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Washington Arbitration Week: Using BITs to Protect Cryptocurrency Investments?

Thu, 2022-03-03 01:19

The Second Edition of the Washington Arbitration Week took place from 29 November to 3 December 2021, hosting 16 panels, including two hybrid panels with both in-person and virtual attendees. This post highlights the panel on ‘Investment Treaty Arbitration in the Digital Era: Using BITs to protect Cryptocurrency Investments?Cristen Bauer (U.S. Department of Commerce) moderated the panel consisting of Ana Fernanda Maiguashca (Private Competitiveness Council and former Board Member of the Central Bank of the Republic of Colombia), Santiago Rodríguez (Uria Menendez), Sophie Nappert (3VB), David L. Attanasio (Dechert LLP), and Tom W. Walsh (Freshfields Bruckhaus Deringer LLP).

Ms. Bauer opened the discussions by remarking on the cutting-edge nature of the legal questions brought by cryptocurrencies into international investment law. While cryptocurrency investments have been soaring in the past decade, governments and their regulators are still trying to determine the nature of crypto assets and whether and how they should be regulated, raising many questions about the potential implications for investment treaty claims. The panel addressed various issues, including the definition of crypto assets, the ownership of such assets, whether investment treaties and conventions cover disputes involving crypto assets and, finally, the impending regulation of cryptocurrency investments.

 

Defining Crypto Assets

Whilst there is no universal definition of crypto assets, a common nomenclature is emerging. Mr. Rodríguez identified four categories of crypto assets, noting that whether they find protection under ISDS will depend on their nature, type, and the process through which they are created:

  • Payment tokens, also called “digital money,” are used to transact or store value. They include: (i) decentralized digital money like Bitcoin, whose value is tied to algorithms being “mined” by computers and the market’s demand; (ii) stablecoins that use the same technology as Bitcoin, but whose value is tied to some underlying asset (e.g., the U.S. Dollar for Tether); and (iii) central bank digital currencies (“CBDCs”), centralized digital money issued by governments, whose value is tied to a state’s national currency or a state-owned asset such as oil or gold reserves.
  • Utility tokens, digitized assets that enable the use of other digitized assets.
  • Asset tokens, digitized assets that provide liquidity to certain physical assets.
  • Non-fungible tokens or “NFTs,” a relatively new form of digitized assets, which may have the characteristics of other digitized assets. In some cases, NFTs have been described as property rights within a blockchain application. (An overview of NFTs and property rights can be found here.)

 

Fractionary Ownership

Ms. Nappert noted that the tokenization of human activities, where individuals in peer-to-peer environments own a fraction of a larger investment, has radically transformed the field of investments by opening avenues of investment to the broader public such as gold reserves, real estate, art, or even an athlete’s employment contract, prompting the rise of mass claims.

Ms. Nappert presented the impending Binance dispute, which she has also discussed in another blog post, as a case study of the novel types of issues that may also arise in ISDS. The dispute originated when on 19 May 2021 Binance, a Chinese-founded crypto-trading platform, shut down parts of its platform, allegedly causing multi-million-dollar losses for traders who had been prevented from making trades. Soon thereafter, a third-party funder based in Switzerland announced its plan to fund a mass claim seeking redress in a HKIAC “class-action style” arbitration. The dispute raises a number of novel issues that arise from the world of cryptocurrencies such as the identification of proper parties, how responsibility should be ascribed, the potential arbitrability of the dispute, and what law should govern it.

 

Protection under BITs and the ICSID Convention

Next, Mr. Attanasio discussed whether crypto assets are protected investments under investment treaties.

Mr. Attanasio noted that investment treaties tend to define the concept of protected investments broadly, and so there do not seem to be serious issues with accepting crypto assets as protected investments. Tribunals may find that many cryptocurrencies, stablecoins, and potential future CBDCs qualify as protected investments within the movable property category and, in the case of assets stored in a “wallet” controlled by another party, those investments may be protected as a claim to money or performance.

However, whether such assets will be considered located in a qualifying location for treaty protection is more problematic. Abaclat v. Argentina states, in the context of disputes over bonds, that “the relevant criteria should be where and/or for the benefit of whom the funds were ultimately used, and not the place where the funds were paid out or transferred.”1)Abaclat and Others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, para 374. jQuery('#footnote_plugin_tooltip_40767_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40767_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It may be hard to apply this test to crypto assets, as the locus of the investment may not be where the regulatory action affecting the investment took place. Nevertheless, it is possible that at least some tribunals will try to expand the test to find otherwise.

Next, Mr. Walsh addressed the various scenarios in which state actions could trigger claims under a treaty. He stressed the importance of looking at how investors use the different types of crypto assets to get a sense of whether they will be protected. Although crypto assets belong to the digital world, in many cases the investments around them are more traditional. For example, companies across numerous industries are now heavily investing in the ability to transact in various digital coins exposing themselves to regulations that might someday prohibit or treat such transactions differently. Certain countries also give incentives to foreign investors to develop crypto mining within their borders, which could be later withdrawn as was the case in the solar energy cases filed against Spain. Similarly, crypto exchanges that are located and operate within a particular State, are subject to that State’s regulations and therefore are akin to traditional investments.

 

Regulating the Crypto Industry?

Ms. Maiguashca noted that attempting to effectively ban crypto activities could prove nearly impossible, considering their prevalent digital existence. Further, she questioned to what extent the regulation of crypto assets is desirable. Even if one accepts that some form of protection is needed, the object of the protection must be clearly defined. For instance, by their nature, crypto assets present high risk and returns and investors should not be protected against those risks. However, regulations should sufficiently address other issues such as money laundering risks, which are particularly relevant to crypto asset exchanges.

Furthermore, Ms. Maiguashca challenged the general assumption that crypto activities are financial in nature, which is disputable since the conception that cryptocurrencies are currencies can be challenged. Fiat money, in addition to being accepted as means of payment, must be able to serve as storage of value and a unit of value. Most crypto assets do not serve those objectives since their supply and demand are not controlled, and they are not government-backed. Therefore, the regulations applicable to financial assets may not be the most appropriate for regulating crypto assets.

 

Further Thoughts and Conclusion

The panel highlighted that crypto assets present a range of cutting-edge issues in the field of investment arbitration. The era of crypto assets has brought with it a mass mobilization of smaller investors across the globe, and the rapid development of crypto assets will have consequences in the area of investment arbitration in the years to come. Some aspects of crypto assets raise completely novel legal issues that are challenging to gauge absent guidance from jurisprudence, e.g. novel fractionary ownership structures, the elements of risk and contribution of crypto assets and their territorial nexus, and potential challenges to enforcement of arbitration awards arising from crypto-related disputes.

In our view, the panel’s discussion on crypto assets also illustrates that disputes arising from investments in technology may define the next chapter of investment treaty disputes. The incredible speed at which technology, including crypto assets and activities, has been developing has left States grappling to understand and manage the potential risks that they bring.

Given that advancements in blockchain technology will increasingly open up avenues for fractionary ownership structures in underlying assets—both tangible and intangible— it is possible that traditional shareholder ownership structures in investments may strongly influence the concepts of “investor” and “investment” in future. Further, as blockchain-based technology continues to flourish, the physical location of investments—both investments in blockchain technology and investments located on the blockchain—will continue to present arbitrators with new challenges. For example, if an investment has no clear territorial link, the question arises as to whether the investment was made in the State that ultimately destroyed the investment through its regulation or other governmental acts.

Conceptually, there is a paradox between a virtual asset having an identifiable location, and its decentralization and absence of its ties to the physical world. As discussed by the panel, States need to carefully consider whether and to what extent they should regulate crypto activities. A necessary precursor to that would be consideration of where such activities should be deemed to take place and, consequently, whether and how they can be effectively regulated by the State in question.

References[+]

References ↑1 Abaclat and Others v. Argentina, ICSID Case No. ARB/07/5, Decision on Jurisdiction and Admissibility, para 374. function footnote_expand_reference_container_40767_30() { jQuery('#footnote_references_container_40767_30').show(); jQuery('#footnote_reference_container_collapse_button_40767_30').text('−'); } function footnote_collapse_reference_container_40767_30() { jQuery('#footnote_references_container_40767_30').hide(); jQuery('#footnote_reference_container_collapse_button_40767_30').text('+'); } function footnote_expand_collapse_reference_container_40767_30() { if (jQuery('#footnote_references_container_40767_30').is(':hidden')) { footnote_expand_reference_container_40767_30(); } else { footnote_collapse_reference_container_40767_30(); } } function footnote_moveToReference_40767_30(p_str_TargetID) { footnote_expand_reference_container_40767_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40767_30(p_str_TargetID) { footnote_expand_reference_container_40767_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Outcome Related Fee Structures Proposed for Arbitration in Hong Kong

Wed, 2022-03-02 01:54

At present, Hong Kong lawyers are prohibited from charging outcome related fees in arbitration. As discussed in a previous blog, the landscape started to change since the publication of a Consultation Paper by the Outcome Related Fee Structures for Arbitration Sub-committee (the “Sub-committee“) of the Law Reform Commission of Hong Kong (the “Commission“). The Sub-committee proposed that the law in Hong Kong should be amended to permit lawyers to use outcome related fee structures (“ORFSs“) for arbitration taking place in and outside Hong Kong.

On 15 December 2021, the Commission published a comprehensive Report setting out recommendations on the use of ORFSs in arbitration, and the appropriate form of regulation and the specific safeguards relating to ORFSs. This blog looks at the key recommendations in the Report.

 

Overview of the Report

The Sub-committee, co-chaired by Ms Kathryn Sanger and Ms Briana Young of Herbert Smith Freehills, studied the legal regimes and experiences of a number of other jurisdictions including Singapore, England and Wales, Australia, Mainland China and the United States, and took into account public responses to the earlier Consultation Paper in formulating the final recommendations (“Final Recommendations“).

In the Report, ORFSs refer to three types of agreements which a lawyer may enter into with a client, namely conditional fee agreements (“CFAs“), damages-based agreements (“DBAs“) and hybrid damages-based agreements (“Hybrid DBAs“). The respective meaning of these three types of agreement is covered in Edward Taylor’s previous blogpost, here.

The Report makes 14 Final Recommendations:

  • Final Recommendations 1 to 3 concern lifting the prohibitions on the use of CFAs and other matters relating to CFAs, including the recoverability of success fee premiums and legal expense insurance premiums from the unsuccessful party and a proposed cap on the success fee;
  • Final Recommendations 4 to 7 deal with lifting the prohibitions on the use of DBAs and other matters relating to DBAs, including the recoverability of legal expense insurance premiums from the unsuccessful party and the cap on the DBA payment;
  • Final Recommendations 8 and 10 relate to Hybrid DBAs;
  • Final Recommendation 9 concerns the treatment of barristers’ fees; and
  • Final Recommendations 11 to 14 deal with the appropriate forms of regulation, safeguards relating to ORFSs, and whether lawyers should be permitted to charge separately for separate aspects of an arbitration.

 

Key Recommendations

  •  Lifting the prohibitions

An overwhelming majority of the respondents to the Consultation Paper supported the recommendation to lift the prohibitions on the use of ORFSs. According to the Report, the proposed reforms are necessary to preserve and promote Hong Kong’s competitiveness as a leading arbitration centre, enhance access to justice, and respond to increasing client demand for pricing and fee flexibility. Having analysed the arguments for and against the proposed reforms, the Commission concludes that the benefits of permitting the use of ORFSs in arbitration outweigh the potential disadvantages.

 

  • Scope of the proposed reforms

That said, the proposed lifting of prohibitions is limited to arbitration and related court proceedings, including applications to the Hong Kong courts to set side or to enforce an arbitral award, or for interim relief in support of an arbitration. One exception is arbitration related to personal injury claims, where ORFSs would be void and unenforceable (although we rarely see personal injury claims in arbitration). The recommendation to remove prohibitions on ORFSs does not extend to civil litigation, standalone mediation, and court proceedings such as matrimonial and family proceedings. Considering the less sophisticated nature of some parties in these proceedings, such limitation is understandable.

 

  • Recoverability of the success fee premium and legal expense insurance premium

The Report recommends that the losing party should not be responsible for any success fee premium (i.e., the portion of success fee which exceeds the amount of fees which would be payable to the lawyer if there were no ORFSs in place) or legal expense insurance premium agreed by a client with its lawyers or insurers under the ORFSs. This is mainly because the losing party is not party to the fee arrangements between the successful party and its lawyer and/or insurer, and accordingly has no control or say over any pricing which is ultimately agreed. However the Report recommends that the arbitral tribunal should have power to apportion those costs between the parties in the arbitration if it determines that apportionment is reasonable in exceptional circumstances.

 

  • Cap on the success fee and DBA payment

In respect of CFAs, the Report recommends that the success fee should be fixed by reference to the fee that the lawyer would charge the client if there were no ORFSs in relation to the arbitration, also known as the “benchmark” costs, and be capped at 100 per cent of the benchmark costs.

For example, let’s say the benchmark rate for a lawyer is HK$10,000 per hour. The lawyer and a client agree in a CFA that a proportion of the benchmark costs will be charged during the course of the matter (e.g. 60%), to be uplifted to HK$12,000 per hour in the event of successful outcome. The success fee premium in this scenario is HK$2,000 per hour. In accordance with the Report’s recommendation, the maximum success fee that the lawyer can charge in the event of successful outcome would be capped at HK$20,000 per hour in this scenario (i.e., with a success fee premium of 100 per cent of the benchmark costs).

As regards the DBAs and Hybrid DBAs, the Report recommends that the DBA payment should be payable in accordance with the terms agreed between lawyer and client wherever a financial benefit is obtained by the client, and should be capped at 50 per cent of the value of that financial benefit. The Report defines “financial benefit” broadly, to include “money or money’s worth” (being any money, assets, security, tangible or intangible property, services, any amount owed under an award, settlement agreement or otherwise, and any other consideration reducible to a monetary value, including any avoidance or reduction of a potential liability). For example, a party to an intellectual property rights case may wish to pay the lawyer who acts successfully in infringement proceedings by reference to the monetary value of the intellectual property rights. This broad definition would permit lawyers to offer DBAs to respondent clients, as well as claimants, and would extend DBAs to a broader range of cases.

The proposed caps are consistent with the position in England and Wales, and would apply to both solicitors and barristers.

 

  • Termination of an ORFS

The Report recommends that the legislation should specify the principal grounds upon which an ORFS can be terminated by the lawyer before the arbitration concludes; for example, if the client has committed a material breach of the agreement, or behaved unreasonably. On the other hand, the Commission does not consider it necessary to set out statutory grounds on which a client may terminate an ORFS prior to the conclusion of the arbitration. In the Commission’s view, this should be a matter for agreement between the client and the lawyer in accordance with the basic principles of freedom of contract and party autonomy.

 

  • Legislative framework and safeguards

The Report recommends that that the ORFS regime be regulated by subsidiary legislation. Proposed safeguards include:

  • the ORFS must be in writing and signed by the client;
  • the lawyer should inform clients of their right to take independent legal advice;
  • the ORFS should be subject to a minimum “cooling-off” period of seven days;
  • the ORFS itself should state clearly in what circumstances a lawyer’s fees and expenses, or part of them, will be payable, the circumstances in which the lawyer’s payment, expenses and costs, or part of them, are payable by the client in the event that the ORFS is terminated, and whether disbursements, including barristers’ fees, are to be paid irrespective of the outcome of the matter.

The Report also sets out draft amendments to the Legal Practitioners Ordinance (Cap 159) and the Arbitration Ordinance (Cap 609)  of Hong Kong (“Arbitration Ordinance“) in order to affect the recommended changes.

 

Going forward

The proposal to permit ORFSs has been warmly welcomed by the arbitration community in Hong Kong and beyond. It is hoped that legislative amendments will come into place by the end of 2022. If introduced, it would give commercial parties greater access to justice and more flexibility in respect of how they fund their disputes. This is particularly so for arbitration cases involving Mainland Chinese clients given the continuing rise in arbitrations seated in Hong Kong involving Mainland Chinese parties, and the fact that DBAs are permitted and often used in Mainland China already.

The proposed reform will enhance Hong Kong’s competitiveness as an international hub for cross-border and international arbitration, by bringing it in line with other major arbitral seats such as London and New York. This is essential for lawyers in Hong Kong to remain globally competitive with lawyers in other major jurisdictions. Further, it is expected that with ORFSs in place, third party funding in arbitration (which was introduced via amendments to the Arbitration Ordinance in 2019) will gain more momentum and receive wider application in Hong Kong.

 

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Peaceful Resolution of Disputes: We Stand United Against War In All Its Many Forms

Tue, 2022-03-01 03:00

All Members shall settle their international disputes by peaceful means in such a manner that international peace and security, and justice, are not endangered. (UN Charter, Art. 2.3)

The peaceful settlement of international disputes is a fundamental principle of international law. While it can be debated precisely when or where this common principle emerged, it has served as a guiding light since the establishment of the United Nations after the close of World War II. Indeed, ‘transnationalists‘ look to the United Nations and other international institutions to provide a framework for the domestic and international legal ordre. Inherent to the transnational legal process is the idea that peaceful acts, including conciliatory and amicable dispute resolution, are preferred over unilateral tactics, coercion, and sheer force. 

Unfortunately, modern history generously provides examples where the peaceful resolution of conflicts was preceded by war, civil unrest, and the senseless loss of innocent lives. For sake of discussion, we describe below a few such conflicts as well as the dispute resolution and negotiation processes that deescalated tensions and created room for amicable relations.  In doing so, we do not mean to minimise or ignore the many other conflicts that are still actively taking place, loudly or quietly, around the world today.

  • In 1968, the Rann of Kutch arbitration resolved a long-running border dispute between India and Pakistan through a three-member tribunal, following the successful cease-fire mediation by the UK Prime Minister, Harold Wilson. The dispute was considered formally resolved a year later, when the parties signed more than 1,500 maps and documents showing the border as fixed by the ICJ decision. Mr. Said Mohammad Yusuf, who signed the maps and documents on behalf of Pakistan, commented at the time, ‘The process through which this dispute has been settled illustrates that given will and co-operation, all other disputes, however intractable, can be resolved peacefully’.
  • In 1988, the Taba arbitration, between Egypt and Israel settled a long-running dispute concerning the Sinai peninsula. At the time, as reported by the Washington Post, Egyptian and Israeli officials noted that the five-member tribunal created a forum for them to resolve a disputed boundary issue that had been perocolating since the March 1979 peace treaty was signed. According to the Washington Post, it marked ‘the first time Israel and an Arab government have ended an argument through international law rather than warfare’.
  • The Namibia-Angola settlement of 1988 (The Tripartite Agreement among the People’s Republic of Angola, the Republic of Cuba, and the Republic of South Africa), which secured the independence of Namibia from South Africa, involved a concerted effort by the UN, the US and other world powers. Importantly, the dispute was settled in spite of differences remaining and anger lingering. On the day of the signing, The New York Times commented, ‘the sharp words used today by the Foreign Ministers of Cuba, Angola and South Africa and by Mr. Shultz showed that serious differences remain…But the Angolan official also called for the restoration of normal relations with the United States, saying that since the two countries must work together to carry out today’s agreements, “such collaboration could surely be facilitated by the normalization of diplomatic relations”’.
  • The Tajikistani Civil War began in 1992. UN-sponsored mediations took place intermittently, but the dispute was not resolved until 1997, through an armistice facilitated by the UN-mediated negotiation process involving multiple parties, including Russia and the US. It has since been hailed as ‘an exceptionally well-coordinated peace process – involving local civil society, the international community, and a newly established Commission for National Reconciliation’.
  • The wars in Yugoslavia (1991-1995) saw the unsuccessful mediation by the EU mediator, Cyrus Vance, followed by the US mediation under the command of Richard Holbrooke. Ambassador Holbrooke’s month-long negotiation session resulted in the 1995 Dayton Accords. More than twenty-five years later, the Dayton Accords are still referred to as a ‘landmark’ agreement. A digital exhibit by the US State Department demonstrates that diplomacy was the key to uneasily concluding the brutal war and horrific ethnic violence. The Serbs referred to Ambassador Holbrooke’s style toward brokering this peace as ‘getting Holbrooked‘. Time Magazine reported at the time that ‘Holbrooke’s staff jokes that the Serbs agreed to a cease-fire just to get him to shut up for a while’.
  • The 1995 Ecuador-Peru war (Cenepa War) ended with the peace treaty of Brasilia in 1998, and facilitated by the guarantors Argentina, Brazil, Chile and the US, as appointed by the 29 January 1942 Rio Protocol for Peace between Peru and Ecuador. The negotiation is said to have resolved a territorial dispute that caused two-centuries of conflict. 
  • The Northern Ireland conflict and the 1998 Good Friday Agreement facilitated by the mediation team consisting of George Mitchell (US), Harri Holkeri (Finland), and John de Chastelain (Canada). The mediation team won the respect of both sides and resulted in a historic compromise. As explained by the US Institute for Peace, ‘[f]or the first time, the two governments, along with parties from across the divide, agreed on a new political framework for Northern Ireland’.
Map Used in Adjudicating the Rann of Kutch Arbitration in 1968

Most of us who are entrenched in the field of international  dispute resolution and arbitration, in particular, are also well familiar with the fact that the very idea of establishing the International Centre for Settlement of Investment Disputes (ICSID) stems from Aaron Broches’ proposal based on the numerous occasions on which the World Bank, through its president – and in particular the tenure of President Black (1949-1962), who was involved in the settlement of various disputes by good offices, mediation, and conciliation. In this regard, the Indus Waters Treaty merits a special mention: it was entered between Pakistan and India in 1960 in Karachi following the significant interventions of President Black and the World Bank itself. This is reflected in the World Bank actually serving as signatory to the treaty – although it only plays a limited and procedural role in its performance.  

Meanwhile, it is simply impossible to capture here the tremendous role of the International Court of Justice, the Permanent Court of Arbitration, the negotiation and mediation, as well as the ad-hoc and institutionalised arbitration efforts in resolving and – most often, preventing inter-state disputes. At its 100-year anniversary, the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) produced a video that we encourage you to view. Titled The Quiet Triumph, it demonstrates the role of arbitration in world peace and international affairs throughout the decades. 

We recognise that these difficult times make the light harder to find. Despite conflict, we are interconnected in a never-before-seen way. Our world is technologically-integrated and, throughout these past few days, we have had access to raw and unfiltered updates on a real-time basis from friends, colleagues, and strangers that have heightened our consciousness and kept our moral compass properly aligned. Here at Kluwer Arbitration Blog, we have received these direct updates from our own Assistant Editors, from our readers, and from our contributors.

However, as a community, we must continue to push: through our work, through our beliefs and values, and by raising awareness and providing access to knowledge. We are equipped with special tools, including the understanding and worldview that comes from engaging with the notion of peaceful resolution of international disputes on a continuous basis. 

Education and equitable access to opportunity of course plays an important role. International law education is key to unlocking a brighter future. By creating access to information, exposure to different modes of thinking, and opportunities for cultural exchange and knowledge sharing, we build a more resilient, well-informed, and creative community of international dispute resolution specialists. 

These educational opportunities and synergies have not always existed and should not be taken for granted. For decades, international dispute resolution was not considered a discrete discipline. Last year, Professor Stavros Brekoulakis wrote about this evolution and explained that exploring international dispute resolution as its own discpline reflects a:

‘dynamic idea of arbitration law that transcends the often narrow boundaries of legal fields and legal traditions. Indeed, arbitration scholarship in the last twenty years has become more diverse and interdisciplinary. This is not only because non-arbitration scholars have developed an interest in arbitration, but also because arbitration scholars have started to examine arbitration against a wider context.’

It is, indeed, on this premise that our international community thrives and grows. 

Similarly, if technology had not already pervaded every aspect of our lives, the pandemic has exacerbated the role it plays in educational and other capacity building exchanges. It has enhanced access to information and access to each other. This too is not something to be taken for granted and instead presents our community with an opportunity to continue to support one another in favor of a brighter future.  

We therefore urge our community, during these challenging times, to draw upon our international dispute resolution toolkit. We have transnational frameworks and institutions, lessons learned from prior conflicts, disputes, mediations, and peace talks, and educational and other resources that are readily available. We also have one another as a community. We are optimistic that among these resources we will find what is needed to support efforts to negotiate in favour of, and ultimately achieve, peace. We urge that we support one another, continue to receive students and young practitioners to pursue their internships, offer them the support that is needed, and encourage access to education and knowledge – as a service to the next generation of lawyers and leaders.

At Kluwer Arbitration Blog, as expressed yesterday by Professor Roger Alford, we stand for peace and against genocide. We stand for access to education, access to knowledge and equal opportunities. We stand for friendship and collegiality, with our diverse and culturally rich community – and we celebrate this! We say NO to the war and NO to its unimaginable consequences on the lives of ordinary people.

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Prosecuting Putin and His Cronies

Tue, 2022-03-01 02:24

International proceedings have already been initiated against Russia by Ukraine in the International Court of Justice.  Other proceedings in international tribunals, including the International Criminal Court, have also been commenced as the prosecutor has opened an investigation.  This post proposes that another forum, and set of international legal claims, should also be pursued: the historical origins of those claims make them uniquely appropriate for application to Putin and his cronies for their aggression against Ukraine.

At the end of World War II, after Hitler’s invasions of France, Czechoslovakia, Poland and elsewhere had been rolled back, the individuals responsible for those wars were criminally prosecuted.  An international judicial tribunal tried and convicted surviving Nazi leaders for, among other things, undertaking wars of aggression against neighboring European states – branding those actions violations of international criminal law.  Those convicted were subject to lengthy imprisonment or capital sentences.

The Allies, including the Soviet Union, cooperated to establish this international judicial tribunal, which was first known as the International Military Tribunal.  It had the approval and support of virtually all of the world community and later became known as the Nuremberg Tribunal.  Detailed context and information is available within the US Holocaust Memorial Museum’s holocaust encyclopedia series on the Tribunal.  In sum, the Tribunal’s mandate was to consider and decide charges of international criminal wrongdoing – defined in the Tribunal’s Charter – against senior Nazi officials.  In addition to crimes of genocide, crimes against humanity, and war crimes, the Nuremburg Charter included the crime of aggressive war.  The crimes recognized by the Nuremberg Charter included participating in a conspiracy or common plan to undertake a war of aggression (as well as directly doing so).

The same rules of international law apply to Putin’s war against Ukraine and the same charges can be levied against him and his cronies, and perhaps more easily so.  Evidence of this emerging war and its aggressive character is recorded each day in the world’s press, social media and government reports.  That evidence is sufficient to both warrant and require prosecution of Putin, and his enablers, for the same international crimes of aggressive war.

In particular, Article VI of the Nuremberg Charter defined the crime of aggressive war (or “crimes against peace”), as it had developed in customary international law, as “planning, preparation, initiation or waging of a war of aggression, or a war in violation of international treaties, agreements or assurances, or participation in a common plan or conspiracy for the accomplishment of any of the foregoing.”  That standard was subsequently unanimously approved by the U.N. General Assembly and incorporated into the U.N. Charter at Article 1.  It since has been the basis for future development of international criminal law on the subject.

The Soviet Union was not only fully supportive of the Nuremberg Charter’s provisions regarding crimes of aggressive war; it was in many respects the leading proponent of imposing international criminal sanctions for crimes against peace and for attaching grave penalties for such crimes.  Aaron Trainin, a leading Soviet jurist, first articulated the concept of “a crime against peace” in the 1930s.  He said that wars of aggression, in pursuit of “predatory goals,” made “a mockery of the principles and norms recognized by civilized humanity.”  Adopting that logic, the USSR insisted that the Nuremberg Charter include crimes against peace among its provisions (successfully overcoming arguments that customary international law did not yet recognize such a crime).  Likewise, in Tribunal sessions in July 1946, Soviet Judge Nikitchenko argued for devoting greater attention to the defendants’ crimes against peace because the Nazi invasions were one of the “clearest cases of aggression.” (available at:  https://bit.ly/3psy7TH at p. 370)

Applying the standard formulated by Trainin and set out in the Charter, the Nuremberg prosecutors charged two dozen senior Nazi government officials and military officers with crimes against peace for, among other things, planning and directing the invasions of Austria, Czechoslovakia, Poland, France, Belgium, Luxembourg, the Netherlands, the Soviet Union and other European nations.  In particular, two German Foreign Ministers (von Ribbentrop and von Neurath) were indicted for having planned and directed the Nazi foreign policy relating to these invasions, while several senior German military officers (Keitel, Raeder, Jodl and Doenitz) were similarly charged with respect to military preparations and actions.

The Nuremberg Tribunal convicted each of these defendants.  It declared that:

“The charges in the Indictment that the defendants planned and waged aggressive wars are charges of the utmost gravity.  War is essentially an evil thing.  Its consequences are not confined to the belligerent States alone, but affect the whole world.  To initiate a war of aggression, therefore, is not only an international crime; it is the supreme international crime differing only from other war crimes in that it contains within itself the accumulated evil of the whole.”

The Tribunal traced the Nazi’s militarization, claims of rightful authority over all German-speaking people, “premeditated and carefully planned” preparations for war (noting that “planning and preparation are essential to the making of war”), brutal and unprovoked military invasions of Poland, Austria, Czechoslovakia, France and elsewhere, and violations of multiple treaties or assurances.  It concluded that each of the defendants had, by participation in these actions, violated international criminal prohibitions against aggressive war.  In the Tribunal’s words:

“the solemn renunciation of war as an instrument of national policy necessarily involves the proposition that such a war is illegal in international law; and that those who plan and wage such a war, with its inevitable and terrible consequences, are committing a crime in so doing.  War for the solution of international controversies undertaken as an instrument of national policy certainly includes a war of aggression, and such a war is therefore outlawed by the [Kellogg-Briand] Pact.”

The Nuremberg Tribunal’s reasoning, and the terms of the Nuremberg Charter, are almost eerily tailored to Russia’s invasion of Ukraine.  The same massive military build-up, claims to natural authority over Russian-speaking territories, careful planning and preparation and brutal, unprovoked invasions (reminiscent of the attacks on Poland and the Low Countries at the outset of World War II), in plain violation of prior treaty and other commitments characterize Putin’s assault on Ukraine.  Although convicting Putin, and his enablers, would require evidentiary proof, the existing record appears clearly to warrant prosecution.

The defendants in a prosecution for crimes against peace would, obviously, begin with President Putin, but also include both Foreign Minister Lavrov (holding the same position as von Ribbentrop) and senior Russian military commanders (holding positions like Keitel and Doenitz).  It would be no defense in the latter cases that Putin himself was responsible for ordering the invasion.  The Nuremberg Tribunal considered exactly that defense, and rejected claims that Hitler possessed supreme authority and was ultimately responsible for all military decisions; it concluded instead that wars require participation by multiple individuals, which included the Nuremberg defendants.

There is also no basis for suggestions that Putin (or others) might enjoy head of state immunity.  The international crime of aggressive war applies to all persons, regardless of governmental rank.  Indeed, as Article VII of the Nuremberg Charter provided, “[t]he official position of defendants, whether as Heads of State or responsible officials in Government Departments, shall not be considered as freeing them from responsibility or mitigating punishment.”

Another important question concerns the prosecution of senior corporate officers, in Russia and elsewhere, of companies that participated in the invasion of Ukraine.  The Nuremberg Tribunal did not itself consider charges against officers of German companies involved in the Nazi war effort.  Nonetheless, in one of its best-known decisions, the U.S. Military Tribunal in Nuremberg tried and convicted senior corporate officers of several German businesses, including IG Farben, Krupp, and Flick, who were found to have provided weapons or financial assistance for wars of aggression.  In the Krupp Tribunal’s words, corporate officers were no less capable than governmental officials of violating international criminal law:  “The laws and customs of war are binding no less upon private individuals than upon government officials and military personnel.  In case they are violated there may be a difference in the degree of guilt, depending upon the circumstances, but none in the fact of guilt.”  Similarly, Trainin wrote at the time that Nazi financial and industrial figures had committed “grievous violations of the principles of international intercourse and human ethics.”

That reasoning applies equally in present circumstances.  Officers of weapons suppliers who participated in supplying or resupplying Russian combat troops, or producing armaments responsible for widespread civilian casualties in Ukraine, would appear to be in little different position that the German industrialists convicted in Nuremberg.  The same could potentially be true of other companies and their officers, including those engaged in cyber-attacks, logistics and supply, financing and otherwise.

Preparations for prosecutions against senior Russian political and military figures need not await apprehension of suspects.  Just as the Allies in World War II began planning for prosecutions during the War, so evidence-taking and work on the appropriate legal framework for an international tribunal ought also begin now.  The International Criminal Court’s prosecutor, with jurisdiction over crimes against humanity and war crimes in Ukraine (but not crimes against peace), has already stated that he is investigating Russia’s actions.  Similar steps can be taken with respect to crimes against peace, prosecuted before an international tribunal established by the world community.  If Putin and his cronies choose, as they likely will, to be fugitives from justice, trials can be conducted in absentia.  Circumstances may frustrate any apprehension or personal appearance of Putin or his cronies before an international tribunal.  But they need not frustrate a judgment of the international community regarding their actions.

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The Perpetual Pursuit of Peaceful Dispute Settlement

Mon, 2022-02-28 01:28

One often maps the path of history as the sordid account of one bloody war after another.  But if one were to mark history by the great moments of peace, then the modern era began at 2:00 p.m. on May 18, 1899.  From across the globe, representatives of the world’s most powerful nations gathered for a purpose without precedent.  A purpose filled with an earnest hope, but undoubtedly and intimately grounded in the stark realism of humanity’s flawed condition.  The delegates who gathered that day aimed to sign a peace treaty before there was war, to draft an agreement to reduce arms and resolve future disputes peacefully.  The gathering came to be known as the Hague Peace Conference of 1899.  The Permanent Court of Arbitration was the crowning achievement of the Hague Conference.  The momentum for arbitration had been growing for years, and the delegates seized the opportunity by securing the best mechanism that was acceptable to all the major powers.  The Hague Conference “conveyed to the world the united views of all the assembled nations upon the wisdom and expediency of arbitration as a substitute for war.”

But it was not to last.  On August 1, 1914, Europe was at war.  The Times leader announced, “The great catastrophe has come upon Europe.”  When the German Ambassador delivered the declaration of war on Russia, the Russian Foreign Minister said, “This is a criminal act of yours.  The curses of the nations will be upon you…. You could have prevented the war with one word.”  Britain’s King George V, cousin of both the Kaiser and the Tsar, telegraphed the Tsar, “I cannot help thinking that some misunderstanding has produced this deadlock.” There was no misunderstanding.  Despite every attempt to resolve the matter peacefully—including numerous invitations to resort to the Permanent Court of Arbitration and four powers conferences—Germany and Austria-Hungary ushered in the Great War, the first world war in history.  The pacific dream of reaching the lofty summit of universal peace through international arbitration fell headlong into the abyss.  Great aspirations and grand experiments were of little value in the face of bellicose allies bent on war.

After the Great War they tried again, this time not with the Permanent Court of Arbitration but with an international league of nations.  Upon the birth of the League of Nations in 1919, Woodrow Wilson reflected on the singular achievement of his presidency:

These men did not come across the sea merely to defeat Germany…. They came to defeat forever the things for which the Central Powers stood….  The thing that these men left us, though they did not in their counsels conceive it, is the great instrument which we have just erected in the League of Nations.  The League of Nations is the covenant of governments that these men shall not have died in vain.  It is for us … to use our weapons of counsel and agreement to see to it that there never is such a war again.

There is much to criticize about the Treaty of Versailles and its principal architect Woodrow Wilson.  A bad war was followed by a bad peace.  But all was not lost, for Wilson had his League, albeit without his own country as a member.  From those imperfect beginnings, the foundations of international society were born.  A society of nations slowly developed.  The League became the central pillar of civilization for two decades, and the forerunner to the United Nations, the European Union, and dozens of lesser international organizations.  The statesmen who were in Paris in 1919 wrought both the next world war and the new world order

But the new world order could not prevent the next world war.  On October 3, 1935, Italy had invaded Ethiopia despite stern warnings from the British foreign secretary the previous month that “the League [of Nations] stands, and this country stands with it, for the collective maintenance of the Covenant in its entirety, and particularly for steady and collective resistance to all acts of unprovoked aggression.”  Mussolini ignored such warnings because he knew that British saber rattling assumed French support for collective action, which he accurately predicted would not be forthcoming.  Adolf Hitler was so impressed by the League’s indecisiveness that he took immediate action to test its mettle in the face of German aggression.  In March 1936—less than six months after Mussolini’s invasion of Ethiopia—Germany withdrew from the Locarno Pact and invaded the Rhineland.  It was a bluff, but once again collective action under the League of Nations was tested, and once again the League faltered.  By 1936, the League of Nations was dead.  “One day it was a powerful body imposing sanctions, seemingly more effective than ever before,” wrote historian A.J.P. Taylor. “The next day it was an empty sham, everyone scuttling from it as quickly as possible.”

So they tried again, this time not with the League of Nations, but with the United Nations.  At 10:30 a.m. on August 21, 1944, U.S. Secretary of State Cordell Hull called the conference to order.  For the first time during the war, the delegates of all four major powers—the United States, Great Britain, the Soviet Union, and China—were gathered together to frame the post-war world.  The draft worked from the presumption that the new organization would be organized first and foremost in order to “maintain international security and peace.” Acceptance of this basic American framework allowed the delegates to focus on the details of the future organization.  It also provided a forum for identifying the fundamental issues that still divided the major powers.   The most significant dispute arose one week into the negotiations, when the Soviet Union refused to compromise on the question of the veto rights of permanent members. The Soviets argued that an absolute veto was justified given that “the great powers alone would have the force necessary to maintain peace and security.” The British and Americans countered that smaller nations would accept special arrangements given the major powers’ primary responsibility to maintain security, but they would not accept a complete veto, especially on matters to which a major power was a party.

U.S. President Franklin Roosevelt directly intervened in a September 8, 1944 letter to Soviet Premier Josef Stalin:

Since the founding of the United States, parties to a dispute have never voted in their own case and I know that public opinion in the United States would neither understand nor support a plan of international organization in which this principle was violated.  Furthermore, … the smaller nations would find it difficult to accept an international organization in which the great powers insisted upon the right to vote in the Council in disputes in which they themselves were involved.  They would most certainly see in that an attempt on the part of the great powers to set themselves up above the law.

Stalin replied on September 14, 1944 refusing to compromise, and insisting that the Council must “work on the basis of the principle of coordination and unanimity of the four leading powers on all questions, including … those which directly relate to one of these nations.”  Stalin prevailed, and the United Nations was born with a congenital defect.  The UN Security Council could act on matters of international peace and security only upon the affirmative vote of the permanent members of the Security Council, including matters in which they were the aggressor.

On June 26, 1945, at the final plenary session of the San Francisco Conference, U.S. President Harry Truman expressed his hopes for the new United Nations:

You have created a great instrument for peace and security and human progress in the world.  The world must now use it.  If we fail to use it, we shall betray all those who have died in order that we might meet here in freedom and safety to create it.  If we seek to use it selfishly … we shall be equally guilty of that betrayal.  The successful use of this instrument will require the united will and firm determination of the free peoples who have created it.  The job will tax the moral strength and fiber of us all….  Upon all of us, in all our countries, is now laid the duty of transforming into action these words which you have written.

So, here we are today, with yet another failure of the international order to secure the peace.  On February 25, 2022, fifty-two countries, including three permanent members of the Security Council, delivered a joint statement to the United Nations following Russia’s veto of a Security Council resolution that would have held Russia accountable for its aggression against Ukraine:1) On 27 February, the UN Security Council voted to call for a rare emergency special session of the 193-member UN General Assembly on Russia’s military operation in Ukraine, which will be held on Monday, 28 February 2022. jQuery('#footnote_plugin_tooltip_40843_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40843_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The UN Charter was written with the express purpose of preventing a war like the one President Putin just started…. President Putin chose to violate Ukraine’s sovereignty. President Putin chose to violate international law. President Putin chose to violate the UN Charter…. President Putin is the aggressor here. There is no middle ground. We believe we have a particular responsibility to stand up to this violation of the UN Charter because Russia is a Permanent Member of the Security Council who is culpable. Those of us standing here today continue to believe in the Security Council’s solemn duty and highest purpose – to prevent conflict and avert the scourge of war. Russia has abused its power today to veto our strong resolution. But Russia cannot veto our voices. Russia cannot veto the Ukrainian people. Russia cannot veto their own people protesting this war in the streets. Russia cannot veto the UN Charter. Russia cannot, and will not, veto accountability.

Today we face a great calamity in Ukraine, and a great tragedy of an international body that is impotent to address Russian aggression.  The perpetual pursuit of the peaceful settlement of disputes continues.

References[+]

References ↑1 On 27 February, the UN Security Council voted to call for a rare emergency special session of the 193-member UN General Assembly on Russia’s military operation in Ukraine, which will be held on Monday, 28 February 2022. function footnote_expand_reference_container_40843_30() { jQuery('#footnote_references_container_40843_30').show(); jQuery('#footnote_reference_container_collapse_button_40843_30').text('−'); } function footnote_collapse_reference_container_40843_30() { jQuery('#footnote_references_container_40843_30').hide(); jQuery('#footnote_reference_container_collapse_button_40843_30').text('+'); } function footnote_expand_collapse_reference_container_40843_30() { if (jQuery('#footnote_references_container_40843_30').is(':hidden')) { footnote_expand_reference_container_40843_30(); } else { footnote_collapse_reference_container_40843_30(); } } function footnote_moveToReference_40843_30(p_str_TargetID) { footnote_expand_reference_container_40843_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40843_30(p_str_TargetID) { footnote_expand_reference_container_40843_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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2021 In Review: Continued Strides in Favor of Diversity and Sustainable Development in International Arbitration

Sun, 2022-02-27 05:11

As the field of international arbitration continues to mature, our community grows alongside it. Last year, Dr Maria Fanou and I wrote about this topic from the lens of virtual platforms. We optimistically opined that the increasingly virtual world presented an opportunity for greater collegiality and equity. In late 2020, Maguelonne de Brugiere and Cherine Foty also reflected on the impacts of COVID-19 on diversity and sustainability and referred to the pandemic as a “natural accelerator” for positive behavioral shifts. In this post, which reflects on key developments and blog posts during 2021 and looks ahead to 2022, I remain optimistic that the international arbitration community continues to collectively progress in favor of greater diversity and sustainably-sound practices.  

 

Diversity

Diversity is of course intersectional. In 2022, this statement rarely raises eyebrows and a variety of initiatives and perspectives bring attention to this fact. At the beginning of the year, the launch of Racial Equality for Arbitration Lawyers (REAL) took place, which coincided with Martin Luther King Day. The initiative has already been immensely successful and has resulted in the awarding of 70 scholarships to lawyers and law students around the world to participate in training and other educational programs – an achievement that was nominated for a 2022 GAR Pledge Award

2021 also saw growth of the Rising Arbitrator Initiative (RAI), which aims to support the next generation of arbitrators around the world by creating a support network and encouraging best practices. RAI started off 2021 by interviewing Claudia Salomon, who was recently appointed the first woman President of the ICC International Court of Arbitration in its more than 100-year history. 

While female leadership within our community is a great achievement, Noor Kadhim reminds us that this is not the moment to rest on our laurels. Indeed, in a March 2021 interview, Judge Gabrielle Kirk McDonald noted that, from her point of view, it is only the representation of white women that has improved: “When I say women, unfortunately I mean white women…Although women as a group are doing better, though still not where they should be, race trumps gender, because Black women are still in the lowest of all categories.” Judge McDonald’s perspective brings into stark relief the vast amount of work still required within our community. 

In a September 2021 post, Archismita Raha, Shreya Jain, and Juhi Gupta thoughtfully echoed this sentiment. They examined the gender gap by looking at data provided by arbitral institutions and the metrics it failed to account for – especially its failure to take into account country-specific data, and the oft-ignored challenge of sustainable participation, which entails making opportunities available to a more diverse set of younger practitioners so that they can one day assume leadership positions. 

With respect to arbitrator appointments, much of the data reveals that corporations – and the counsel they select – are ideally placed to cause a sea change by exercising their economic clout. This aligns well with ideas discussed at New York Arbitration Week and CanArbWeek.  Arbitration remains a service industry and, as the industry’s needs and demands change, the arbitration community (which includes practitioners and arbitrators alike) will need to evolve to keep pace and reflect the diversity of cultural understandings, linguistic skills, and other talents required to resolve particular disputes. Meanwhile, unconscious bias may impact the decisionmaking process and drawing from a more diverse arbitrator and mediator pool can help parties reach a more fair decision. At the end of 2021, the USA Subcommittee for the ERA Pledge launched to help raise awareness of and address challenges unique to this large and diverse jurisdiction. Arbitrator Intelligence, for its part, seeks to address the arbitrator challenge from a data-driven point of view – it is impossible to appoint an arbitrator whose qualifications and track record remain unknown. 

 

Sustainability

While the post-COVID period has accelerated our community’s attention to and comfort with virtual meetings and hearings in lieu of frequent and extraneous travel, the question remains how quickly we may fall back on old ways as corporate and governmental travel restrictions are lifted and business returns to normalcy. The 2021 Queen Mary University/W&C International Arbitration Survey examined the external factors that may contribute to whether arbitration is actually becoming “greener.”  In particular, the Survey included a list of measures that might be used to reduce the environmental impact of international arbitration and respondents were asked to answer whether they had experience using that measure, and whether they thought the measure should be used in the future. While the findings were mixed, the dialogue created by the Survey questions is surely a fruitful one. Meanwhile, paperless practices within law firms and as part of arbitrations continue to gain traction.

The broader global dialogue on sustainable development cannot be ignored and creates further pressure. The COP26 Summit took place in October/November 2021 and was the first since the Paris Agreement of COP21 and sought to raise consensus of climate change challenges and seek international support for positive initiatives. Recently on the Blog, Anja Ipp drew attention to the substantive nexus between international investment law, arbitration, and climate law. Stephan Minas also examined whether arbitration presents a venue for carbon market disputes. Just last week, the European Commission published a proposed Directive on “Corporate Sustainability Due Diligence.” The Directive aims to impose enforceable obligations on large European companies, and on large non-EU companies doing business in Europe, drawing attention to their environmental impacts, operations, and corporate supply chains. Collectively, these various ideas dovetail to suggest that we should expect greater synergies between pressing climate-related challenges and international investment and commercial law.

 

Concluding Remarks

Despite pandemic-related slowdowns and shutdowns, 2021 proved to be a significant year for greater diversity and sustainable development among the international arbitration community. Conversations were launched (virtually and in-person) to support greater substantive engagement in 2022 and beyond. Few would argue with the need for greater intersectional diversity among practitioners and arbitrators to serve arbitration users and stakeholders and significant efforts are underway to support emerging talent. Meanwhile, the pressing global need for more sustainable and environmentally-sound business practices is gaining prominence. The arbitration community is watching these developments closely and appears well-poised to respond in a greener and earth friendly way.

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Approaches to Providing for Mediation in Investment Treaties and Model Clauses

Sat, 2022-02-26 01:45

In 2021, ICSID conducted an extensive survey of dispute resolution clauses in bilateral investment treaties (BITs), free trade agreements (FTAs) and other treaties (including model treaties). The data set comprised more than 900 treaties, from which nearly 350 clauses were identified for closer analysis. The overarching goal of the survey was to see to what extent, and how, existing dispute resolution clauses already provide for mediation and/or other forms of amicable dispute resolution, and to provide the investor-state dispute settlement (‘ISDS’) community with a useful resource for addressing the question of the role that mediation can and should play in the resolution of investor-state disputes.

 

The Evolution of Approaches to Investor-State Dispute Settlement in Investment Treaties

The survey highlighted that the ways in which dispute settlement clauses in investment treaties (including model treaties) have provided for amicable dispute resolution generally, and mediation specifically, have evolved considerably.  Many early generation investment treaties (predating the 1990s) provided only for the submission of an investment dispute for resolution by arbitration or conciliation at the investor’s election. These early treaties made no mention of alternative dispute resolution mechanisms prior to this step (see e.g., Article 6 of the Jordan-UK BIT (1976)).  Over the past 25-30 years, however, there has been a gradual trend to provide expressly for amicable dispute resolution within disputes clauses. The last decade, in particular, has seen an increase in clauses providing for mediation as a means of amicable dispute resolution, as explained further below.

 

Categories of Investor-State Dispute Settlement Clauses Providing for Amicable Dispute Resolution

Broadly speaking, investor-state dispute settlement clauses that include amicable dispute resolution methods can be placed into five categories:

  1. Clauses which have an amicable settlement period and, usually, a bare direction to seek “amicable settlement” prior to the institution of arbitration. Such clauses typically make the initiation of an arbitration contingent only upon the dispute having not been resolved during the amicable settlement period (and do not affirmatively require the parties to do anything within this period).  The process the parties might use to achieve amicable settlement is not addressed. An example of a clause in this category is Article 10 of the Peru-UK BIT (1993), which provides that disputes “shall, as far as possible, be settled amicably between the two parties concerned.   If any such dispute cannot be settled within three months between the parties to the dispute through amicable settlement, pursuit of local remedies or otherwise, each Contracting Party hereby consents to submit it to [ICSID] for settlement by conciliation or arbitration…”
  2. Clauses that expressly permit mediation or other specified amicable dispute resolution mechanism prior to arbitration. These clauses expressly provide for amicable settlement, by (i) providing for optional “non-binding third party procedures” (or similar), which would include mediation, or (ii) providing specifically for optional mediation. However, they go no further than this.  For example, Article 23 of the Australia-Hong-Kong IA (2019) requires the parties to the dispute to “initially seek to resolve the investment dispute through consultations, which may include the use of non-binding, third party procedures, such as good offices, conciliation or mediation,” and makes submission of a claim to arbitration contingent upon six months having elapsed following the initiation of this consultation process.
  3. Clauses affirmatively encouraging the use of mediation or other amicable dispute resolution mechanisms in the amicable settlement / “cooling off” period. These clauses go beyond merely permitting mediation or another amicable dispute resolution mechanism, to affirmatively encouraging A clause may stipulate that specific conditions or milestones must be achieved with respect to the designated amicable dispute resolution mechanism, in the period after the filing of the notice of dispute/request for consultations, thereby gently encouraging the affirmative use of the mechanism. For example, Article 31 of the ASEAN Comprehensive IA (2009) imposes a timeframe for the commencement of amicable settlement discussions (defined to included non-binding, third party procedures), stipulating that “Consultations shall commence within 30 days of receipt by the disputing Member State of the request for consultations, unless the disputing parties otherwise agree.” The Colombia Model BIT (2017) takes a slightly different track, mandating that the amicable dispute resolution procedure (in this instance “consultation and negotiations”) take place over a minimum timeframe and not simply that a particular timeframe must elapse before an arbitration can be commenced.  Other clauses, such as Article 17.1 of the Netherlands Model IA (2019), impose an obligation on the disputing parties to give favorable consideration to a request for mediation.
  4. Clauses mandating mediation or other amicable dispute resolution mechanisms prior to arbitration. A small handful of clauses have gone further still, by (i) imposing an obligation on both disputing parties to undertake mediation unless another method of amicable dispute resolution is agreed (e.g., Article 26(2) of the COMESA Investment Agreement (2007)), by (ii) requiring a designated amicable dispute resolution procedure to actually have taken place before an arbitration can be initiated (e.g., Article 3.35 of the EU-Viet Nam IPA (2019)), or by (iii) making participation in the designated amicable dispute resolution procedure mandatory for the investor, at the State’s election (e.g., Article 14.23 of the Australia-Indonesia CEPA (2019)) (or including advance consent of the State to mediate at the investor’s election, e.g., Articles 19 and 20 of the Mainland-Hong Kong CEPA Investment Agreement (2017)).
  5. Clauses permitting mediation at any point in time (i.e., stand-alone mediation). These clauses provide, in addition to typical provisions permitting arbitration of a dispute, that the parties can agree to mediation of a dispute at any point in the dispute resolution process (i.e., prior to or during the amicable settlement period or parallel to an ongoing arbitration). Such clauses make mediation optional, and subject to an additional agreement to mediate between the investor and the State.  Article 23 of the Burkina-Faso-Canada BIT (2015) provides an example of such a clause, stipulating that “[t]he disputing parties may at any time, be it after notice of intent to submit a claim to arbitration has been given or after a claim has been submitted to arbitration, agree to mediation.”

 

Regulation of Procedure for Mediation

The survey also revealed great variety in the ways in which the procedure of a mediation is regulated (if at all).  Most treaties that expressly provide for amicable dispute resolution, including through mediation, do not regulate the procedure to be adopted.  This may reflect the understanding that the appropriate procedure in any given case is dispute-specific, and can readily be agreed upon by the parties to the dispute (including through the incorporation of institution-specific investment mediation rules).  However, to the extent disputes clauses do regulate the procedure, they typically provide only minimal procedural guidance relating to the commencement of the process (e.g., written notice requirements, the designation of responsible agencies), and how the process interacts with other proceedings relating to the same dispute (e.g., clauses addressing without prejudice privilege and confidentiality, or the staying of a related arbitration during the pendency of a mediation).

 

Issues to be Considered by Drafters of Dispute Settlement Clauses

On the whole, the survey demonstrated that drafters of disputes clauses seeking to include mediation might consider, inter alia:

  1. when to make mediation available (early, during the amicable dispute period, or at any stage);
  2. whether to make mediation entirely optional or to endeavor to encourage or even mandate mediation;
  3. the appropriate duration of an amicable dispute period, should mediation be envisioned as taking place in this period;
  4. the timing of, and requirements for, a written notice of dispute/ request for mediation;
  5. whether to stipulate the agency to which notices relating to disputes should be sent, to ensure timely notification of disputes within a state; and
  6. the extent to which other procedural aspects of mediation should be explicitly addressed in a Treaty (another option is to stipulate a set of institutional mediation rules that are to apply).

As treaty drafting continues to become more sophisticated, and as recognition that mediation can be an effective means for the resolution of investor-State disputes increases, we expect to see even more varied and innovative approaches to including mediation in disputes clauses in the coming years.

 

The author wishes to thank Frauke Nitschke and Damon Vis-Dunbar, as well as Esmé Shirlow, for their helpful peer reviews.

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Nudging Better Arbitrations? An Introduction to the Revised 2021 Delos Rules of Arbitration

Fri, 2022-02-25 01:16

Delos Dispute Resolution (Delos) has introduced its first significant update to the Delos Rules of Arbitration (the 2021 Delos Rules) which entered into force on 1 November 2021.  The new rules range from including new provisions which align with other major arbitral institutions, for example on joinder and consolidation, to more radical innovations such as the introduction of a “Compliance Failure Notice” and new provisions encouraging settlement.

The Delos Rules first launched in January 2014 and marked the creation of Delos, a nascent arbitral institution seeking to provide the arbitration market with a new offering that promised fair and efficient resolution of disputes through arbitration.  Delos was established by arbitration practitioners, following a year of extensive research and discussion, and is advised by independent and experienced arbitration practitioners and global leaders in the field of international arbitration and dispute resolution.

The Delos Rules differ to the rules of other major arbitral institutions, such as the London Court of International Arbitration (LCIA) or the International Chamber of Commerce (ICC), because they are designed to nudge participants in an arbitration, both the parties and arbitrators, to make time and cost-efficient choices with a “systematic combination of incentives and innovations” – whether that be at the contract formation stage, pre-arbitration phase, the initial claim documents, constitution of the tribunal, conduct of the proceedings, costs of the arbitration, encouraging settlement, compliance with the awards and so on.

Alignment with Other Major Arbitral Institutions

The latest update aligned the Delos Rules with other major arbitral institutions, such as the LCIA and ICC, by including provisions addressing joinder, consolidation, ex parte interim measures, and consent awards.  The 2021 Delos Rules also address recent developments in arbitral practice:

  • In view of the increased use of remote hearings due to the COVID pandemic, the 2021 Delos Rules expressly provide that the tribunal may “render an award with or without holding an oral hearing or meeting and […] conduct the same remotely […]” (Article 12.4(d)). The inclusion of an express power to hold remote hearings clarifies the tribunal’s discretion to decide on how proceedings should be conducted and recognises that proceeding with a remote hearing will not necessarily constitute a breach of due process.  Delos was notably one of the very first institutions to put together a compendium of links to articles and advice in response to the pandemic, as well as its own virtual hearing protocol in March 2020 (nominated for a GAR special recognition award).
  • The 2021 Delos Rules now require the legal representatives of a party to disclose the identity of any non-parties from whom they are taking instructions. This disclosure obligation applies for the entire duration of the arbitration to assist prospective and acting arbitrators in complying with their disclosure duties (Articles 7.2 and 7.3; see also the 2021 ICC Rules and 2021 Vienna International Arbitration Centre (VIAC) Rules). While this disclosure obligation already existed under General Standard 7 of the IBA Guidelines on Conflicts of Interest in International Arbitration, the introduction of an express disclosure requirement is timely given the increase in funded arbitration claims.

Compliance Failure Notice

The most novel change is undoubtedly the introduction of the “Compliance Reinforcement Mechanism” (Article 16 and Appendix 6).  The Compliance Reinforcement Mechanism allows an award creditor to request the publication on Delos’ website of a Compliance Failure Notice, once the time-limits for all forms of recourse against the award have expired at the seat of the arbitration and the award has not been annulled or overturned at the seat of the arbitration.

Delos retains a discretion on whether to publish the Compliance Failure Notice and will consider the award debtor’s comments on the request (if any).  Both parties may also include statements to be published with the Compliance Failure Notice (Appendix 6(5)).  The Compliance Failure Notice may also be varied or removed by either of the parties at any time, for example where it would be appropriate to reflect a reduced extent of non-compliance (if requested by the award creditor) or where the parties wish to vary their statements (Appendix 6(6)).

The new compliance mechanism applies as the default rule under the 2021 Delos Rules unless the Delos arbitration agreement was concluded before 1 November 2021 or the parties have agreed to opt out (Article 16.2).  Importantly, the mechanism has been designed so that it may be used by all parties, irrespective of whether their arbitration agreement or award refers to the Delos Rules, so long as the parties to an arbitration agree to use of the mechanism (including all related disclosures of information).  Delos hopes that use of the Compliance Failure Mechanism will encourage award debtors to behave in a reasonable manner (e.g., complying with the award or considering a potential settlement of the dispute).

The introduction of the new compliance mechanism signals Delos’ willingness to take a more active role at the enforcement stage.  No doubt the arbitration community will be monitoring the take-up of this mechanism closely, and in particular, how Delos will exercise its discretion to publish awards when complex questions of non-compliance arise (for example, where interim or conditional awards are at issue or where compliance is difficult for reasons outside the award debtor’s control).

Settlement

The 2021 Delos Rules introduce an express power for the tribunal to include a pause in the arbitration timetable so that the parties may consider engaging, at their discretion, in settlement discussions (Article 12.3(a)).  Importantly, the 2021 Delos Rules do not require the parties to report to the tribunal on whether such discussions even took place or their outcome.  This type of power has notably been included in the recent update to the VIAC Rules (Article 28(3)).

The inclusion of such a provision is in keeping with one of the foundational principles of the Delos Rules, namely that arbitral rules should encourage parties to anticipate and tackle issues early.  Indeed, Delos already nudges the parties towards settlement by suggesting in their model clause that parties incorporate a pre-arbitration negotiation period.  To incentivise this, the Delos Rules expressly empower the tribunal to allocate pre-arbitration negotiation costs incurred by the parties “in connection” with the arbitration and any reasonable offers to settle made openly or without prejudice save as to costs (Article 12.4(f)).

The 2021 Delos Rules have also introduced a new pre-award mechanism with settlement in mind.  Provided the parties have paid the full amount of the costs of the arbitration, after the closure of proceedings and before the tribunal delivers its draft award to Delos, the parties (if agreed) can request the tribunal to: (i) provide a non-binding indication of its likely decision on all or part of the issues in dispute, and (ii) failing any request from the parties within the 60 days following the tribunal’s non-binding decision, consider all claims to have been withdrawn on a without prejudice basis with costs lying where they fall unless otherwise agreed (Article 13.7).  The hope is that this provision will lead to more parties settling their disputes amicably, avoiding the costs and delay of enforcement proceedings later on.

List of Prospective Arbitrators

The Delos Rules emphasise cooperation between the parties and require the parties to jointly nominate a sole arbitrator (the default position in the majority of cases) or agree the procedure for the chair’s nomination (if a three-member tribunal is constituted).  The Delos Rules tie the time available to the parties for the nomination of the arbitrator(s) to the value of the dispute, which lengthens or shortens the time available to parties when compared to other arbitration rules (Article 11).  If the parties fail to cooperate as required within the strict deadlines set out in the Delos Rules, then Delos will appoint the arbitrator(s).

The 2021 Delos Rules have sought to restore the parties’ sense of ownership in a default Delos’ appointment, by including a new provision, Article 11.4, empowering Delos to propose a list of prospective arbitrators to the parties.  Accordingly, while the 2021 Delos Rules prioritise efficiency and a certain pragmatism in the formation of arbitral tribunals, they also recognise the importance of building consensus around the eventual appointee(s).

Evolution of the “safe seat” Approach to Arbitrating

Another significant development is the recent update in Delos’ approach to “safe seats”.  Delos had previously introduced the concept of “safe seats” in its model clauses, asking parties to pick a safe seat from a list Delos provided.  Delos has now updated its model clause to allow the parties to choose whatever seat they would like.

We note however that this change in approach is of limited impact since the model clause continues to nudge parties to choose a safe seat for reasons of time and cost-efficiency, and refers the parties to the Delos Guide to Arbitration Places (GAP), which sets out a list of “safe seats”.  Further, the 2021 Delos Rules provide that Delos will continue to consider the seat of the arbitration in fixing the arbitration costs, and for that reason, choice of an “unsafe” seat remains likely to increase the time and costs of a Delos-administered arbitration (Article 14.2; see Appendix 7).

Conclusion

Although Delos remains a young arbitral institution, the 2021 Delos Rules herald a new approach to rule design and arbitral procedure; the rules actively attempt to pre-empt and orient the parties’ conduct away from any potential misalignments of interest, which tend to increase the time and cost of arbitration.  The 2021 Delos Rules are further supported in this endeavour by Delos’ impressive knowledge function which Delos uses to better inform, and ultimately nudge, the arbitration community towards achieving greater efficiency in arbitration.  In our view, such efforts should be commended.

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IC Power v. Guatemala: Setting the Standard on Past Investments and Denial of Justice in Investment Claims

Thu, 2022-02-24 01:09

The recently surfaced award in IC Power Asia Development Ltd. v. Guatemala dated 7 October 2020 reveals the reasoning of the Tribunal’s majority in dismissing IC Power’s claims on the merits. A majority of Albert Jan van den Berg (chair) and Raúl Vinuesa (Respondent’s appointee) dismissed IC Power’s claims on the merits, while Guido Santiago Tawil (Claimant’s appointee) dissented.

The Tribunal acted under the UNCITRAL Rules and the dispute was brought under the Guatemala-Israel BIT (2006) (the “BIT”). Among the many legal issues analyzed by the Tribunal, this entry focuses on two main issues. On jurisdiction, the tribunal upheld jurisdiction even when the investment had been sold before the commencement of the arbitration. On the merits, the Tribunal reaffirmed that international law accords a high level of deference to the decisions of domestic courts and does not purport to have investment tribunals act as courts of appeal. Below we discuss these two issues, after a brief recollection of the factual background.1)The award on this case became public recently in the context of enforcement proceedings in the United States. Guatemala was awarded more than USD 1.8 million on legal and arbitration costs. At the time of this publication, the dissenting opinion remains unpublished. jQuery('#footnote_plugin_tooltip_40694_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40694_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

Background

In 2011, UK investment fund Actis LLP (“Actis”) acquired the Guatemalan group Energuate from Unión Fenosa Internacional S.A. The Group included two Guatemalan electricity distribution companies (DEORSA and DEOCSA, together the “Companies”), a transmission company and a trading company. In May 2012, the Guatemalan Superintendence of Tax Administration (the “SAT” for its Spanish acronym) initiated an audit of the Companies due to a significant reduction in their tax collection (the “Audit”). The SAT identified that the Actis purchase transaction had caused irregular tax deductions in favor of the Companies. In 2015, Actis obtained two binding tax opinions, apparently solving the tax dispute. The SAT did not take the investigations further.

In January 2016, Energuate was acquired by Israeli company IC Power Asia Development Ltd. (the “Claimant”) for a value of USD 265 million. On 13 July 2016, the SAT filed a criminal complaint against the Companies for tax fraud after reviewing the Audit due to a corruption scandal involving former SAT employees. The criminal court at issue granted the SAT’s petition to enact provisional measures over Energuate’s bank accounts, lifted only after Energuate paid the SAT around USD 75 million under protest.2)The criminal proceeding remains open and unresolved. jQuery('#footnote_plugin_tooltip_40694_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40694_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); On 31 December 2017, IC Power closed the sale of its stake at Energuate to a third party, while expressly retaining its rights to bring a treaty claim against Guatemala. Two months after the sale, IC Power filed a Notice of Arbitration (the “NOA”) against Guatemala.

 

On Jurisdiction: A Voluntary Sale of the Investment Prior to the Commencement of the Arbitration Does Not Preclude Treaty Protection

Among the jurisdictional objections dismissed by the Tribunal was that Claimant did not have an “investment” under the BIT because it had sold its shares in the Companies prior to initiating the dispute. Guatemala relied on David R. Aven, et.al. v. Costa Rica to argue that an investor who disposes of ownership should not be eligible to seek investment protection unless “special circumstances” are present, e.g. a loss of the investment due to third-party or state actions. According to Guatemala, a voluntary sale of the investment due to market reasons would not meet this threshold. (Award, ¶¶ 355-356)

In turn, IC Power argued that the relevant date to assess jurisdiction should not be that of the NOA, but the date on which the alleged breach occurred. Claimant also emphasized that it had expressly reserved the right to pursue a treaty claim during the sale, and said retained right qualified as an investment under the BIT. Claimant relied on El Paso v. Argentina to point out that there is no rule of continuous ownership of the investment or otherwise expropriations would automatically bar investor’s rights to bring any claim. Claimant distinguished its case from David R. Aven where the investor did not expressly retain any rights, and where the underlying treaty (the CAFTA-DR), unlike the BIT, required continuous ownership.

The Tribunal upheld jurisdiction. First, the Tribunal held that under the text of Article 1.1 of the BIT, an “investment” would have to be physically located in Guatemala or arise as a matter of domestic law, which was not the case of a treaty claim.3)Israel – Guatemala BIT (2006), “Article 1: Definitions I. For the purposes of the present Agreement: (a) ’Investments’ shall mean any kind of assets, implemented in accordance with the legislation of the Contracting Party in whose territory the investment is made including, but not limited to: (…)”. jQuery('#footnote_plugin_tooltip_40694_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40694_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Additionally, the Tribunal referred to Axos Capital v. Kosovo to clarify that treaty claims do not constitute investments per se.

Second, the Tribunal found that the text of the BIT was ambiguous and did not answer if a dispute could be submitted to arbitration in respect of a former investment that was sold prior to the commencement of the proceedings. The Tribunal sought answers from general international law and the practice of international tribunals.

The Tribunal started its analysis by pointing to the broadly accepted rule that jurisdiction must be assessed at the date on which the proceedings are commenced and that this rule is subject to derogation, e.g. a claimant whose investment has been expropriated and who brings an expropriation claim. Additionally, the Tribunal found that the aforementioned rule is not absolute, and special circumstances may justify extending treaty protection to a claimant who voluntarily disposed of an investment prior to commence arbitration (relying on David R. Aven). On this point, the Tribunal clarified that special circumstances need not be exceptional, but it meant that there must be a valid reason for a claimant to bring a claim that it would otherwise be unable to bring.

Furthermore, the Tribunal reaffirmed that the text of the BIT controlled, and here, the BIT did not include any requirement of continuous ownership of the investment.

Interestingly, the Tribunal clarified that the retention of treaty claims has to be qualified to allow investors to bring future disputes: (a) the retention must be absolute (in the sense that the new owner of the investment is barred from bringing the same treaty claim based on the same facts); and (b) claimant must have fulfilled the treaty’s requirements for a qualifying investor and qualifying investment at some point prior to the commencement of the arbitration.

On these grounds, the Tribunal found that IC Power was eligible to seek Treaty protection of its retained Treaty claims. In their analysis, the Tribunal reaffirmed the rule introduced in David R. Aven and expanded its application to allow investors to bring claims after the voluntarily disposal of the investments so long as there is a qualified retention of treaty claims. This heightened standard sheds a light for investors that are seeking to divest their investment and fear not being able to hold treaty rights in the future. However, investors must first abide by the text of the applicable treaty at issue, since it may include a mandatory continuous ownership requirement.

 

On the Merits: Conduct of Local Courts Can only Generate International Responsibility under the Standard of Denial of Justice

IC Power argued that Guatemala had breached the FET standard in Article 2(2) of the BIT through a breach of legitimate expectations, arbitrary conduct, breach of procedural fairness and due process, and lack of transparency. Claimant’s claims arose from the SAT’s decision to initiate criminal proceedings and submit seizure orders against the Companies in alleged disallowance of the binding tax opinions and without exhausting administrative proceedings under Guatemalan law. Claimant also claimed a breach of FET in relation to the criminal court’s decision in granting seizure orders. Guatemala denied all these allegations.

The majority of the Tribunal held that the local criminal court’s action could only give rise to a breach of the BIT under the standard of denial of justice, an allegation that Claimant did not raise. The Tribunal recalled that international law accords a high level of deference to the decisions of domestic courts and does not purport to have investment tribunals act as courts of appeal. Simply put, the Tribunal did not want to second-guess determinations that had been made at the local level, which the majority found reasonable under the circumstances.

The Tribunal resorted to the standard set out in Robert Azinian, et. al. v. Mexico to identify different instances of denial of justice: e.g. refusal to entertain a suit, undue delay in the issuance of a decision, seriously inadequate administration of justice or clear and malicious misapplication of the law. In addition, the exhaustion of local remedies has also been regarded as one of the main grounds for denial of justice, as set in Loewen v. United States and revived in Jan de Nul N.V. et. al. v. Egypt. The Tribunal characterized Claimant’s allegations within the paradigms of denial of justice in Azinian, concluding that they could not entertain Claimant’s claim on arbitrariness (under a FET breach) because Claimant did not claim denial of justice.

The Tribunal’s analysis and majority decision on this particular point reinforce the predominant position of the international community with respect to the interplay between local courts and international tribunals: international law imposes a particularly high threshold for conduct of the judiciary to give rise to international responsibility through denial of justice. This balance seems to play a crucial role in delimiting the role of international tribunals in disputes that involve decisions from local courts. However, the predominance of this position remains to be tested in future cases involving denial of justice claims, in particular those in which the alleged conduct does not only entail decisions from the judiciary, but also governmental actions; or those in which arbitrariness derives from the alleged misuse of the judiciary.

The authors thank María Inés Corrá for her guidance and review of this article.

References[+]

References ↑1 The award on this case became public recently in the context of enforcement proceedings in the United States. Guatemala was awarded more than USD 1.8 million on legal and arbitration costs. At the time of this publication, the dissenting opinion remains unpublished. ↑2 The criminal proceeding remains open and unresolved. ↑3 Israel – Guatemala BIT (2006), “Article 1: Definitions I. For the purposes of the present Agreement: (a) ’Investments’ shall mean any kind of assets, implemented in accordance with the legislation of the Contracting Party in whose territory the investment is made including, but not limited to: (…)”. function footnote_expand_reference_container_40694_30() { jQuery('#footnote_references_container_40694_30').show(); jQuery('#footnote_reference_container_collapse_button_40694_30').text('−'); } function footnote_collapse_reference_container_40694_30() { jQuery('#footnote_references_container_40694_30').hide(); jQuery('#footnote_reference_container_collapse_button_40694_30').text('+'); } function footnote_expand_collapse_reference_container_40694_30() { if (jQuery('#footnote_references_container_40694_30').is(':hidden')) { footnote_expand_reference_container_40694_30(); } else { footnote_collapse_reference_container_40694_30(); } } function footnote_moveToReference_40694_30(p_str_TargetID) { footnote_expand_reference_container_40694_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40694_30(p_str_TargetID) { footnote_expand_reference_container_40694_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Brazilian Superior Court of Justice (STJ) Reaffirms Brazil as an Arbitration Friendly Jurisdiction

Wed, 2022-02-23 01:30

On November 3, 2021, a decision rendered by the Third Panel of the Brazilian Superior Court of Justice in the Special Appeal No. 1.953.212-RJ (OSX Construção Naval v. AGF Engenharia) was published under the opinion of Minister Nancy Andrighi. The decision addresses relevant issues for arbitration in Brazil and demonstrates the support given by Brazilian courts to arbitration.

 

Background

OSX Construção Naval S.A., OSX Brasil S.A., and OSX Serviços Operacionais Ltda. pleaded for judicial reorganization in the State Court of Rio de Janeiro on November 11, 2013. The reorganization proceedings ended successfully on November 23, 2020, when the reorganization plan was finally approved by the court.

The arbitration claimant, AGF Engenharia, filed a claim against OSX Construção Naval S.A. requesting the payment of R$ 7,585.009.12 to the arbitral tribunal for extra-bankruptcy credits, that is, credit related to services provided after the request for judicial reorganization. The tribunal issued a partial award asserting its competence to determine the existence and the amount of the credit, and therefore to decide issues with regard to the an debeatur as well as to the quantum debeatur. The arbitral tribunal established its competence in terms of arbitration to assess only extra-bankruptcy credits‎.

OSX Construção Naval S.A. challenged the partial award. It argued that, by hearing and deciding extra-bankruptcy claims, the arbitration tribunal acted outside the limits of the arbitration agreement, and in detriment of the jurisdiction of the Judicial Reorganization Court.

 

The Court’s Analysis

Competence-Competence & Objective Arbitrability

The Superior Court of Justice sided with AGF Engenharia‎ and endorsed the competence-competence principle under the terms of article 8, sole paragraph, and article 20, both of the Brazilian Arbitration Act. In her opinion, Justice Nancy Andrighi stated that only “the practice or control of acts of enforcement of individual credits against bankrupt companies or against companies under judicial reorganization” is within the exclusive jurisdiction of the Judicial Reorganization Court. In consequence, the court concluded that the arbitral tribunal’s decision on the credit’s existence and amount‎ did not violate said exclusive jurisdiction.

Article 6º § 1º of the Brazilian Bankruptcy Act (Law 11.101/2005) claims that the declaration of bankruptcy or judicial reorganization implies the continuation of the court proceedings that deal with gross values (illiquid). Therefore, under these terms, it would be the arbitral tribunal’s competence to assess any credit-related dispute under the arbitration agreement, except for any enforcement action (the judicial reorganization state court exclusively performs these acts). Thus, it all comes down to a discussion of objective arbitrability of the bankruptcy and extra-bankruptcy credits.

The same Justice ruled similarly in a 2014 decision, stating in that occasion that:

Nevertheless, the necessary strengthening of arbitration led to effect from the promulgation of the Arbitration Act of 1996 makes it essential to preserve the arbitrator’s authority as much as possible for she is the judge in fact and law for issues related to the merit of the cause. [Disrespect of] such a [principle] would empty the content of the Arbitration Act, allowing, simultaneously, the same question to be assessed, although in perfunctory cognition, by the state judge and the arbitrator, often with severe possibilities of conflicting interpretations for the same facts.

The Superior Court of Justice dealt in this case, as it did several times before, with the concept of objective arbitrability. Article 1 of the Brazilian Arbitration Law specifically addresses the subject. Only issues regarding transferable property rights can be solved by arbitration in Brazil. The Court’s decision correctly understood that granting the request for judicial reorganization does not change the nature of the credit, as transferable property rights, and therefore does not modify the competence of the arbitral tribunal. It is noteworthy that the Brazilian Bankruptcy Act (Law 11.101/2005) and its recent amendment of 2020 (Law 14.112/2020) states that neither the claim for judicial reorganization nor the declaration of bankruptcy invalidates the arbitration agreement or impedes the initiation of the arbitration procedure (Article 6º, § 9º).

Challenge of Arbitration Awards

Moreover, the decision addressed the possibility of challenging arbitration awards, on the grounds of item IV of article 32 of the Brazilian Arbitration Act. Such article establishes that an arbitration award rendered outside the limits of the arbitration agreement is null and void. In an investigation carried out in two main Brazilian state courts (Court of Justice of São Paulo, and Court of Justice of Rio de Janeiro), between 2015 (January) and 2019 (December), considering challenges against arbitration awards, Euclides Filho and Daniel Ferreira concluded that the previously mentioned provision is the most used ground to attempt to set aside an arbitration award. In cases before the Court of Justice of São Paulo, the main arbitration seat in the country, parties seeking to vacate an arbitration award (partially or totally) succeeded in 17.32% of the cases).1)(See FILHO, Euclides; FERREIRA, Daniel B.. Ação anulatória de sentença arbitral: uma análise doutrinária ‎e empírica da jurisprudência dos Tribunais de Justiça dos estados de Santa Catarina, Rio de Janeiro e ‎São Paulo, entre 2015 e 2019. Revista Brasileira de Alternative Dispute Resolution, vol. 2, n. 3, pp. 195-‎‎214, 2020. Available at: https://rbadr.emnuvens.com.br/‎ jQuery('#footnote_plugin_tooltip_40594_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40594_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In the Court of Justice of Rio de Janeiro, the percentage was 14.28%. It is essential to point out that this percentage only represents the successful challenges and has no relation to the total number of arbitration awards rendered within that period in Rio de Janeiro and São Paulo. On the contrary, if the parameter to be considered were the total number of arbitration awards, the percentage of successful cases would drop radically, since the majority of arbitral awards are not challenged in Brazilian Courts.

Malicious Prosecution

Finally, it is worth addressing the issue of malicious prosecution. Malicious prosecution in Brazil is regulated by articles 79 to 81 of the Brazilian Civil Procedure Code (Law 13.105/2015). It occurs when a plaintiff, defendant or even third party litigates in bad faith. A malicious litigant is one who: I – files a claim or defense contrary to the express provisions of the law or an indisputable fact; II – alters the truth of the facts; III – uses the proceedings to achieve illegal aims; IV – unjustifiably resists the prosecution of the lawsuit; V – acts frivolously in any procedural act; VI – institutes unfounded proceedings; VII – files a frivolous appeal. As a general rule, parties found guilty of malicious prosecution are ordered to pay a fine for their misconduct.

During the arbitration, OSX requested the tribunal to include in the arbitral award its rationale and conclusion about its competence on extra-bankruptcy credits‎.  OSX did this in order to later challenge the award on the arguing that the assessment of extra-bankruptcy credits should be exclusive of the judicial reorganization state court and that the arbitral tribunal had, therefore, exceeded its powers under the arbitration agreement. Justice Andrighi ‎ expressly rejected OSX’s argument. However, she did not order OSX to pay a malicious prosecution fine as requested by ‎ AGF Engenharia‎. The decision is consistent with the Court’s jurisprudence. In a decision of 2012, the same Justice already stated that “the mere filing of the appropriate appeal, even with arguments repeatedly rejected by the original Court or without the allegation of any new ground able to refute the contested decision, does not reflect malicious prosecution nor justifies the imposition of a fine.”

 

Conclusion

In the present case, according to the Brazilian Superior Court of Justice, the arbitral tribunal exercised its power within the limits of the arbitration clause and without practicing any enforcement measure, avoiding any issue whatsoever that might be of exclusive jurisdiction of the Judiciary.

In short, we might say that, once again, the Superior Court of Justice reaffirmed its deference to arbitration rulings, interpreting article 32 (arbitral awards challenging hypothesis) of the Brazilian Arbitration Act formally and narrowly. The Court considered that the situations that allow the Judiciary to declare an arbitration award void and null are those exhaustively mentioned in article 32. Furthermore, it demonstrated that the nature of the disputed claim does not detract from the arbitral tribunal’s competence to decide whether the amount is due and how much is owed. The ruling is an important decision that honors arbitration and demonstrates that Brazil is an arbitration-friendly country.

References[+]

References ↑1 (See FILHO, Euclides; FERREIRA, Daniel B.. Ação anulatória de sentença arbitral: uma análise doutrinária ‎e empírica da jurisprudência dos Tribunais de Justiça dos estados de Santa Catarina, Rio de Janeiro e ‎São Paulo, entre 2015 e 2019. Revista Brasileira de Alternative Dispute Resolution, vol. 2, n. 3, pp. 195-‎‎214, 2020. Available at: https://rbadr.emnuvens.com.br/‎ function footnote_expand_reference_container_40594_30() { jQuery('#footnote_references_container_40594_30').show(); jQuery('#footnote_reference_container_collapse_button_40594_30').text('−'); } function footnote_collapse_reference_container_40594_30() { jQuery('#footnote_references_container_40594_30').hide(); jQuery('#footnote_reference_container_collapse_button_40594_30').text('+'); } function footnote_expand_collapse_reference_container_40594_30() { if (jQuery('#footnote_references_container_40594_30').is(':hidden')) { footnote_expand_reference_container_40594_30(); } else { footnote_collapse_reference_container_40594_30(); } } function footnote_moveToReference_40594_30(p_str_TargetID) { footnote_expand_reference_container_40594_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40594_30(p_str_TargetID) { footnote_expand_reference_container_40594_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Parties’ Confidentiality Obligations in International Commercial Arbitration: A Dutch Perspective

Tue, 2022-02-22 01:00

Confidentiality is perceived to be one of the advantages of international (commercial) arbitration. Despite this, institutional arbitration rules are largely (or even completely) silent on the parties’ confidentiality obligations, leaving such issues to be determined by the parties and/or the tribunal or, in many cases, the applicable law. Defining what the duty of confidentiality – if any – entails, is thus, not easy. These obligations may vary from not disclosing the merits of the case to not disclosing the amount in dispute or not disclosing the existence of the arbitration itself. The approach that different jurisdictions follow with regard to such obligations provides no further clarity.

This contribution aims to provide a brief overview on confidentiality from a Dutch law perspective. First, this blog post touches upon the general notion of confidentiality under Dutch arbitration law. Next, it discusses two clear-cut exceptions thereof. Lastly, it assesses what difficulties may arise and how to remedy these when seeking to enforce any confidentiality obligations. The analysis limits itself to the parties’ obligations, leaving aside any obligations of tribunals or arbitration institutions.

 

The notion of confidentiality under Dutch arbitration law

Confidentiality remains a primary feature of Dutch arbitration law, even though the current version of the Dutch Arbitration Act (“DAA“) neither defines the notion of confidentiality nor provides explicit party obligations. As part of the process of amending the DAA to its current version, the possibility of explicit confidentiality obligations was discussed in 2005. At that time, Prof. van den Berg proposed explicitly recognising this principle, by adding the following wording: “An arbitration is confidential, and all persons directly or indirectly involved are bound to secrecy, except and to the extent that disclosure follows from the law or the parties’ agreement” (unofficial translation).

The Dutch Minister of Security and Justice, however, rejected this proposal. The Minister’s view was that codifying confidentiality would be difficult, as the proposed wording left too much room for discussion as to the scope of confidentiality, which would have resulted in legal uncertainty. Moreover, the Minister considered that Article 1058(4) of the Dutch Code of Civil Procedure (“DCCP”) under the 2015 DAA, which provides that no copies of or extracts from arbitral awards shall be provided to third parties, served to safeguard confidentiality. Yet, this provision does not fully remedy the absence of an explicit confidentiality rule setting out the scope of confidentiality, nor does it clarify who must comply with confidentiality obligations.

Ultimately, the Minister stated that confidentiality of international (commercial) arbitration was already an unwritten rule under Dutch arbitration law and would remain so.

 

The notion of confidentiality under Dutch institutional rules

Although Prof. van den Berg’s proposal was not ultimately adopted in the DAA, it found its way into the 2010 update of the institutional arbitration rules of the Netherlands Arbitration Institute (“NAI”) (see Article 55(2) of the NAI Rules, 2010). The confidentiality rule can also be traced in the 2015 NAI Rules (see Article 6 of the NAI Rules, 2015).

Other Dutch arbitral institutions however have not followed suit. For instance, the Arbitration Board for the Building Industry (Raad van Arbitrage voor de Bouw) and UNUM Transport Arbitration & Mediation do not contain confidentiality provisions whatsoever.

 

Confidentiality obligations arising from the parties’ agreement or the tribunal’s confidentiality order

Parties may also establish their own framework regarding confidentiality. The greatest benefit of an agreement in this regard is that it provides certainty regarding the exact scope of confidentiality, duration of the agreement and remedies available in case of a breach thereof. The parties may, for example, agree to the exact issues to be covered by their agreement, which may range from the documents submitted or disclosed in the arbitration and/or the awards themselves to the existence of the arbitration in itself.

Alternatively, parties may simply adopt specific arbitration rules that provide for confidentiality.

One caveat regarding the impact of confidentiality agreements is that they do not encompass third parties, for instance witnesses or experts providing evidence in an arbitration. Hence, it is recommended to conclude separate confidentiality agreements if the parties wish the confidentiality obligations to apply in relation to such participants too.

Parties may also – individually or jointly – request the tribunal to render a confidentiality order during the arbitral proceedings. It is generally accepted that the tribunal may also do so at its own motion, even in the absence of an express provision in applicable arbitration rules or arbitration laws. Under Dutch law specifically, such authority is based on Article 1036(1) DCCP, pursuant to which the tribunal shall determine the manner in which the arbitral proceedings shall be conducted insofar the parties have not agreed thereupon.

In practice, tribunals employ a wide range of methods when dealing with confidentiality. These methods can range from a limitation on disclosure only to redacted documents, to the involvement of third parties to review the confidential information and assess, if necessary, certain issues of the dispute taking into account such information.

 

The exceptions to confidentiality from a Dutch perspective: two clear-cut examples

Although confidentiality is an unwritten rule under Dutch arbitration law, and even if the parties have explicitly agreed thereupon, exceptions may apply. For instance, the existence of an arbitration may be revealed in arbitration-related court proceedings, including interim relief proceedings (pursuant to Article 254 DCCP), enforcement proceedings (pursuant to Article 1062 DCCP in case of a domestic arbitral award and either Article 1075 or 1076 DCCP in case of a foreign arbitral award), setting aside proceedings (pursuant to Article 1065 DCCP), or revocation proceedings (pursuant to Article 1068 DCCP).

This exception follows from the public character of court judgments pursuant to Article 121 of the Dutch Constitution and Article 29 of the DCCP. The public character of court proceedings only entails that court decisions and hearings in (open) court are public. In case of a hearing held behind closed doors, only an anonymised copy or extract of the decision will be issued in accordance with Article 29(4) DCCP. Party submissions and other documents submitted in court proceedings (including those relating to an arbitration, e.g., the arbitral award) are not made public unless and to the extent they are quoted in a decision (see Article 29(3) DCCP. This is in contrast to, for example, US litigation proceedings).

Moreover, confidentiality will not prevail when it clashes with mandatory provisions of Dutch law. For example, according to Articles 2:101(1) and 2:210(1) of the Dutch Civil Code (“DCC”) respectively, both public limited and private limited companies must prepare and file their annual accounts with the Dutch Chamber of Commerce. As part thereof, and pursuant to Article 2:374 DCC, such companies must include provisions in the annual accounts, “which (…) may be seen as likely or certain (…).”Accordingly, legal claims and, by extension, legal claims being adjudicated in arbitration may be included in such annual accounts.

 

Difficulties of and remedies to enforcing confidentiality obligations

Tribunals have a multitude of tools to enforce confidentiality provisions during an arbitration. Once tribunals have rendered their awards, however, they no longer have the mandate to enforce a breach of in-arbitration confidentiality obligations.

It may be difficult to effectively enforce confidentiality obligations in practice outside of arbitral proceedings. In case one party breaches its confidentiality obligations, the aggrieved party may initiate interim relief proceedings before the Dutch courts (pursuant to Article 254 DCCP), irrespective of whether the parties concluded a confidentiality agreement. This is possible because, in the absence of a confidentiality agreement, the unwritten confidentiality rule still provides the right to initiate such proceedings. The advantage of having agreed on confidentiality obligations however is that the aggrieved party will have fewer hurdles to overcome in terms of proving an actual breach, in particular where the agreement stipulates the exact elements of the arbitration that must be kept confidential.

The most common and immediate manner to remedy a breach of confidentiality is to seek an injunction in interim relief proceedings that would prohibit the breaching party from any further disclosure of information governed by the confidentiality agreement. Nonetheless, such a remedy does not reverse the initial harm. In order to ‘undo’ the harm, a party may seek damages arising from the breach (in accordance with Article 6:74 DCC). However, certain elements required under Dutch law to successfully claim damages may prove to be difficult, for example, establishing a causal link between the breach and the damage or providing the court with a calculation of the damages incurred, to name but a few. To overcome at least some of these hurdles in advance, parties could agree ex ante on a penalty clause in case of a breach of any confidentiality obligations. In most civil law jurisdictions, penalty clauses are enforceable. This is however generally not the case in common law jurisdictions.

 

Conclusion

Although under Dutch arbitration law, confidentiality is an unwritten principle, the disputing parties would do well to include comprehensive (and comprehensible) confidentiality obligations, either by explicit agreement or by reference to arbitration rules that provide for confidentiality (such as the NAI Rules), depending on their specific needs.

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Washington Arbitration Week: Is the EU a Recalcitrant Entity?

Mon, 2022-02-21 01:32

The Second Edition of the Washington Arbitration Week (WAW) took place from 29 November to 3 December 2021, hosting 16 panels. This post discusses the key issues raised in the panel called ‘Is the EU a Recalcitrant Entity? The Case of Domestic and Regional Judicial Decisions Non-Compliant with Invest­ment Awards’.

Gene Burd (Fisher Broyles) moderated the panel, which comprised both practitioners and scholars, featuring  Guido Carducci (Carducci Arbitration), Nikos Lavranos (NL-Investmentconsulting), Alvaro Galindo (Carmingniani Perez Abogados) and Jose Antonio Rivas, SJD (Xtrategy LLP/Georgetown Law).

 

The CJEU’s Perspective on Intra-EU ISDS

Carducci walked the audience through the events prior to the preliminary ruling of the Court of Justice of the EU (CJEU) in Komstroy. In particular, Carducci referred to (i) the Achmea ruling from March 2018 when the CJEU declared intra-EU ISDS clauses incompatible with EU law; (ii) the 2019 political declarations through which some EU Member States announced their intention to terminate intra-EU BITs, and (iii) the adoption of the Agreement to terminate the intra-EU BITs’ sunset clauses effective May 2020.

In this legal and political context, in 2019, the CJEU added its Opinion 1/17 in which it ruled the ISDS clause in the EU-Canada Comprehensive Economic and Trade Agreement (CETA) was compatible with EU law because it was in the context of an extra-EU trade and investment agreement. In October 2021, in PL Holdings, the CJEU ruled that an arbitration agreement between an investor from an EU Member State and another EU Member State,  based on an ISDS clause inserted in an intra-EU BIT, was incompatible with EU law. To date, the most recent decision expressing the EU judiciary’s position towards investment arbitration came in the Komstroy preliminary ruling concerning an ECT dispute between a Ukrainian investor incorporated in BVI and Moldova. The CJEU, interpreted the ECT provisions without referring to the Vienna Convention on the Law of Treaties (VCLT), and concluded the ECT dispute settlement provisions are contrary to EU law when the case at issue is an intra-EU dispute. The CJEU extended its Achmea reasoning to intra-EU ECT cases, ignoring (i) the ECT is a multilateral treaty (ii) to which almost all EU Member States, including the EU (as an entity) are signatories. Carducci also remarked the CJEU ruling in Komstroy impacts exclusively the EU Member States and their domestic courts, which must comply with the ruling as it is part of EU law. Therefore, when an ECT dispute is also an intra-EU dispute, the CJEU treats the ECT dispute similar to an intra-EU BIT.

 

The Komstroy Judgement or the Achmea of the ECT

Lavranos argued that from a public international law (PIL) perspective, the CJEU acted ultra vires in Komstroy. He considered Komstroy as an example of extraterritorial application of EU law, and criticized CJEU’s simplistic approach, which treated a multilateral treaty the same as an intra-EU BIT when, in fact, Komstroy really concerned an extra-EU dispute; neither Ukraine, nor Moldova are EU Member States. Although, de facto the ECT might seem like a bundle of bilateral treaties, de jure it continues to be a multilateral investment treaty. The CJEU failed to explain the dual nature of the ECT: a PIL treaty which, only for EU purposes, could be considered as a set of norms integrated in the EU legal system. In Komstroy the CJEU also failed to mention the only EU link in the dispute was the ad-hoc arbitration’s seat, i.e. Paris. Otherwise this was an entirely extra-EU dispute. With its ruling in Komstroy, the CJEU created more uncertainties for non-EU investors who now should avoid an EU seat because they would risk their awards being set aside. Considering the ongoing modernization process of the ECT, the Komstroy ruling only added uncertainty about the ECT, its membership and the future role of the EU and its Member States. Lavranos remarked that as of now, an ECT arbitration proceeding under other rules than ICSID, and with a seat in the EU, would most likely risk being annulled and/or not being enforced. Therefore, the safest option seems to be ICSID arbitration. However, Lavranos reminded the audience of the Micula saga in which the enforcement of an ICSID award was considered contrary to EU law (details concerning the CJEU here). Ironically, after Komstroy, for purposes of investment awards enforcement within the EU, even non-EU ECT signatories would be confronted with the principles of autonomy and supremacy of EU law.

 

The EU and CJEU in Komstroy: Déjà-vu of Recalcitrant Policy against International Awards

The extra-EU effects of the Komstroy and Achmea rulings have not yet been seen in other parts of the world confronted with investment arbitration proceedings. Galindo considered the potential effects of these two rulings on the Court of Justice of the Andean Community (CJAC). The CJAC allowed arbitral tribunals to file interpretation requests if such a tribunal would have to apply Andean community law. However, the current adversity towards investment arbitration in the EU, is not new for Latin America. The CJEU’s move is reminiscent of Ecuador’s recalcitrant policy fifteen years ago, when Ecuador ended up withdrawing from the ICSID Convention. Interestingly, Ecuador has rejoined the ICSID Convention in 2021. The current Ecuadorian administration not only supported the re-accession to the ICSID Convention but endorsed a new arbitration law in Ecuador, and the negotiation of new BITs and trade agreements with the US, Mexico and different Caribbean countries. The shift against investment arbitration of the EU’s judicial body and the EU itself might impact how Latin America’s regional courts and other parts of the world consider investment arbitration in the future.

 

The EU as a Disruptor of the International Rule of Law?

The panel ended with Rivas’ remarks. Rivas argued that the EU and the CJEU should respect the international rule of law, instead of stubbornly resisting investment arbitration awards. Rivas relied on Simon Chesterman’s definition of international rule of law in the Max Planck Encyclopedia of PIL: “[A]n international rule of law would include consistent application of international law to states and other entities, including respecting the decision of international tribunals.” He argued the Komstroy dispute should be analyzed not only from the CJEU’s perspective, but also from the perspective of the courts at the seat of arbitration, i.e. the French courts. The French Court of Cassation, in its decision dated 28 March 2018, quashed the judgment of the Paris Court of Appeal (CoA) annulling the Komstroy Award. Moreover, contrary to the CJEU, the French Court of Cassation considered the Paris CoA erred in its reasoning by adding inexistent criteria to determine the existence of “investment” under the ECT. The Cassation Court sent back the case to the Paris CoA, stating it acted ultra vires by adding elements which were not included by the ECT drafters in the definition of “investment”. In the second proceedings, the CoA sent three preliminary questions to the ECJ. Rivas opined the CJEU erred in its reasoning by including some elements, such as those characteristics of an investment provided in the Salini test, which derived from ICSID jurisprudence, while Komstroy was an ad-hoc arbitration under the UNCITRAL Rules. Additionally, he remarked, the Komstroy Award has not been annulled yet by the French courts and therefore, it currently stands.

Additionally, in the United States, in its Opinion dated 16 November 2021, the District Court for the District of Columbia denied Moldova’s motion that the proceedings in the US be stayed until French courts decide on the annulment of the award. The US Court reasoned the CJEU preliminary ruling would not, with absolute certainty, lead to the annulment of the arbitral award. Previously, the District Court and the Court of Appeals for the District of Columbia  allowed the enforcement of arbitral awards which were annulled at the seat of arbitration, as in Commissa v Pemex (2008), The Micula brothers in the Micula saga were also successful in having their ICSID award entered into judgment before the Court of Appeals for the District of Columbia Circuit. However, the same courts in the District of Columbia refused the enforcement of the arbitral award annulled by the Malaysian courts in Thai-Lao Lignite Co., Ltd v Government of the Lao People’s Democratic Republic (2009). The US District Court did not refer to Commissa or Thai-Lao. Instead, it relied on Europcar Italia, S.p.A. v. Maiellano Tours, Inc. and denied a stay by concluding that the lengthy proceedings in France have no obvious conclusion in sight.

 

Conclusion

The active policy of the EU against ISDS, and the decisions of the CJEU concerning investment treaties have immense ramifications both within and outside the EU territory. Countries in other continents are currently monitoring the rulings of the CJEU and how the EU and its Member States approach the Komstroy decision’s implementation. This could easily lead to dangerous State behaviour in the rest of the world. After all, if the EU refuses to comply with its international obligations, non-EU countries may be tempted to similarly disrespect PIL.

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Washington Arbitration Week: What can Corporate Social Responsibility and Human Rights Assessments Teach to International Arbitration?

Sun, 2022-02-20 01:00

The second edition of Washington Arbitration Week (WAW) drew attention to areas of synergy between corporate social responsibility (“CSR”), human rights assessments and international arbitration. Consistent with these themes, the panel “What can Corporate Social Responsibility and Human Rights Assessments teach to International Arbitration?” discussed the current legal status of this topic and future developments. The panel was moderated by José Antonio Rivas (Xtrategy LLP/Georgetown Law), with panelists Douglas Cassel (King & Spalding), Rafael Benke (Proactiva), Ursula Kriebaum (University of Vienna) and Motoko Aizawa (Observatory for Sustainable Infrastructure).

Relationship between human rights due diligence (“HRDD”) and arbitration disputes

Mr. Cassel focused on the evolving relationship between environmental law and human rights, and how this relationship might have an impact on arbitral proceedings. He referred to the most recent developments concerning the human right to a decent environment, calling attention to the recent resolution 48/13 of the UN Human Rights Council that, for the first time, recognized the right to a clean, healthy and sustainable environment on a global scale. In his view, the lines between human rights and environmental rights are being blurred.

The impact of developments in environmental and human rights on international arbitration and investment disputes, in the view of Mr. Cassel, will be seen in cases related to extractive industries. Cases like Urbaser v. Argentina are the current point of reference. The Urbaser award recognizes that private entities may have the duty to comply with human rights obligations in general, keeping in mind that investment agreements confer rights to the investor and implying that they are also obligation holders. However, Mr. Cassel recalled that Urbaser was found not to have the positive obligation to provide drinkable water to the Buenos Aires province, as that obligation belonged to the State. The tribunal concluded that companies only hold the negative obligation not to violate human rights.

While Urbaser is a landmark decision, Mr. Cassel explained, the tribunal missed an opportunity to evaluate HRDD. He further developed that HRDD reached universal application in 2008, with the UN Framework on Business and Human Rights. In 2011, the UN Guiding Principles (“UNGPs”) clarified that companies are required to respect human rights under this instrument. Respect entails the active identification of risks to human rights, the adoption of measures to avoid the materialization of human rights violations or to mitigate a negative impact, and cooperation in remediation.

France led the way in 2017 in mandatory HRDD, enacting its Duty of Vigilance Law. This law requires large French corporations and foreign companies operating in France to engage in HRDD. As explained by Mr. Cassel, those entities are obliged to report their due diligence processes, and if they fail to undertake them adequately or if human rights violations result from their activities despite the HRDD, they might be held responsible.

At the regional level, Mr. Cassel noted that in 2017, the Interamerican Court of Human Rights interpreted the Pact of San José as to require HRDD in relation to environmental rights through Advisory Opinion 23 of 2017. At the global level, in 2021 the UN working group on business and human rights called for mandatory HRDD and announced its interest in developing a treaty on business and human rights.

A practical approach to the UNGPs and expectations for HRDD

Mr. Benke affirmed that international arbitration practitioners have the task of finding ways to reinforce the business and human rights agenda while preventing risks of their violation and enhancing the likelihood of effective remedies.

The system of business and human rights stems from the milestone UNGPs. This instrument has three main pillars involving businesses, rightsholders and the State:

  1. Protection: States must protect human rights in their territory.
  2. Respect: Businesses must take steps to prevent and mitigate adverse impacts of their operations in a territory.
  3. Remedy: Both States and businesses must work together to ensure the existence of effective judicial and non-judicial remedies.

Mr. Benke emphasized that human rights impacts are usually not caused solely by one corporation. Therefore, to achieve compliance with pillars (2) (Respect) and (3) (Remedy), businesses must recognize that they contributed to adverse impacts on human rights and cooperate towards remediation and non-repetition.

Mr. Benke recognized four types of agents that demand the implementation of extensive human rights policies: (i) consumers in search of sustainable products; (ii) other producers in the supply chain that have heightened their risk management plans; (iii) banks and investors that seek to fund responsible companies; and (iv) States with increasingly mandatory regulations. An example of this scrutiny, we add, is shown by the new German supply chain law, which gathered 200,000 signatures for its endorsement in 2020 (see German Supply Chain Act – New Standard for Human Rights and Environmental Due Diligence for Global Supply Chains).

Keeping in mind that HRDD is an ongoing and “person centered” process, Mr. Benke proposed six steps that companies can follow for compliance:

  1. Implementing a corporate policy to respect human rights;
  2. Conducting risk and impact assessments in the operational environment to identify potential human rights violations;
  3. Integrating and acting upon findings from the assessments;
  4. Tracking and monitoring the progress made in avoiding or mitigating human rights impact;
  5. Communicating and reporting the progress made, which enhances transparency and accountability; and
  6. Establishing grievance mechanisms and remedies in case of any adverse results.

The Hague Rules on Business and Human Rights Arbitration

According to Ms. Kriebaum, the responsibility of States to provide access to remedies is precisely what The Hague Rules on Business and Human Rights Arbitration seek to supplement. The Hague Rules modified the 2010 UNCITRAL arbitration rules to adapt them to human rights disputes. They contain features aimed at protecting human rights and granting an effective remedy within the arbitral process (other features of the rules are thoroughly explained in a previous KAB post). The Hague Rules were conceived to promote effective cooperation between States and companies to meet the pillars of the UNGPs. The focus of the Hague Rules is to ensure the right to an effective remedy as the third pillar of the UNGPs, given that most national legislations lack such a system. Ms. Kriebaum describes that the rules have a dual function as a forum of remediation and manage risks of businesses.

She also discussed the provisions requiring the tribunal to determine the law applicable to the dispute. As substantive standards were not designed in the Hague Rules, a tribunal might rely on human rights national law, contracts, human rights treaties, and even soft law instruments.

Finally, the tribunal has the duty of evaluating whether the award rendered is compatible with human rights, which would render it nationally enforceable as well. Such compatibility requires the right to an effective remedy that is cumulatively accessible, neutral, impartial, rapid, appropriate and sufficient to repair the damage caused.

Finally, Ms. Kriebaum invoked the Sustainable Investment Facility and Cooperation Agreement (SIFCA, drafted by experts for The Gambia) as the only instrument so far that refers to the Hague Rules as an alternative to human rights dispute settlement. SIFCA is the most innovative model bilateral investment treaty to encourage HRDD, as before a company may initiate ISDS proceedings, it must certify its compliance with the UNGP pillars. Additionally, SIFCA is consistent with Professor Philippe Sands’ Partial Dissenting Opinion in Bear Creek v. Peru, as compensation awarded in ISDS arbitration under SIFCA must consider any infringement to the UNGPs that may have taken place during the company’s operations.

Regulating HRDD through investment contracts

Ms. Aizawa highlighted the importance of including human rights requirements in investment contracts, as they are the most immediate legal regime regulating the relationship between the parties (investor and state) and balancing their needs. She focused on how States may regulate human rights in investment contracts, much like some treaties that have included provisions to preserve the State’s ability to regulate for the protection of public welfare, health, and lives. Preservation of the State’s regulatory power in the field of environmental and human rights is especially relevant in the contractual sphere where certain States may enter into contracts with stabilization clauses.

The goal is for disputes to be amicably resolved or not even arise at all. Victims would much rather have violations remedied instead of proceeding to litigation or arbitration. As Ms. Aizawa pointed out, the inclusion of detailed human rights provisions in investment contracts increases transparency and predictability, reducing disputes in a national and international level.

Ms. Aizawa also gave practical tips for contract drafting, such as including specific obligations, rather than vague references to human rights. A process for HRDD should also be pre-established, as it is required throughout the life of the project, and a budget should be pre-approved for this purpose. Finally, periodic evaluation of performance of these policies is recommended.

Conclusion

Although the panel was designed to present a discussion on CSR due diligence, HRDD is a more thorough approach for human rights compliance by investors, as it entails a 360 degree review of all relevant matters related to human rights. The obstacle still lies on the voluntary character of such due diligences. Some States have made efforts to include mandatory CSR due diligence or HRDD for companies and investors at a domestic and international level. In 2016, the Nigeria-Morocco BIT emerged as the first investment treaty requiring it, providing an “unambiguous legal base to apply human rights obligations to private investors” and, as presented by previous KAB posts, The Gambia has gone a step further with SIFCA in 2021. SIFCA demands that investors face human rights challenges and solve them to be entitled to the usual protections they enjoy under international investment law and arbitration, as recognized here. Mandatory HRDD or CSR due diligence would attract qualified investments, promoting sustainable development in the host State and relieving it from some of the burden of being the only actor responsible for protecting and respecting fundamental and human rights.

Still, as pointed out by the moderator Mr. Rivas in his concluding remarks, a few questions remained for future discussion: How to encourage governments and large corporations to adopt these standards as mandatory domestically and internationally? How to disprove the belief that it would discourage investment in a State? After all, as we are reminded by H.E Bruno Simma, the objective is to achieve protection of investors’ rights while ensuring compliance with and respect of human rights. While finding a balance between both is an ongoing effort, the panelists agreed that clearer standards on human rights and what is expected from investors would encourage (rather than discourage) foreign qualified investments in host States.

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New Domestic and International Arbitration Rules at Uruguayan Chamber of Commerce in Force: A Much-Awaited Update

Sat, 2022-02-19 01:25

As of January 1, 2022, the Conciliation and Arbitration Center of the Uruguayan Chamber of Commerce and Services (“Center”) has new Arbitration Rules (the “2021 Rules”) in force. They apply to cases filed from January 1, 2022 onwards.

Following the trend of several other institutions in the region, who updated their rules in 2021, in a context where cases in Uruguay and before the Center have continued to increase, this update of the Arbitration Rules making them consistent with standard international practice is welcome.

The former rules were often a significant obstacle for non-Uruguayan parties to accept submitting to arbitration administered by the Center. They lacked flexibility and failed to reflect international practices in significant aspects, the most relevant being the design and duration of the written phase of the proceedings (with no possibility for a reply or rebuttal and terms for relevant filings being too short), and the rules for production of evidence. The former Rules were inspired, almost verbatim, by the procedural regulations governing most non-criminal litigation in the country including family matters (the 1989 “General Code of Procedure”) which—unsurprisingly—is unsuitable for commercial arbitration. While the parties could agree on different terms and depart from some rules, this “bargaining” process, when possible, was far from efficient.

The 2021 Rules include standard arbitration practices, many of which the Center had begun applying before, especially since the Covid-19 pandemic started. They mirror the Rules of the main global institutions in key aspects: flexibility, production of evidence, use of technology, transparency, joinder of parties and consolidation of proceedings and expedited proceedings.

The main features of the new rules are discussed below.

 

1. Flexible Rules and Procedure: Calendar, Submissions and Evidence

A key novelty of the 2021 Rules is a paradigm shift in the design of the proceedings. To gain efficiency and afford the parties the possibility to fashion a suitable proceeding, the 2021 Rules add three traditional milestones which the former rules lacked: (i) the Terms of Reference (“Initiation Act,” art. 25), (ii) a conference to discuss the proceedings (art. 26), and (iii) the Procedural Calendar (art. 26).

The Terms of Reference are to be signed by the parties and the tribunal and, as is customary, must contain the basic description of the tribunal’s mission, including the parties’ positions and claims, the matters to be decided, the applicable procedural and substantive rules, the venue and the language of the proceedings. The signing of the Terms of Reference has two consequences under the 2021 Rules: (i) it prevents filing new claims, unless authorized by the tribunal, considering their nature, the stage of the proceedings and other relevant circumstances (art. 11), and (ii) it triggers the term to issue the Award (six months as from execution of the Terms of Reference, unless a different term is set in the Procedural Calendar, or it is extended by the Center upon the tribunal’s request or at its own initiative as allowed by article 41).

Another addition is the duty of the arbitrators to hold a conference with the parties to discuss how the proceedings are to be conducted and help decide the procedural calendar. The addition of a procedural calendar designed by the parties together with the tribunal is a critical shift in the Center’s regulation, abandoning the formerly structured proceedings including fixed 30-day terms for the main submissions and 10, 6 or 3-day terms for less relevant filings, resulting from applying the General Code of Procedure.

Additionally, the 2021 Rules amended the production of evidence which is  now governed by principles consistent with the IBA Rules on the Taking of Evidence in International Arbitration. Now (i) witness statements and expert opinions must be submitted in writing and witnesses and experts may be examined about them later at a hearing, (ii) anyone can be a witness, including the parties, their directors, or their employees—although this was already common-practice, with this provision frequent objections are now settled—and (iii) arbitrators may appoint experts in consultation with the parties, but the general rule is that the expert reports are filed by the parties, as is standard practice.

 

2. Electronic Communications and Virtual Hearings

While the Center had started to allow electronic communications in the months following the beginning of the pandemic and hearings since then have included different combinations of in-person, hybrid or virtual (mostly subject to the tribunal’s discretion or agreements reached by the parties), now under articles 3, 26 and 31 of the 2021 Rules written submissions and evidence shall be filed electronically. The exception to this are initial filings (i.e., the Request for Arbitration, art. 5; the Response, art. 6; and the Counterclaim, art. 6), which must be submitted in hard copies.

While no specific protocol for virtual hearings was approved, the 2021 Rules include some provisions stating that: (i) the case management conference shall be virtual, unless the arbitrators find it necessary that it be in-person; and (ii) that hearings can be virtual or hybrid, if one of the parties or an arbitrator so requests and gives valid grounds for it. Despite the Rules being silent as to what reasons call for virtual or hybrid hearings, in addition to sanitary restrictions—which will hopefully decrease in relevance—procedural efficiency and cost-saving are valid grounds for witnesses to testify by videoconference.

 

3. Provisional Remedies and Emergency Arbitrator

The 2021 Rules also address the lack of a regulation on provisional measures, a possibility allowed by the Uruguayan Arbitration Act, Law 19,636, but which had no supporting provision in the old rules. Under Art. 35 provisional remedies can be adopted before or after the tribunal is appointed. Once constituted, the tribunal shall rule on provisional remedies, but until then the parties can: (i) apply for provisional measures before domestic courts without waiving the arbitration agreement (this is consistent with the Arbitration Act), and (ii) request provisional remedies from an emergency arbitrator, a possibility not contemplated by the former rules. The Emergency Arbitrator provisions apply only to cases based on arbitration agreements signed after January 1, 2022, provided that the parties do not expressly opt out of them.

The Emergency Arbitrator procedure—which is similar to the one included in most institutions’ rules—is designed to last roughly 30 days, a period in which the arbitrator is appointed, the parties are heard, and the measure, if any, is issued. Within 10 days of obtaining the measure the Request for Arbitration must be filed.

 

4. Expedited Arbitration for Cases Under US$ 200,000 or if Agreed Upon

As has been the trend of many institutions, the 2021 Rules also include regulations on small claims and expedited arbitration, addressing a need regularly pointed out by practitioners.1)See, Patricia Shaughnessy, UNCITRAL Working Group II: Expedited Arbitration Provisions as Stand-Alone Rules, or Appendix and When Should They Apply, Kluwer Arbitration Blog, September 16, 2020; Julián Bordaçahar, UNCITRAL, Expedited!, Kluwer Arbitration Blog, July 14, 2021; UNCITRAL Expedited Arbitration Rules) jQuery('#footnote_plugin_tooltip_40580_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40580_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Similar to what happens under most rules, the 2021 Rules provide for an expedited procedure for (i) cases under a certain threshold (which here is rather low: US$ 200,000) and with arbitration clauses executed after January 1, 2022, or (ii) even in cases involving a higher amount if the parties choose the expedited procedure. The parties can opt out of the expedited procedure, which can also be disregarded by the Center based on the circumstances of the case.

Time and costs are reduced by having a sole arbitrator (a rule with a few exceptions), shorter terms to hold the case management conference (there are no Terms of Reference) and more powers for the arbitral tribunal to limit the parties’ submissions and to reject evidence (Articles 47 to 49 of the 2021 Rules). Finally, the award must be issued within a year as from when the case was referred to the tribunal (which may be extended under exceptional and justified circumstances).

 

5. Multi party and Multi contract arbitrations.

Lastly, as is common in many institutions and in manner consistent with the 2020 ICC Rules, the 2021 Rules of the Uruguayan Center allow to: (i) incorporate parties in pending arbitrations (art. 8); (ii) file arbitrations against several parties or based on several contracts (art. 9); and (iii) consolidate proceedings (art. 10).

Additional parties may be joined before or after an arbitrator is confirmed and even after the Terms of Reference are signed, subject to different requirements: (a) before an arbitrator is confirmed, the request of a party suffices (unless it has been agreed that its joinder would not proceed); (b) after an arbitrator is confirmed: the agreement of all parties (including the party intended to be joined) is needed; (c) after the Terms of Reference are signed: at the discretion of the tribunal even if the parties so agree (the tribunal shall consider the need or convenience of resolving the disputes with the additional party in a single proceeding, the progress of the proceeding and other relevant circumstances).

Regarding arbitration with multiple parties and/or contracts, although this had been allowed to a certain extent based on the local procedural regulations or the tribunal’s discretion under the former rules, the 2021 Rules clarify that arbitrations based on different contracts can continue between the same parties.

Consolidation under the 2021 Rules can proceed absent an agreement by the parties in  two cases: (i) if the arbitrations were brought under the same arbitration agreement; and (ii) if they were initiated under different agreements consolidation will also require that: (a) the proceedings be between the same parties; (b) the disputes stem from the same “legal relationship” 2)See, Smitha Menon, Charles Tian, Joinder and Consolidation Provisions under 2021 ICC Arbitration Rules: Enhancing Efficiency and Flexibility for Resolving Complex Disputes jQuery('#footnote_plugin_tooltip_40580_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40580_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });; and (c) the arbitration agreements are compatible.

 

Final Remarks

The 2021 Rules are very good news for arbitration practice in Uruguay and in the region, especially for domestic and medium-size arbitrations that under the 2021 Rules can be resolved following widely extended practices and with flexibility in view of the circumstances of a case. These changes strengthen the Center as a modern institution and together with the update of the arbitrators list serve as a strong step in the right direction to help continue developing arbitration in Uruguay.

References[+]

References ↑1 See, Patricia Shaughnessy, UNCITRAL Working Group II: Expedited Arbitration Provisions as Stand-Alone Rules, or Appendix and When Should They Apply, Kluwer Arbitration Blog, September 16, 2020; Julián Bordaçahar, UNCITRAL, Expedited!, Kluwer Arbitration Blog, July 14, 2021; UNCITRAL Expedited Arbitration Rules) ↑2 See, Smitha Menon, Charles Tian, Joinder and Consolidation Provisions under 2021 ICC Arbitration Rules: Enhancing Efficiency and Flexibility for Resolving Complex Disputes function footnote_expand_reference_container_40580_30() { jQuery('#footnote_references_container_40580_30').show(); jQuery('#footnote_reference_container_collapse_button_40580_30').text('−'); } function footnote_collapse_reference_container_40580_30() { jQuery('#footnote_references_container_40580_30').hide(); jQuery('#footnote_reference_container_collapse_button_40580_30').text('+'); } function footnote_expand_collapse_reference_container_40580_30() { if (jQuery('#footnote_references_container_40580_30').is(':hidden')) { footnote_expand_reference_container_40580_30(); } else { footnote_collapse_reference_container_40580_30(); } } function footnote_moveToReference_40580_30(p_str_TargetID) { footnote_expand_reference_container_40580_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40580_30(p_str_TargetID) { footnote_expand_reference_container_40580_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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In (No) Particular Order: The High Court of England and Wales on the Sequence of Applications

Fri, 2022-02-18 01:00

Insolvency-related claims arising from contracts containing arbitration clauses continue to culminate in intriguing cases before the England and Wales High Court (a previous post on the Blog analysed the Riverrock Securities Limited v International Bank of St Petersburg (Joint Stock Company) [2020] EWHC 2483 (Comm)). In a recent case titled The Deposit Guarantee Fund for Individuals v. Bank Frick & Co AG and Eastmond Sales LLP, the England and Wales High Court discussed the implications of the order in which the respondent sought to pursue a Summary Judgment Application (‘SJ Application’) and a Stay Application. In this blog post, we summarise this case, and we shed light on its ramifications.

 

Background and Issues before the Court

PJSC National Credit Bank (‘PJSC’), a Ukrainian company, concluded in total six pledge agreements with the Liechtenstein company Bank Frick & Co A.G. (‘Frick’) in the 2013-2014 period. Under these agreements, PJSC pledged funds as security for several loans Frick had made to three UK incorporated entities. In 2015, the debtors failed to meet their debt obligations and, as a result, Frick turned to PJSC and sought the funds that PJSC had pledged as security. After making a payment to Frick in the amount of US$25.8 million, PJSC’s assets were severely depleted, and this led to the insolvency proceedings in which the claimant in this case – The Deposit Guarantee Fund for Individuals – was appointed as PJSC’s liquidator.

The claimant brought the case before the England and Wales High Court, alleging that the pledge agreements, along with the accompanying loan agreements, constituted part of a sophisticated money-laundering scheme. Frick and one of the UK incorporated entities that had obtained a loan from Frick – Eastmond Sales LLP – were named as defendants.

Frick challenged the jurisdiction of the court (the second defendant did not respond to the claim) based on the existence of an arbitration clause in all of the pledge agreements. To this end, Frick submitted the Stay Application, asking that the Court refer the parties to arbitration in accordance with s9 of the Arbitration Act 1996 which provides as follows:

(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.

(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim.

Frick also sought, in the event that its Stay Application was unsuccessful, a Summary Judgment in its favour.

After the opposing sides corresponded with each other in relation to the upcoming hearings, Frick asked the claimant to agree to two things. First, Frick opined that the SJ Application was not a substantive step in the proceedings based on which an inference could be made that Frick was submitting itself to the jurisdiction of the Court. Second, Frick was of the view that its SJ Application ought to be listed for a hearing before the Stay Application, following from its position that there was no substantive aspect to its SJ Application. The claimant, however, strongly opposed both of Frick’s suggestions.

In essence, then, the Court was asked to tackle the following two issues:

(1) whether by pursuing the determination of the SJ Application before the determination of the Stay Application, Frick is taking a step in the proceedings to answer the substantive claim;

(2) if not, whether, as a matter of case management, the SJ Application should be listed before the Stay Application.

 

Decision

a) Frick’s SJ Application not a “step in the proceedings to answer the substantive claim”

Both the claimant and the defendant relied upon Capital Trust Investments Ltd v Radio Design TJ AB [2002] EWCA Civ 135, [2002] CLC 787 to support their respective positions. It was common ground between the parties, referring to Capital Trust Investments, that the following are not a “step in the proceedings” under s9 of the Arbitration Act 1996:

(1) an application for strike out or summary judgment which is made expressly conditionally on a Stay Application not succeeding;

(2) seeking a hearing and making of submissions at the hearing of such an application.

However, the claimant argued that “a defendant could only avoid making an election to waive its objection to the jurisdiction, if it did not seek the determination of the summary judgment application before the stay application.” This required the Stay Application to be determined before the SJ Application.

The Court, following the rationale in Capital Trust Investments, held that the SJ Application was expressly conditional on the outcome of the Stay Application and would have had effect “only in the event that the Stay Application is unsuccessful” regardless of the order in which the two applications were listed. Accordingly, the Court concluded that Frick had not waived its objection to the jurisdiction, nor made a “step in the proceedings to answer the substantive claim.”

b) Stay Application to be heard ahead of the SJ Application

With regard to the issue concerning the sequence of the hearing of the applications, the Court noted that irrespective of the order in which the Stay Application and the SJ Application were to be heard, there was a risk of unnecessarily incurred costs.

The Court further noted, on the basis of a rather superficial overview of the Stay Application, that it could not decide whether the latter was more complex and time-consuming than the SJ Application.

Moreover, unlike Capital Trust Investments, the case at hand had “no common issue which favours the two applications being heard together.”

Finally, the Court concluded that, as the SJ Application was expressly predicated on the outcome of the Stay Application, as a “matter of logic”, “it should be heard first unless there are clear countervailing case management considerations to the contrary,” which in the present case were not present.

 

Concluding Remarks

The Court reached a practically reasonable and legally sound solution, taking into account the complexity and the length of the issues at hand, the associated time and the risk of incurring unnecessary costs. The judgment confirms the proactive case management approach of the English courts aiming to ensure time and cost-efficiency. Further, the judgment continues the line set in previous case law, thus confirming the consistent positive attitude of the English courts towards arbitration.

From a practical perspective, the judgment provides handy case management directions to defendants seeking to challenge the jurisdiction of courts in favour of arbitration.

First, it suggests that a defendant who is applying for a stay of court proceedings in favour of arbitration is also entitled to apply for a summary judgment, as long as the summary judgment application is made expressly conditional on the outcome of the application to stay. The defendant need not fear that they are taking a substantive step in the proceedings before the court so long the conditionality element between the application to stay and the summary judgment application is present.

Second, the judgment further demonstrates that in such a case scenario, to ensure a practical outcome, it only makes sense for the court to hear a stay application ahead of a summary judgment application. The court rightfully observed that, given that the summary judgment application is conditional on the stay application being unsuccessful, the logic dictates that the latter be listed first, and not the former. There were certainly no compelling reasons whatsoever to take the upside-down approach.

Although the Court in the case at hand only focused on the case management considerations, it would certainly not be far-fetched to say that, overall, the judgment results in a pro-arbitration outcome. If the Court were to first hear the arguments on the SJ Application, it would potentially be treading on the territory reserved for the arbitrators, provided that the Stay Application turns out to be successful. So, all in all, it would be safe to say that the England and Wales High Court got it right, yet again!

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Interviews with Our Editors: The VanIAC in the Spotlight with Barry Penner, QC

Thu, 2022-02-17 01:00

Established in 1986, the Vancouver International Arbitration Centre (“VanIAC”, formerly known as the British Columbia International Commercial Arbitration Centre) is an organization committed to offering additional dispute resolution paths, providing services to individuals and businesses who wish to resolve conflicts through mediation and arbitration.  Barry Penner Q.C. serves as VanIAC’s Managing Director.

Mr. Penner, thank you for joining us on the Kluwer Arbitration Blog!  We are thrilled to have this opportunity to share with our readers your perspectives and to highlight interesting initiatives undertaken by the VanIAC. 

 

1. Before we delve in, would you please briefly introduce yourself and describe the path that brought you to the VanIAC?

I’m a licensed lawyer, and served almost 16 years in elected office as a member of the Legislature in British Columbia, the third largest province in Canada. During that time, my roles included Attorney General, Minister of Aboriginal Relations & Reconciliation and Minister of Environment.

During my years in legal practice and public service, I observed lengthy delays and rising costs associated with court proceedings, which increased my interest in alternatives to traditional litigation. The Canadian justice system is renowned for its impartiality, but also for what can sometimes be excruciating delays.  After hearing that the board of directors was looking for a Managing Director to help the organization grow, I took on the role of Managing Director of the VanIAC in 2017.

 

2. Mr. Penner, in your opinion, what are the advantages of seating arbitrations in Vancouver?

British Columbia statutory law limits the ability of courts to intervene in the arbitration process. Generally, our courts are “arbitration friendly” with extensive case law supporting the principle of party autonomy. Judicial intervention is limited, but court enforcement of arbitral awards is well established. Canada is a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards.

Vancouver, located on the Pacific rim, is in the same time zone as the west coast U.S.-states of California, Oregon and Washington. Vancouver is known internationally for its mild climate, stunning scenery and highly-capable legal counsel and impartial arbitrators. With direct flights to many Asian, European, South Pacific, North and South American cities, Vancouver is an ideal meeting point for domestic and international businesses and, thus, an excellent venue for hosting international arbitrations.

 

3. This year, VanIAC is celebrating its 36th birthday. As the institution has grown and gained traction, has it seen any trends in the kinds of users and disputes it attracts? How has VanIAC used this information to enhance its services and approach over the years? Have you noticed a change in Canadian companies’ attitudes toward international arbitration during your time with VanIAC?

Like other industries, we moved quickly to make greater use of technology when the COVID-19 pandemic was declared in early 2020, allowing us to move seamlessly to virtual hearings. VanIAC has remained fully-functioning and for the fourth year in a row, we’ve opened a record number of files, representing an increase of more than 50% since 2019. Online video platforms such as Microsoft Teams and Zoom are now commonly used to host arbitration and mediation hearings, although today we can also support in-person meetings (that comply with public health requirements) as well as hybrid hearings.

While there are fluctuations from year to year, the types of cases administered by VanIAC continue to include disputes relating to commercial lease agreements, shareholders’ agreements, construction, real estate, employment, and energy purchase agreements.

In 2021, the total value of new arbitrations commenced with VanIAC exceeded $1 billion, with a typical case being in the $1 million range.

The majority of our international cases are between counterparties based in the USA and Canada, but our arbitrators and mediators hail from the USA, France, New Zealand, Australia, Austria, Italy, Portugal, Hong Kong, UK, UAE, China, Portugal, Columbia, Switzerland, India, Mexico, and Germany.

The length of proceedings of course depends on a number of factors, including complexity of the individual case. Under our new expedited procedures for domestic arbitrations, a document-only arbitration case can be completed within four months. The length of non-expedited proceedings can be estimated between 10 – 18 months, but again this depends on the facts of the particular case and the conduct of the parties.

 

4. VanIAC’s Domestic Arbitration Rules were amended in 2020, coinciding with the changes in domestic legislation. The International Commercial Arbitration Rules of Procedure, however, were last amended in 2000. We understand that VanIAC is currently in the process of preparing revised rules for release. Could you preview for us two or three of the key areas of focus in the revision process?

Our new International Rules of procedure are nearing completion. Subject to further feedback from our consultation process with leading practitioners, we anticipate the new rules to include:

  • expedited procedures for claims under $500,000,
  • flat fee arbitrations for claims under $250,000, and
  • provisions for emergency arbitrations.

Further, we anticipate adding language specific to virtual hearing techniques and a requirement that such hearing methods be considered at the initial procedural conference.

VanIAC is making sure that any changes in our new International Rules complement the International Commercial Arbitration Act which was updated by the British Columbia Legislative Assembly in 2018 to reflect the latest version of the UNCITRAL Model Law.  Ultimately, our objective is to provide individuals and businesses with a cost-effective and efficient alternative to courts for resolving disputes, while adhering to fundamental principles of neutrality and the rule of law.

 

5. In 2019, VanIAC established a division dedicated to providing assistance with domain name disputes – the Canadian International Internet Dispute Resolution Centre (“CIIDRC”). There are only a few institutions in the world that administer disputes under the Uniform Domain Name Dispute Resolution Policy (“UDRP”). How did this idea come about and how does the CIIDRC compare to these other UDRP service providers? Since CIIDRC administers disputes not only under the UDRP but also under the Domain Name Dispute Resolution Policy of the Canadian Internet Registration Authority (“CDRP”), could you please shine some light on the distinctions between the two procedures?

We launched CIIDRC to focus on administering internet domain name disputes. We had already been administering such disputes for the Canadian Internet Registration Agency (CIRA) since 2002, and decided to offer our services to the Internet Corporation for Assigned Names and Numbers (“ICANN”).

Prior to our approval to administer domain name disputes for ICANN in accordance with their UDRP, there was only one approved service provider in the western hemisphere…and none in Canada. At the same time, there have been double digit increases in the number of domain name disputes in recent years, leading to reports of increasing delays at some other service providers. We believe there is in an opportunity for us to build on our 20-year track record handling CIRA disputes, as well as Canada’s reputation for skilled legal practitioners, impartial arbitrators and the highest standards of intellectual property protection.

While dispute resolution policies are similar under the CDRP and UDRP, there are some distinctions. Some of the key differences include:

  • For CDRP cases, the definition of what constitutes trademark use is similar to “use” as defined in Canada’s Trademarks Act;
  • CDRP disputes require a three-member panel, unless the registrant does not file a response, whereas in UDRP disputes complainants can opt for either a single- or three-member panel;
  • The entire cost of a CDRP process is borne by the complainant, whereas the costs of a UDRP dispute can be shared between both sides; and
  • For CDRP cases, decisions are implemented (eg, domain name transfers) within 30 days, compared to 10 days for ICANN/UDRP cases.

 

6. As of June 2021, VanIAC has supported the Equal Representation in Arbitration Pledge and the Campaign for Greener Arbitrations. Mr. Penner, in light of your previous experiences as Attorney General of British Columbia and the Minister of Environment and Minister of Aboriginal Relations and Reconciliation, how do you plan to transpose VanIAC’s commitment to these initiatives into practice? Do you think the international arbitration community faces any unique challenges in this regard?

VanIAC has a diverse board of directors, which is the result of a conscious effort to reach out to and encourage a new generation of leadership. We have also been encouraging previously under-represented demographic groups to apply to join our roster of approved mediators and arbitrators.

By pivoting to adopt online software to facilitate ‘virtual’ hearings, the carbon footprint associated with in-person arbitrations has been greatly reduced. We also designed our CIIDRC website to facilitate the uploading of key documents, replacing the previous need to courier packages of printed documents. VanIAC recently updated its website to enhance online, interactive functionality, further reducing the volume of paper that must be used. www.VanIAC.org provides its users with 24/7 digital access to their case files, including submitted material, case schedules, correspondence, directions and awards, that is safe and secure, saving time and money.

 

7. To conclude, what do you hope to achieve before VanIAC’s 40th anniversary?

VanIAC’s overriding objective is to provide expert and trusted dispute resolution services, with streamlined rules and friendly, supportive administrative services. We strive to uphold the highest standards in domestic and international mediation and arbitration. In doing so, we hope to increase public awareness that there is a convenient, cost-effective alternative available for those who hope to resolve disputes without going to court.

 

Thank you for your time and perspectives – we wish you and the VanIAC continued success!

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

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Eyes Wide Shut: Why the UKSC Should Have Considered French Law in the Kabab-Ji Case

Wed, 2022-02-16 01:00

The recent judgment of the United Kingdom Supreme Court (the UKSC) in Kabab-Ji v Kout Foods (the Kabab-Ji judgment) has reopened issues concerning the differing approaches of English and French courts to determining the law governing arbitration agreements.

The Kabab-Ji saga provides a case study on the English-French law divide and has been discussed at length on this Blog (here, here, here, and here). The central controversy is simple. In a contract where the parties have not expressly provided the law applicable to the arbitration agreement, English courts apply the law governing the underlying contract and French courts apply the law of the seat.

 

UKSC’s rationale for not considering the approach of French courts

In deciding the Kabab-Ji case, the UKSC had the benefit of two preceding decisions – first, its judgment in Enka v Chubb (the Enka v Chubb judgment) (discussed on the Blog here and here), and second, the Paris Court of Appeal’s decision upholding the Kabab-Ji award (discussed on the Blog here).

The UKSC’s Kabab-Ji judgment places substantial reliance on the Enka v Chubb judgment but does not analyse or consider the French legal position or the decision of the Paris Court of Appeal. In this regard, the UKSC (para 32 of the Kabab-Ji judgment) has reasoned that since there is a lack of “clear consensus” among the courts of contracting states of the New York Convention regarding the interpretation of Article V(1)(a), English courts must “form their own view based on first principles.” The UKSC further concluded (at paras 87 to 90) that since French and English courts take “a very different approach” to deciding the law applicable to the arbitration agreement, English courts could not be bound by French court decisions and the risk of contradictory judgments was unavoidable.

This reasoning, though attractive, understates the importance of analysing the French legal position and its implications. There are compelling reasons why the UKSC should have analysed or at least considered French law while determining the law applicable to the arbitration agreement.

 

Why the UKSC should have considered the French approach

The parties’ choice of a Paris-seated arbitration in Kabab-Ji has important implications. Other than the obvious consequence of granting supervisory jurisdiction to French courts, the choice of Paris as a seat may also connote an implied intention of the parties that certain legal provisions and settled jurisprudence of French law would apply. The UKSC, in the Enka v Chubb judgment, acknowledged this possibility and held that “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” may imply that the arbitration agreement was intended to be governed by the law of the seat. To illustrate, the UKSC referred to Section 48 of the Swedish Arbitration Act and Section 6 of the Arbitration (Scotland) Act 2010, which provide that in the absence of an express choice of governing law of the arbitration agreement, the law of the seat will apply.

Taken to its logical conclusion, this line of reasoning can be extended beyond statutory provisions to jurisprudence established by court decisions. This is theoretically possible since the Enka v Chubb judgment refers to “any provision of the law of the seat” and not just ‘statutory provisions’. Moreover, the objective of looking at legal provisions of the seat is to identify an implied agreement of the parties to subject the arbitration agreement to the law of the seat. Such implied agreement can also arise from the settled and consistent judicial approach of the courts of the seat, particularly in agreements between sophisticated commercial parties who are aware of, or have been advised about, the approach of the courts of the seat.

French courts have consistently held in French seated international arbitrations that in the absence of express choice, mandatory rules of French law and international public policy (i.e., the law of the seat) govern the arbitration agreement, without a need for a reference to national law. This has been the position since the Dalico case (discussed on the Blog here) which was reiterated by the Paris Court of Appeal in the Kabab-Ji case. The UKSC in the Dallah v Pakistan case (discussed on the Blog here) (in para 15) found the above approach of French courts as “being part of French law.” Notably, the French approach is based on Article 1447 of the French Code of Civil Procedure regarding the separability of the arbitration agreement from the underlying contract, which is automatically applied to international arbitrations seated in France. French courts view Article 1447 as creating a complete separation of the arbitration clause from the underlying contract such that the law applicable to the underlying contract does not automatically extend to the arbitration agreement. Given this clear position of French courts, the parties in the Kabab-Ji case may have intended the French legal approach to apply to the arbitration agreement by choosing Paris as a seat. Moreover, since the French approach does not require a reference to any national law, the parties may have considered it unnecessary to specify a national law to govern the arbitration agreement, as the seat was Paris.

 

UKSC overlooked the arbitral tribunal’s reasoning

In its Kabab-Ji judgment, the UKSC observed “in passing” (in para 46) that the arbitrators “have given no reason for their view that they should apply the law of the seat to decide whether they had jurisdiction.” However, this may not be entirely accurate. In paragraph 127 of the award (as quoted in para 26 of the Paris Court of Appeal decision), the arbitral tribunal noted that it would have to “apply French law to determine whether it has jurisdiction over the Respondent, since the validity of the arbitral award in this case depends on the law prevailing at the seat of the arbitration. Any action by the losing Party to set aside the arbitral award would fall within the jurisdiction of the Court of Appeal of Paris and this Court would apply French law on this subject, i.e. the principles developed by the Cour de cassation itself.

The arbitral tribunal in the present case considered that the application of French law to the arbitration agreement is a necessary consequence of the seat being in Paris, based on previous decisions of French courts. The arbitral tribunal’s reasoning is vindicated by the fact that it was upheld by the Paris Court of Appeal. Seen from this perspective, even the award alludes to the existence of a requirement under French law, as interpreted by French courts, that in the absence of express choice, the arbitration agreement is governed by French law or the French approach, where the seat of arbitration is in France.

 

Concluding Remarks

Considering this and following its Enka v Chubb judgment, the UKSC should have analysed the legal consequences of a French seat of arbitration in greater detail to determine the parties’ intention. The UKSC’s failure to consider French law affects its determination of the law applicable to the arbitration agreement. It also affects the UKSC’s decision to permit a summary dismissal of the case without a complete trial to determine the law governing the arbitration agreement. Such a trial could have provided an opportunity to determine whether the parties wanted French law to apply to the arbitration agreement by choosing a French seat. This would have yielded a more accurate understanding of the parties’ knowledge of the French approach and their intended choice of law.

It is pertinent to note that the UKSC’s determination of the Kabab-Ji case is based significantly on the language of the contract and particularly the scope of the term ‘Agreement’ used in the governing law clause. The UKSC may therefore have reached a similar conclusion, even if it had considered French law. However, the above critique is directed at the UKSC’s approach in reaching its conclusion in the Kabab-Ji case and the importance of paying proper heed to the law of the seat while deciding the law applicable to the arbitration agreement.

The differences between the English and French approaches in deciding the law applicable to the arbitration agreement have caused significant disharmony in international arbitration. The UKSC in the Enka v Chubb judgment upheld the importance of paying attention to provisions of the law of the seat which require that the arbitration agreement be governed by that country’s law. In doing so, the UKSC has allowed English courts to analyse and if appropriate, follow the French approach in French seated arbitrations. The UKSC’s observations thus provide a potential avenue for bridging this historic divide and mitigating contradictory judgments. The Kabab-Ji case was an apt opportunity to explore this avenue. By analysing French law in the Kabab-Ji judgment, the UKSC could have paved the way for greater comity between French and English courts, while remaining within the bounds of the English approach outlined in the Enka v Chubb judgment.

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2021 in Review: India Continues to Make Significant Strides

Tue, 2022-02-15 01:00

While the second wave of Covid-19 hit India harder in 2021 than in 2020, this did not hamper progression in the legal sphere. 2021 saw several notable arbitration-related developments including another amendment to the Arbitration and Conciliation Act, 1996 (“Indian Arbitration Act”). Following on the tradition of the “2020 in Review: India” and “2019 in Review: India” posts that reflected eventful times in the Indian arbitration landscape, this post revisits India-focused discussions of topical issues that were published in the Kluwer Arbitration Blog over the last year.

 

Joining Non-Signatories to Arbitrations

Joining non-signatories to arbitrations is antithetical to consent, which is a fundamental basis of arbitration. In 2012, the Indian Supreme Court first adopted the group of companies doctrine in Chloro Controls (I) P. Ltd. v. Severn Trent Water Purification Inc. & Orsas a basis to join non-signatories to an arbitration. Over the last decade, Chloro Controls has been applied in various factual scenarios, including in Canada, as discussed in this post. As this post discusses, the developing case law highlights the challenges in the application of the group of companies doctrine and discusses instances where this doctrine has been applied in conjunction with principles of alter ego and lifting of the corporate veil to join non-signatories to an arbitration. The emerging jurisprudence in India suggests that the original ratio of Chloro Controls appears to have been diluted. As this could lead to the unintended addition of third parties to arbitrations, parties should be aware of the potential risks where Indian law is applied.

 

Another Amendment to the Indian Arbitration Act

Since the 2015 amendments to the Indian Arbitration Act, the Indian parliament has proactively ironed out the creases in the workings of the Indian Arbitration Act. While the previous amendments were welcomed by all, this post described the 2021 amendments as a “retrogression in the pro-arbitration regime sought to be fostered in India.” Significantly, the 2015 amendments removed the automatic stay jurisprudence in the enforcement of awards in India. However, the 2021 amendment empowered the courts to “stay the [enforcement of the] award unconditionally” in cases where the court is prima facie satisfied that the arbitration agreement or underlying contract or the making of the award was induced or effected by fraud or corruption. Case law suggests that recalcitrant parties have previously misused the position under Indian law on arbitrability of fraud claims to wriggle out of arbitration proceedings and drag the proceedings into courts. There is an apprehension that this amendment similarly could deprive the award holders from realizing the fruits of awards.

 

Two Indian Parties Choosing a Foreign Seat of Arbitration

Complementing the Indian parliament’s proactive approach, the Indian Supreme Court has also continued to pronounce pro-arbitration judgments. In a watershed judgment, in PASL Wind Solutions Private Limited v. GE Power Conversion, the Indian Supreme Court laid to rest the argument that the designation of a foreign seat between two Indian parties was contrary to public policy. As noted in this post, the Indian Supreme Court recognized party autonomy as “the brooding and guiding spirit of arbitration” and held that Indian parties are free to choose a seat anywhere in the world. This reflects a major step forward in favor of international arbitration as a venue for dispute resolution, even where domestic business transactions may be at stake.

 

Post-award Interim Reliefs to the Losing Party

Grant of interim reliefs by courts in support of arbitration highlights the symbiotic relationship shared between the court system and arbitral procedure. The power of courts to grant such reliefs is recognized in the UNCITRAL Model Law, which is replicated in section 9 of the Indian Arbitration Act. Section 9 itself does not bar any party from approaching the court to seek interim measures under any given situation. However, recent Indian court judgments have held that after the arbitral award is made, only the winning party in the arbitration proceedings is entitled to obtain interim reliefs from the courts, whereas, the losing party in the arbitration proceedings is not entitled to seek any remedy under Section 9. This post discusses this interesting facet of section 9 and argues that this provision should also extend to the losing party. Such a construction will provide parties with an avenue of relief under all circumstances.

 

Arbitration Agreement in an Unstamped Document

Under the Indian Stamp Act, any unstamped or inadequately stamped document loses its evidentiary value. The question before the Indian Supreme Court in M/s. N. N. Global Mercantile Pvt. Ltd. v. M/s. Indo Unique Flame Ltd. & Ors. (“NN Global”) concerned the enforceability of an arbitration clause contained in an unstamped work order. As discussed in this post, the Indian Supreme Court overruled its previous decisions in SMS Tea Estates v. M/s Chanmari Tea Co. and Garware Wall Ropes v. Coastal Marine Constructions and Engineering Ltd and held that the arbitration agreement is a separate agreement and therefore, would survive independent of the substantive contract. The previous judgments had prompted parties to raise the issue of stamp duty as another ground to resist arbitration. Thankfully, the authoritative pronouncement in NN Global on the basis of the doctrine of separability will nip this issue in the bud.

 

Discussion on Unequal Power in the Appointment of an Arbitration Tribunal

Taking the lead from an earlier discussion on the issue of unilateral appointment of sole arbitrators, this post looks at one of the ways in which the appointment of an arbitration tribunal can be lopsided. The post critically analyzes a judgment of the Indian Supreme Court where it held that one of the parties could effectively appoint two arbitrators (including the presiding arbitrator) and even the third arbitrator could only be appointed (by the opposite party) from a panel set by the first party. The post discusses how this judgment’s rationale found support in one of the decisions of the Delhi High Court where it deemed legal an appointment of an arbitrator selected through an exhaustive roster forwarded by one of the parties. It is hoped that the cloud surrounding the issue of unilateral appointments is authoritatively decided by the Indian Supreme Court soon.

 

No Sovereign Immunity to Resist Enforcement of an Arbitration Award

This post discusses two petitions that were taken up together by the Delhi High Court where the Court ruled that foreign states cannot claim sovereign immunity or related procedural safeguards under the Indian Code of Civil Procedure, 1908 to resist enforcement of awards before Indian courts. Citing examples from the UK and the US, the post highlights international consensus that state actors are to be treated at par with private parties when involved in commercial disputes. The countries that had filed petitions resisting enforcement of arbitration awards were Afghanistan and Ethiopia. The Delhi High Court held that an arbitration agreement in a commercial contract where a foreign state is participating is an implied waiver of any defense against enforcement based on the principle of sovereign immunity. This is a positive development for private counterparties who frequently enter into contracts with state actors.

 

Might Devas’ Liquidation Order Lead to Another BIT arbitration?

The National Company Law Tribunal (“NCLT”) ordered the liquidation of the Devas Multimedia (“Devas”) in May last year on the basis that it was incorporated for fraudulent purposes. The NCLT order was upheld by the National Company Law Appellate Tribunal and the Indian Supreme Court has also recently upheld the liquidation order. This post discusses how the NCLT order could lead to yet another BIT claim in the already heavily contentious matter being fought in various fora. The post argues that an arbitral tribunal would have jurisdiction over a claim of indirect expropriation as the liquidation of Devas was done with an alleged view to preventing enforcement of an ICC award in favor of Devas. The post contends that since arbitral awards can be subject to expropriation, a BIT claim could be sustained on the basis that the commercial award was expropriated by way of liquidation of Devas.

 

Court’s Discretion to Modify an Arbitration Award

This post discusses an Indian Supreme Court judgment that lays down the scope of an Indian court’s power to modify an award under the Indian Arbitration Act when it is presented with setting-aside applications. In brief, the post highlights the ratio of the judgment that as a general rule Indian Arbitration Act does not provide any power to courts to modify an arbitral award. However, it does allow limited scope in rare circumstances where an award may be modified by a court. The post concludes that while the judgment has advanced the debate on the topic, it does not settle it. The courts are sure to develop this area in the future as further disputes arise among litigants.

 

Enforcement of Foreign Seated Emergency Awards in India

Beginning in late 2020, the Amazon v Future Retail judgment captured global attention. This post discusses the judgment and breaks it down to clarify that, as made to be, the case is not an authority for the proposition that foreign-seated emergency arbitrations awards are enforceable in India. This is because the arbitration, in this case, was seated in India (in Delhi) though the administrative institution was SIAC. The post discusses the provisions in the Indian Arbitration Act that enable the enforcement of emergency awards. It also discusses potential arguments in favor of and previous decisions on enforcement of foreign seated emergency awards in India.

This post on the same case examines it through a different prism and evalutes whether the decision has presented the parties with a difficult either-or dilemma between seeking an emergency award and approaching the court for interim relief. The post discusses the regime of seeking interim relief post the amendment of the Indian Arbitration Act in 2015 and the consequence of the Amazon decision in seeking interim reliefs before courts.

 

Status of Arbitrability of Derivative Action Claims in India

Arbitrability of derivative claims has been a grey area in India. While there are judgments that have held that certain derivative claims, especially those relating to oppression and mismanagement are non-arbitrable, they are different from typical derivative action suits that may be arbitrable. This post reviews Indian judgments on the issue and advocates in favor of arbitrability of derivative actions while being careful of the pitfalls. In doing so, the post also discusses the decisions of American courts and how they have looked at the issue.

 

The Indian Supreme Court’s Approach Towards Scrutiny of Arbitral Awards

This analysis of the Indian Supreme Court’s judgments between January 2020 and September 2021 is an interesting read as it provides empirical evidence of the well-known trend of Indian courts in terms of abstaining from interfering in the enforcement of arbitration awards. The post discusses the current scope of scrutiny of a domestic arbitration award under Section 34 of the Indian Arbitration Act while also noting certain departures where the Indian Supreme Court has engaged in excessive interventions.

 

Looking Forward into 2022

The Indian Supreme Court’s decision in Amazon v Future was significant for emergency arbitration proceedings. However, recently the Delhi High Court stayed the arbitration proceedings and the issue is currently before the Indian Supreme Court. We will have to wait and see what the final outcome is. In another signigicant academic development, the book Arbitration in India (ed. Dushyant Dave, Martin Hunter, Fali Nariman, Marike Paulsson) was published in 2021. This book offers a detailed analysis and description of the evolution and current position of the arbitration law and practices in India. With India proving itself as a mature arbitration jurisdiction (with a few steps back once in a while) in the past few years, 2022 should be another year to keep an eye on India.

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2021 in Review: Arbitration-Related Developments in France

Mon, 2022-02-14 01:00

Following a fruitful 2020, 2021 also brought some noteworthy developments in France, that this post proposes to review on a general level. Overall, the Paris Court of Appeal (“the Court”) seems to have taken a slightly more exigent approach towards arbitration this year, while the Cour de cassation has overturned regrettable decisions.

Admissibility and Waiver of Arguments in Annulment Proceedings

Important judgments were delivered in relation to the principle of waiver under Article 1466 of the French Code of Civil Procedure (“CCP”), which provides that parties are deemed to have waived their right to subsequently rely on any irregularities which they knowingly refrained from raising before the tribunal in a timely manner. This rule has continued to generate litigation as it applies differently depending on the ground of annulment raised under Article 1520 CCP.

In the Pharaon case, the Court applied the principle of waiver more carefully when ruling under Article 1520(2) CCP (irregular constitution of the tribunal), making clear that it was not enough for a litigant to challenge an arbitrator before the arbitral institution, it must then “at least expressly formulate reservations before the arbitral tribunal” in order for the argument to be admissible. Similarly, it is not enough to simply complain during the hearing of the arbitrator’s behavior without seeking his disqualification, as ruled in Aboukhalil .

The Court also ruled in Pharaon that an annulment request was not admissible because the requesting party, that had properly challenged the impartiality and independence of an arbitrator within the time limit set forth under the ICC Rules, had failed to restate its objection before the arbitral tribunal after rejection of the challenge. It is highly questionable whether such Court’s ruling would resist the European Court’s review as performed in Beg (discussed here and here).

One exception is of course when the impartiality results from the award itself (see the Rotana case), which is to be established on the basis of “precise elements as to the structure of the award and its own terms”. This strict application of Article 1466 CCP to some of annulment grounds is counterbalanced by the large scope of issues that can be reviewed under other.

Since last year’s Schooner case (discussed here), the Court reviews the Tribunal’s jurisdiction, allowing for new legal and factual arguments to be raised, provided that jurisdiction has been challenged to some extent before the arbitral tribunal. This approach has been routinely endorsed through the year, including when assessing jurisdiction based on a BIT.

The Court simply required in Pharaon that the claimant object to the jurisdiction of the tribunal before the annulment proceedings, including through a mere objection to the tribunal’s power to enforce decisions of a dispute board – as in Ukravtodor or a through a simple letter sent raised by a party that refused to appear before the tribunal, challenging its jurisdiction (see Oschadbank v Russia).

In the same vein, the Court reiterated in Grenwich that the principle of waiver does not apply to public policy grounds, even though the matter was not raised during the arbitral proceedings as clarified in Webcor v Guinea. It is worth noting that in both the Pharaon and the Fiorilla cases, the Court reviewed a claim for lack of independence and impartiality not under Article 1520(2) CCP (irregular constitution of the tribunal), but under Article 1520(5) CCP (review on public policy grounds) as a breach of due process. One could hope that the Court will limit this diversion to exceptional circumstances.

Investment Arbitration

2021 has been a very prolific year with regards to the number of investment arbitration cases that came under the review of French courts.

Relevant developments first concern dual nationality. In Aboukhalil, the Court upheld the award granting the BIT’s protection to an investment made by a dual national despite the BIT being silent on the issue. The Court’s previous judgment in Garcia Armas v Venezuela endorsed the opposite view on the ground that the investor did not hold the relevant nationality at the time of the making of the investment. However, this judgment was overturned by the Cour de cassation, which considered that this approach wrongly adds a requirement to the BIT. These cases therefore herald a welcome consistency, though the issue remains controversial in arbitral practice.

In 2021, the Court held that questions relating to attributability, the legality of the investment, corruption and compliance with a cooling-off provision are not to be reviewed by the Court under Article 1520(1) CCP. This is a welcome development as it prevents issues that are not related to jurisdiction to benefit from the broad review allowed under the Schooner approach.

Several decisions were also rendered in relation to temporal issues, the Court ruling in Oschadbank that a BIT provision relating to its temporal scope is a matter of jurisdiction, not admissibility. In Rusoro, the Cour de cassation rejected the Court’s view that a BIT’s statute of limitations goes to jurisdiction and rather qualified it as a matter of admissibility.

The Court also recalled that a State cannot escape its contractual obligations by invoking parliament’s lack of ratification of a contract or the breach of a domestic law on public markets (even if qualifying as a foreign mandatory law), nor a general climate of corruption within its administration.

On a separate note but rare enough to be mentioned, a second investment arbitration has been initiated against France in relation to its decision to abandon a gold mine project in Guyana.

Parties’ Equality in the Constitution of the Arbitral Tribunal

Established in the Dutco case, the principle of the parties’ equality in the constitution of the tribunal is part of French public policy as recalled by the Court in Maessa v Ecuador.

But can this principle justify overriding the terms and conditions of an arbitration agreement? In Vidatel, the Court answered positively and endorsed the ICC’s decision not to stricty enforce  an arbitration clause allowing each party to appoint one arbitrator of a 5-member tribunal.

The Court agreed that “in the actual configuration” (1 claimant vs 3 respondents with converging interests) and “absent any better agreement”, the ICC’s decision not to confirm the 4 party-appointed arbitrators but to appoint on its own the five arbitrators was compliant with this principle, which the Court expressly considered “binding upon the parties despite the terms of the arbitration agreement”.

What matters is thus the equal position of the parties, even if equality means the non-involvement of all the parties in the constitution of the tribunal and overriding the terms of the arbitration agreement.

Arbitrators’ Independence and Impartiality

In 2021, the Court again issued several decisions on disclosure obligations and independence and impartiality of arbitrators.

The Court first addressed the source of this duty. On this issue, it seems that French courts move towards a combination of both French law and arbitration rules, considering the arbitration rules and then the arbitrator’s disclosure duty under article 1456 CPC, expressly stated that its content was not limited to what was foreseen under the arbitration rules chosen by the parties.

The Court found that an arbitrator had to disclose the previous 9 appointments by a counsel over 21 years, but considered that this failure to disclose did not create a reasonable doubt, which requires “the systematic character of a designation by the party or the counsel as well as its frequency and its regularity over a long period in comparable contracts”.

One other controversial issue is the “exception de notoriété”, which allows arbitrators not to disclose circumstances that are publicly well-known and should therefore have been known by the parties. If it may be understandable that, as the Court made it very clear, the information published in the GAR is to be deemed “well-known” despite not being a free-access website, other circumstances are more questionable. For example, the Court ruled that an information was “well-known” if it could have been found when constituting the tribunal, by applying German search terms.

The Tribunal’s Duty to Respect its Mandate

The Court clarified that the failure by a tribunal to give reasons for its decision and the failure by an arbitrator to render an award within the prescribed time-period were to be reviewed under Article 1520(3) (failure to comply with the mandate conferred upon the tribunal).

In Boralex, the Court also stated that such a failure, when it relates to a procedural rule, can only lead to a set aside of the award if it caused a grievance to one of the parties. It is also the first decision of the Court that ruled and dismissed a covid-related request for the annulment of an award signed remotely and at different dates by the arbitrators.

Assessment of Corruption Issues

Corruption remained under the spotlight in 2021, but French courts appeared less permissive on this issue as well.

While the Court stuck to its well-established case law that circumstantial evidence needs to be “serious, precise and consistent” (see also the reinstatement of the arbitral award in the Alstom saga), it considered that neither a general climate of corruption, a situation of revolution, nor the “bad reputation” of the investor, as such, evidence corruption. The Court also recalled that an alleged bribe which postdates the investment does not taint the making of the investment with illegality.

Along with an imbalance in the contract’s economic model (as suggested last year in Sorelec v Libya), other decisive circumstantial evidence now apparently accepted by the Court includes a lack of legal proceedings initiated against alleged bribers or the State’s “manifest inaction. The Court however also upheld an award that ordered Senegal to compensate an investor for deprivation of an investment following a domestic criminal ruling for illicit enrichment. The Court confirmed the tribunal’s findings that the investor was deprived of his fundamental procedural rights, as the criminal proceedings did not comply with general principles of international law.

Procedural Fraud

The Court also ruled in LMH and Cevikler that the production of forged documents, including false witness statements or fraudulent dissimulation of documents, can constitute a breach of French public policy and are to be reviewed under Article 1520(5) CCP. The challenging party must establish that the other party was in possession of the document and the document was decisive to the resolution of the dispute.

Third-Party Challenges Against Enforcement Orders

The Cour de cassation allowed a third-party challenge against an enforcement order issued by French judges of an international arbitral award rendered abroad, clarifying that the third-party challenge against the decision of the Court granting the enforcement order constituted an ordinary legal remedy not against the arbitral award itself, but only against the decision to enforce the award rendered abroad.

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Tribunal Seated in London Awarding Costs of Ancillary Litigation in Warsaw: Another Exception to the General Rule?

Sun, 2022-02-13 01:00

A party to arbitration proceedings may incur ancillary litigation costs, such as those associated with interim measures. Most academic commentary considering whether such expenditures actually constitute arbitration costs refers to professor Hanotiau, who states that costs related to litigation proceedings ancillary to arbitration do not generally fall under the umbrella of arbitration costs. As such, these expenses should be claimed directly in litigation proceedings or, alternatively, as damages in arbitration. Most scholars concur with this approach and highlight that arbitrators should ensure that they do not award duplicate costs.

However, the question may arise as to how often the lex fori of the court granting interim measures urges a party to ask an arbitral tribunal to award costs of ancillary litigation proceedings in the arbitration. For instance, according to Finnish law, the costs of proceedings regarding interim measures have to be determined and then allocated between the parties only in connection with the decision on the merits of the dispute, i.e., in a final award rendered by the arbitral tribunal. An arbitral award rendered in 2020 under the 2014 LCIA Rules sheds light on the matter when Polish courts order interim measures in support of international arbitration seated in London.

 

Background to the Case

In said matter, a dispute arose out of two contracts for the sale of motor diesel fuel. Both contracts were governed by English law. The Swiss seller delivered the full amount of fuel under the first contract and a part of the agreed amount under the second contract. The Polish buyer accepted the delivered goods. At the same time, the buyer failed to pay for the last four shipments under the first contract and for all shipments under the second contract. As a result, the seller suspended further deliveries and submitted two requests for arbitration under the LCIA Rules and demanded payment for the delivered goods and the contractual interest.

Before submitting its requests, the seller applied for interim measures in support of these arbitral proceedings before the Polish state courts, where the buyer was based. In short, the seller applied for two separate interim measures in two separate proceedings: an interim injunction in the form of an attachment to the buyer’s bank accounts and other receivables, and an application for an interim injunction for a judicial mortgage. The seller prevailed in both court proceedings.

The buyer appealed both interim measures unsuccessfully. In one of the cases, the appellate court adjudicated the costs of the appeal proceedings in favor of the seller.

The seller also prevailed on the merits of the arbitration proceedings. The arbitrators noted that, in contrast to the substantive issues, the issue of costs was hotly disputed and was subject to no less than seven written submissions.

 

Awarding the Costs

Even before the final award was rendered, the buyer had been ordered to pay all of the seller’s costs occasioned by two of the buyer’s adjournment applications. As for the final award, the seller had been pursuing a goal of allocating all costs of arbitration and interim measures to the buyer. As for the costs which the appellate court partially adjudicated, the seller argued that the court incorrectly did so. Still, the seller reduced its claims on the amount of the previously adjudicated costs.

Apart from numerous issues related to costs that are beyond the subject of this blog post, the buyer claimed that Polish law provides for the right to demand the costs of interim measures ordered by the Polish courts only before the same Polish courts that ruled on the interim measures. The seller challenged the buyer’s assertion stating that under Polish law, the costs of interim measures, including those in support of arbitration, may be awarded only by the final judgment/award regardless of whether it is rendered by a state court or an arbitral tribunal. Therefore, in this case the costs of interim measures should be awarded by the arbitral tribunal.

A party-appointed expert confirmed the seller’s position. Under Polish civil procedural law, when deciding on interim measures, a court does not decide on costs of those proceedings. The relative costs are awarded in the judgment deciding on the merits of the case, i.e., in the final judgment. In the case at hand, the arbitrators found a similarity with an English rule, according to which the costs follow the event. Consequently, it is only possible to know which party won (and should thus recover its costs) once the final decision on the merits is reached. In the arbitral proceedings, the final decision on the merits is reached by the arbitral tribunal. Thus, the arbitral tribunal is the only forum that can decide on the costs incurred by the parties in the course of the interlocutory proceedings before the state courts for interim measures.

The expert concluded that if the arbitral tribunal does not decide on the costs of interlocutory proceedings, Polish state courts would decline to decide on those costs at the request of the parties. The Polish courts would be only entitled to award interim measure costs incurred after the final award had been rendered.

The buyer tried to contest the seller’s position. According to the buyer, no clear-cut answer exists in Polish jurisprudence as to whether it is the Polish courts or an arbitral tribunal that can rule on the allocation of costs of interim measures in support of international arbitration. To support such allegation, the buyer referred to cases where Polish courts awarded the costs of interim measures ordered in support of international arbitration.

Despite this, the arbitral tribunal agreed with the seller and stated as follows (direct quotation from the award, with only the names of the parties anonymized):

 [U]nless we make an award in respect of those costs, following an assessment of their reasonableness, the Claimant will be unable to recover such costs. This would expose any claimant in [Claimant’s] position to a choice of either pursuing interim measures for the preservation of assets through the local courts, knowing that it will not recover its costs of doing so (albeit this would be a direct result of its previous choice to contract with the Respondent), or waiting until the constitution of the Tribunal to make its application for interim measures thus risking that in the meantime the Respondent will dissipate its assets rendering any further arbitral award effectively unenforceable and useless.

 Consequently, the arbitral tribunal ruled that the buyer must pay all costs. In doing so, the tribunal slightly reduced the costs of interim measures proceedings in Poland taking into account the amount of legal costs of arbitration itself.

After the final award was rendered, the seller initiated proceedings in Poland in order to enforce the award. In November 2021, the Warsaw Court of Appeal recognized and enforced this award in its entirety.

 

Conclusion

The rationale of the Finish and Polish approaches is similar. It follows that if the lex fori of the court granting interim measures allows for allocating relevant costs only by a final judgment on the merits, then the arbitral tribunal may award such costs as costs of arbitration in support of which interim measures were granted. Otherwise, a party asking for interim measures will be unable to recover such costs. The case discussed in this blog post constitutes a notable exception to the general rule, under which costs of litigation proceedings ancillary to arbitration are not costs to be reimbursed in arbitration proceedings.

 

Stepan Sultanov as a part of KIAP team has been involved in the LCIA arbitration; Piotr Gajek as a part of WKB team has been involved in the interim measures and the enforcement proceedings. 

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