the challenge was ultimately rejected.

On October 20, 2017, the tribunal issued the Final Award in which it granted Hidroeléctrica San Lorenzo S.A. approximately US$ 23 million in damages plus interest. Saret de Costa Rica tried to set aside the Final Award before the Supreme Court of Panama, but the Court also upheld the Final Award.

 

Costa Rican Proceedings

Hidroeléctrica San Lorenzo S.A. requested the enforcement of the Partial Award and the Final Award mentioned above before the First Chamber of the Costa Rican Supreme Court.

In its analysis, the Court highlighted the fact that it did not have jurisdiction to reopen the discussion on the merits of the case, but rather its reach was limited to the verification of the requirements established in Article 99.2 of the Civil Procedure Code.

Saret de Costa Rica opposed the enforcement by alleging: i) the incorrect application of the arbitration clause; ii) the lack of consent to the arbitration agreement; iii) lack of due process; iv) infringement with respect to the constitution of the arbitral tribunal and the arbitral procedure; and v) the existence of a pending litigation in Costa Rica.

With respect to the first two claims, Saret de Costa Rica argued that it was not a party to the arbitration clause, and that it never expressed consent in a way that would allow the tribunal to extend its effects to it. The Court explained that this point was already studied and decided by the arbitral tribunal in the Partial Award and by the Supreme Court of Panama, so it was not up to the Court to review it again.

As to the lack of due process argument, Saret de Costa Rica submitted that Hidroeléctrica San Lorenzo S.A. did not comply with the conflict resolution phase provided for in the contract before submitting a claim to arbitration. Here, the Court again explained that this pertained to the merits of the case and was an argument that was already rejected by the Panamanian judicial authorities. The Court also used this explanation to reject the fourth claim, that also had to do with the general arbitration procedure.

As for the final claim regarding a pending litigation in Costa Rica, the Court rejected it because the complaint for the parallel litigation was filed by Saret de Costa Rica against Hidroeléctrica San Lorenzo S.A. on the same day that that it filed its response to the petition for enforcement. The Court added that in order for this to be an obstacle for the recognition and enforcement of an award, the parallel procedure must be filed before, not after, the petition to enforce.

 

Conclusion

The Court finally rejected Saret de Costa Rica’s arguments and enforced the Partial Award and the Final Award in Hidroeléctrica San Lorenzo S.A.’s favor. This decision shows that Costa Rica’s Supreme Court is respectful of international arbitration and of the relevant authorities in charge of addressing matters such as the ones raised by Saret de Costa Rica. In its decision, the Court limited the scope of its analysis and generally deferred to the arbitral tribunal’s and the Panamanian courts’ decisions.

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Arbitration and Public Contracts in Brazil: The New Government Procurement Act

Fri, 2021-05-07 01:43

Introduction

On April 1st, the new Government Procurement Act (“GPA”) came into force (Law n. 14,133/2021). The new Act brings many positive changes to the processes of tendering and bidding conducted by state entities. Its legal provisions intend to bring greater legal certainty for those who want to invest in large projects in Brazil led by the Federal, State or Local Governments. A remarkable novelty within the Act is a chapter exclusively dedicated to dispute resolution (ss. 151 to 154), which reinforces Brazil’s arbitration-friendly framework.

As many readers may know, Brazil has not yet signed the ICSID Convention, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or BITs with investor-state dispute settlement mechanisms. Unlike the vast majority of countries, Brazil believes that it does not need to sign any investment treaties to attract foreign investment. Therefore, the new GPA is designed to establish most of the rights of investors interested in playing a part in a market that generated roughly USD 72 billion from 2017 to 2020.

The new Act expressly encourages parties to public contracts to solve their disputes by non-judicial methods, notably conciliation, mediation, dispute boards, and arbitration. The legislator wanted to make explicit that parties may deploy these different mechanisms for resolution of conflicts arising from public tenders and contracts based on Law n. 14,133/2021. It is important to note that such methods can be used not only in new public contracts, but also in pre-existing public contracts. An express provision makes it clear; therefore, that mediation can be initiated, for example, to resolve any outstanding issue. Likewise, arbitration can be adopted to solve a dispute related to a state contract signed before the enactment of the new GPA.

 

Particular features of arbitration in public contracts

With regard to matters that can be taken to arbitration (i.e., objective arbitrability), the sole para. of s. 151 limits them to negotiable and pecuniary matters, which means, for example, non-performance of obligations, economic imbalance of contracts, assessment of damages due to breach of contracts etc. Basically, the only limitation rests on matters in connection with the narrow concept of acta iure imperii.

Unlike arbitrations between private parties, arbitrations involving public contracts must be decided by applying statute law, as set forth in the first part of s. 152 of the GPA. In other words, parties to public contracts are prohibited from adopting ex aequo et bono arbitration. Likewise, arbitral tribunals cannot render their decisions based on usages of trade or general principles of law or lex mercatoria. The same provision can be found in para. 2 of s. 2 of the Brazilian Arbitration Act (“BAA”).

In addition, arbitrations involving public contracts are not confidential, but public, pursuant to the second part of s. 152 of the GPA. Indeed, publicity is a principle provided for in s. 37 of the Brazilian Constitution, which seeks to safeguard better control of the Public Administration, i.e., public accountability. Again, the same requirement is set forth in para. 2 of s. 2 of the BAA. It is important to say, however, that in some circumstances the law imposes confidentiality, as for example when the arbitration involves contracts containing national security issues.

As for the arbitrators, the GPA does not demand any specific personal requirement, not even nationality, years of experience, or qualification in Brazilian law. In other words, it is a market open to foreign arbitrators, not only Brazilian ones. In this regard, s. 154 only mentions that the process of choosing arbitrators or arbitral tribunals should be based on technical, fair and transparent criteria. In practical terms, this process will follow the provisions contained in institutional rules of arbitration, where, in general, one arbitrator is nominated by the claimant, the other one is nominated by the defendant, and the presiding arbitrator is chosen by the co-arbitrators already appointed.

The GPA does not address the choice of the arbitral institution in charge of administering the arbitral proceedings. As a rule, in arbitrations involving public entities in Brazil, parties are free to choose the arbitral institution, as long as the institution is registered with the federal, state or local attorney’s general office. Currently, not only well regarded local arbitral institutions (CAM-CCBC, Ciesp/Fiesp, Camarb, CBMA, Amcham etc.) are registered, but also the International Chamber of Commerce – ICC.

Unlike other Brazilian statutes governing the public sector, the GPA is silent regarding the seat of the arbitration, the applicable law to the merits, and the language of the arbitral proceedings. It is our understanding that nothing prevents a state entity from entering into an arbitration agreement where the seat is outside of Brazil, the applicable law is not Brazilian, and the language is not Portuguese. In practical terms, however, it is very likely that state entities in Brazil will try to favour domestic features in negotiating/drafting the public contracts.

Needless to say: such domestic preferences run against foreign investors’ interests for neutrality, who will manage this risk by simply increasing the financial return for the projects. Maybe it is time for Brazilian state entities to start weighing up the advantages of offering investors more options in terms of law, seat and language, as happens in some investment treaty arbitrations.

 

Conclusion

The GPA represents another welcome initiative taken by Brazil, which is strengthening its arbitration-friendly legal framework, and promoting arbitration as a means of solving disputes arising from public contracts. Other specific statutes already contained provisions in the same sense, but it is the first time in the country that the main Procurement Act expressly adopts arbitration.

The provision of arbitration and other alternative dispute resolution methods in the GPA has the potential to bring many benefits to state entities and to those looking to invest in Brazil, whether Brazilian or foreign investors, with the main benefits being efficiency and speed in the resolution of contractual conflicts with state entities. Efficiency is favoured by the flexibility of arbitration in comparison to court proceedings. Also, arbitral tribunals are specialists in the subject matter of the case, which increases the chances of having a highly technical decision. In addition, speed speaks for itself when Brazilian courts sometimes take 10 years to render a final decision (by the end of 2019, the last official national report informs that there are currently more than 77 million ongoing cases before Brazilian courts).

In the end, arbitration will reduce transaction costs in public contracts, which represents a more cost-effective solution for state entities (and, of course, for the taxpayer) and potential investors.

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The Annulment of Eiser v. Spain: A Call for Improvements to the System?

Thu, 2021-05-06 01:21

In 2017 Spain was ordered to pay Eiser €128 million on account of its failure to afford fair and equitable treatment. This award was subsequently annulled because the claimant-appointed arbitrator omitted to disclose a professional relationship with the claimants’ damages expert which led to, inter alia, the tribunal being improperly constituted. The full costs of the proceedings, including Spain’s legal fees and expenses, were shifted to Eiser.

The Annulment Decision reignited conversations about arbitrator impartiality, disclosure requirements and double hatting (including on this blog, here, here and here). Without addressing the correctness of the Annulment Decision,1) See e.g. Gary B. Born, International Commercial Arbitration, 3rd ed. (Kluwer Law International, 2021), Chapter 12, fn 1476, who states that the Annulment Decision is “an unrepresentative and clearly erroneous decision in the investment arbitration context.” jQuery('#footnote_plugin_tooltip_37299_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); it highlighted the lack of (i) uniform decision-making; and (ii) appropriate mechanisms for dealing with non-disclosure in an international setting, neither of which contributes to certainty or legitimacy of ISDS.

This post takes a closer look at these two issues, before concluding with some concrete solutions.

 

Lack of Uniformity

Compared to the total number of ICSID awards ever rendered, a rather small portion are annulled. Applications for annulment on the ground of improper constitution of the tribunal have been extremely rare and, up until the Annulment Decision in Eiser v. Spain, unsuccessful.

Despite the infrequent reliance on this ground, several Committees have analyzed Article 52(1)(a) of the ICSID Convention rather extensively. Yet, many Committees interpreted this provision almost anew because they did not consider themselves bound by earlier annulment decisions and contrary views expressed therein.2) See, e.g. Suez 03/19, para. 76; Eiser, para. 158  jQuery('#footnote_plugin_tooltip_37299_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In Azurix v. Argentina the latter’s annulment request was refused because Article 52(1)(a) could only give rise to annulment “if there had been a failure to comply properly with the procedure for challenging members of the tribunal set out in other provisions of the ICSID Convention.” If the grounds for disqualification became known only after the issuance of the award, such newly discovered fact could provide a basis for revision under Article 51 of the ICSID Convention, but not annulment.

Although in Vivendi v. Argentina (Vivendi II) the ground for disqualification became known only after the issuance of the award, the Committee deemed that the facts in question could give rise to annulment.

Similarly, in EDF v. Argentina the Committee held that “changes in the circumstances of an arbitrator may mean that a tribunal which was properly constituted at the outset may cease to be so during the course of the proceedings.”

If there was a decision on a proposal for disqualification, a Committee could only find a ground of annulment if the refusal to disqualify the arbitrator in question was “so plainly unreasonable that no reasonable decision-maker could have come to such a decision.” This approach was subsequently followed in annulment proceedings in Suez 03/19 and Suez 03/17.

In the absence of a tribunal’s disqualification decision, the Committee would, after ensuring that there was no waiver under Rule 27, examine, de novo, “whether there exist grounds which a reasonable third party would consider give rise to reasonable doubts whether a member of the tribunal was sufficiently independent and impartial.” If so, the Committee would finally determine whether the lack of impartiality or independence on the part of the arbitrator could have had (and not whether it actually had) a material effect on the award.

The Committee in OI European Group B.V. v. Venezuela reverted to the Azurix approach, holding that the lack or loss of qualities listed in Article 14(1) were to be dealt with through provisions on disqualification, found in Articles 57 and 58 of the Convention, and not through annulment.

As appears from the above, two schools of thought have developed: whereas one addressed newly discovered facts through revision (Azurix and OI European Group B.V.), the other allowed for annulment (EDF and the others). If the latter view is followed (as the Eiser Committee did), is a tribunal to be considered in statu nascendi throughout the proceedings? How is this reconciled with the provisions of the ICSID Convention and the ICSID Rules that refer to tribunal constitution as a specific point in time?3) See, e.g. Article 56 of the ICSID Convention and the following Rules of the ICSID Convention Arbitration Rules: 6, 13, 20, 30 and 41(5). jQuery('#footnote_plugin_tooltip_37299_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Considering that the statement of ICSID’s founding Secretary General, Mr. Aron Broches (“if the grounds for disqualification only became known after the award was rendered, this would be a new fact which would enable a revision of the award”) was disregarded, has the drafting history become an obsolete source of guidance? Since the view of the EDF Committee is that “it is difficult to imagine a rule of procedure more fundamental than the rule that a case must be heard by an independent and impartial tribunal”, what is the value of Article 52(1)(a), in light of Article 52(1)(d)?

Regardless of one’s views on the correctness of the outcome in each of these cases, the fact remains that the same provision was applied differently, causing parties to spend valuable resources only to end up, years later, in the same or even worse position than before. Though a plurality of interpretations is sometimes desirable, fundamental questions such as “what is ‘constitution’ and when is a tribunal deemed ‘constituted’” should not be debatable.

 

Unenforceability of Disclosure Duties

The Eiser Annulment Decision also casts doubt on the effectiveness of disclosure duties. Undisputedly, arbitrators must be neutral and must disclose facts or circumstances that may (or may be perceived to) cloud their judgment.4) See, e.g. the CCAC Code of Ethics, Art. 11. jQuery('#footnote_plugin_tooltip_37299_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Many codes and rules specify that this duty is continuous.5) See, e.g. BCDR Arbitration Rules, Art. 10.6; LCIA Notes for Arbitrators, Section 2, para. 9; WTO Rules of Conduct, Section III, para. 1 and Annex 2; Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement, Art. 10(4), and other codes of conduct: CETA (Art. 3(3)), HKIAC (Rule 2), NAFTA (Section II, para. C), SIAC (para. 2), Vietnam International Arbitration Centre (para. 3). jQuery('#footnote_plugin_tooltip_37299_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Yet, the vast majority of these instruments envisage no consequence for non-disclosure. This, coupled with the fact that arbitrators enjoy immunity from legal process pursuant to Article 21 of the ICSID Convention, leaves room for nonchalance when disclosing potential conflicts.

Though the Eiser Committee stated that “even a disclosure by [the expert] would not have absolved [the arbitrator] from his disclosure obligations,” one cannot help but notice that neither the expert, nor the Claimants’ counsel saw fit to disclose the existing relationship, though both arguably have this duty. In its Article 4(4)(b), the CIArb Protocol for the Use of Party-Appointed Expert Witnesses in International Arbitration, requires the expert to state in their written opinion “any past or present relationship with any of the Parties, the Arbitral Tribunal, counsel […] other witnesses and any other person or entity involved in the Arbitration” (admittedly, the CIArb Protocol did not apply in Eiser). Lawyers likewise have a duty of candor to the tribunal, as appears from both international 6) e.g. the IBA International Principles on Conduct for the Legal Profession, Principle 2 jQuery('#footnote_plugin_tooltip_37299_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and national 7)e.g. the ABA Model Rules of Professional Conduct, Rule 3.3; the Québec Code of Professional Conduct of Lawyers, Art. 112 jQuery('#footnote_plugin_tooltip_37299_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); authorities. Whatever the reasons for non-disclosure were in Eiser v. Spain, it remains that there is no satisfactory way to address non-disclosure in the international context.

 

Solutions?

The creation of a multilateral investment court, which has been suggested as a better alternative for resolving investor-State disputes, appears to enjoy little support, at least among the respondents to the latest Queen Mary Survey. Asking the Secretary-General to scrutinize annulment decisions before their issuance to the parties is also unlikely, as the Secretary-General ought to perform “purely administrative” duties.8) Gabriel Bottini, “Present and Future of ICSID Annulment: The Path to an Appellate Body?”, 31(3) ICSID Review –FILJ 712, p. 726, citing the History of the ICSID Convention, p. 108. jQuery('#footnote_plugin_tooltip_37299_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_37299_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Perhaps, what the system needs to achieve uniform interpretation of the ICSID Convention is an initiative similar to the CISG Advisory Council. This private initiative comprised of leading experts promotes a uniform interpretation of the UN Convention on the International Sale of Goods by issuing opinions on specific subjects/articles. Taking this a step further, during the ongoing revision of the ICSID Rules, provisions on annulment could be supplemented to provide for something similar to the preliminary reference procedure to the European Court of Justice. Persons who are already on the ICSID Panel of Arbitrators, from which members of Committees are selected, could provide opinions to Committees regarding the Convention’s specific provisions, thus ensuring their uniform interpretation and consistent application.

The consequences of non-compliance with disclosure duties could be written into the Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement (“Draft Code”). A provision similar to Article 13 of the Code of Ethics of the Milan Chamber of Arbitration, which empowers the Chamber of Arbitration to replace or refuse to confirm the non-complying arbitrator in subsequent proceedings by taking into consideration the seriousness and the relevance of the violation, may prove helpful. The SIAC Code of Ethics for Arbitrators, which in paragraph 1.3 enables the Registrar of SIAC to consider an arbitrator’s failure to ensure a fair determination of the dispute when fixing the quantum of their fees, may likewise serve as inspiration. Though not precisely in this context, several institutional rules (e.g. the Rules of the ICC, Appendix III, Article 2, and the Vienna International Arbitration Centre, Articles 16(6) and 44(7)) link the arbitrators’ fees to the performance of their duties. Envisaging any kind of consequence for a breach of disclosure obligations would likely increase the effectiveness of the Draft Code.

 

In the meantime, law firms and states could guard against Eiser-like situations by keeping centralized records of all experts retained in any past or present matters.

 

 

*The views expressed herein are those of the author and do not necessarily reflect the views of Woods LLP or its partners.

References[+]

↑1 See e.g. Gary B. Born, International Commercial Arbitration, 3rd ed. (Kluwer Law International, 2021), Chapter 12, fn 1476, who states that the Annulment Decision is “an unrepresentative and clearly erroneous decision in the investment arbitration context.” ↑2 See, e.g. Suez 03/19, para. 76; Eiser, para. 158  ↑3 See, e.g. Article 56 of the ICSID Convention and the following Rules of the ICSID Convention Arbitration Rules: 6, 13, 20, 30 and 41(5). ↑4 See, e.g. the CCAC Code of Ethics, Art. 11. ↑5 See, e.g. BCDR Arbitration Rules, Art. 10.6; LCIA Notes for Arbitrators, Section 2, para. 9; WTO Rules of Conduct, Section III, para. 1 and Annex 2; Draft Code of Conduct for Adjudicators in Investor-State Dispute Settlement, Art. 10(4), and other codes of conduct: CETA (Art. 3(3)), HKIAC (Rule 2), NAFTA (Section II, para. C), SIAC (para. 2), Vietnam International Arbitration Centre (para. 3). ↑6 e.g. the IBA International Principles on Conduct for the Legal Profession, Principle 2 ↑7 e.g. the ABA Model Rules of Professional Conduct, Rule 3.3; the Québec Code of Professional Conduct of Lawyers, Art. 112 ↑8 Gabriel Bottini, “Present and Future of ICSID Annulment: The Path to an Appellate Body?”, 31(3) ICSID Review –FILJ 712, p. 726, citing the History of the ICSID Convention, p. 108. function footnote_expand_reference_container_37299_30() { jQuery('#footnote_references_container_37299_30').show(); jQuery('#footnote_reference_container_collapse_button_37299_30').text('−'); } function footnote_collapse_reference_container_37299_30() { jQuery('#footnote_references_container_37299_30').hide(); jQuery('#footnote_reference_container_collapse_button_37299_30').text('+'); } function footnote_expand_collapse_reference_container_37299_30() { if (jQuery('#footnote_references_container_37299_30').is(':hidden')) { footnote_expand_reference_container_37299_30(); } else { footnote_collapse_reference_container_37299_30(); } } function footnote_moveToAnchor_37299_30(p_str_TargetID) { footnote_expand_reference_container_37299_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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