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Recognition of Arbitral Awards under the New York Convention by Cypriot Courts

Sat, 2022-02-12 01:00

Cyprus is a hub for international business transactions and tax structures. It is also a place where the assets of numerous multinational corporations and businesses are maintained. As such, it is a place which where the enforcement of international arbitration awards is frequently sought. In light of the above, one would expect Cyprus to be arbitration-friendly for the above purposes. Nonetheless, several first instance judgments by Cypriot courts have followed a seemingly restrictive approach regarding the issue of jurisdiction to entertain an application to enforce a foreign judgment or arbitral award in Cyprus. Some of these judgments involve arbitration awards falling within the ambit of the New York Convention (“NYC”), and their reasoning appears to lack conformity with NYC provisions and relevant case law from other jurisdictions, such as the US (see for example: James Edward O’Connor v. Maritime Management Corp., 2017 WL 1018586 (E.D. La. Mar. 16, 2017)). This restrictive approach has not been examined by the Cypriot Supreme Court yet, but it is expected that an opportunity will soon arise for the issue of be clarified.

In this post, we look into the seminal first-instance case law where this restrictive approach was adopted. We also look at the more balanced approach taken in Base Metal Trading Ltd v. MEAT “NKAZ”, another first instance case. We conclude that the latter approach is compatible with the provisions of the NYC, whereas the former is not, and that the Cypriot Supreme Court could potentially provide clarity on this crucial issue in the future.

 

Relevance of the NYC

Cyprus is a signatory to the NYC. It follows that Cyprus is bound under Article III of NYC by an obligation to “recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon, under the conditions laid down in [NYC]”. Under the same provision, Cyprus cannot impose “substantially more onerous conditions… than are imposed on the recognition and enforcement of domestic arbitral awards”. This provision has been interpreted by Cypriot courts as granting them jurisdiction to hear and decide applications for the recognition and enforcement of arbitral awards falling within the ambit of NYC.

 

Law 121(I)/2000

The Judgment of Foreign Courts (Recognition, Registration and Enforcement by Convention) Law of 2000 (L.121(I)/2000) prescribes the procedure under which a foreign “judgment” can be recognized and enforced in the Republic of Cyprus. A “judgment” is widely defined in section 3 of the law and includes “arbitral awards”. Accordingly, the law is applicable whenever recognition and enforcement of a foreign arbitral award is sought in Cyprus on the basis of the NYC or other bilateral or multilateral conventions. According to section 2 of L.121(I)/2000, the “court” to which an application for recognition is made is “the District Court at the district where the respondent resides…” and, “in case the respondent resides abroad… the District Court… at the district where the applicant resides”. The above definition does not designate the appropriate court in the situation where none of the parties resides in Cyprus.

One would have thought that L.121(I)/2000 is merely a procedural law, that is irrelevant to the matter of jurisdiction of the Cypriot courts. It would follow that the definition of “court” in L.121(I)/2000 relates to the issue of which District Court is competent amongst the various Cypriot District Courts, by laying down rules for the determination of the competent District Court where an application to recognise any award can be entertained. However, several District Court Judgments have interpreted L.121(I)/2000 very differently, considering that the said definition sets the limits of the jurisdiction of Cypriot Courts to entertain applications for recognition of international arbitration awards.

 

Baltiyskiy Bank v. Artur Vladimirovich

Albeit related to an application for the recognition of a judgment of the Petrogradsky District Court (instead of an arbitral award), OAO Baltiyskiy Bank v. Artur Vladimirovich Kirilenco, D.C. Nicosia App. No.1339/2009 is worth examining. The case regarded an application for the recognition of a judgment under the Treaty between the Republic of Cyprus and the Union of Soviet Socialist Republics on Legal Assistance in Civil and Criminal Matters (the “Treaty”). In a judgment dated 08.04.2011 (per Parparinos, PDC), the District Court of Nicosia found that it lacked jurisdiction to entertain the application because none of the parties resided in Cyprus. However, this judgment was not based on an erroneous reading of L.121(I)/2000. It relied on Article 28.2 of the Treaty, which states that an application for enforcement of a judgment issued in a contracting state may be submitted to the courts of the other contracting state if the applicant has a permanent or temporary residence in that other contracting state.

The same conclusion was reached in D.C. Nicosia App. No.1340/2009, which related to another judgment between the same parties. By judgment dated 30.04.2012 (per Yiasemis, PDC), an application for recognition of a judgment was dismissed with the same reasoning. Similar applications were dismissed on substantially the same grounds in: VTB Bank v. Alekseyevich, D.C. Nicosia App. No.378/2014, Judgment dated 27/06/14 (per Economou, PDC); and Nikolaevna v. Fridrihovich, D.C. Limassol App. No.5/2013, Judgment dated 14/11/14 (per Kalogirou, PDC). However, in the judgment in D.C. Nicosia App. No.1340/2009, the court went on to comment that L.121(I)/2000 was not merely procedural, but substantially regulated the matter of recognition and enforcement of foreign judgments. As such, said law prevailed over Cypriot laws that ratified international conventions. The latter position is clearly wrong, as Article 169 of the Constitution of Cyprus expressly and clearly provides that international conventions prevail over national laws.

Nonetheless, the position taken in OAO Baltiyskiy Bank v. Artur Vladimirovich Kirilenco and subsequent case law was approved by the Cypriot Supreme Court in VTB Bank v. Alekseyevich and others, Civil Appeal No.206/2014, Judgment dated 12.06.2020.

 

Kismetia Ltd v. Nilsson Lupusco Volga Farming Ltd

Kismetia Ltd v. Nilsson Lupusco Volga Farming Ltd and others, D.C. Nicosia App. No.1639/2011, Judgment dated 02.05.2012 (per Parparinos, PDC) was an application for the recognition of an NYC arbitral award. In this case, the District Court of Nicosia again dismissed the application for lack of jurisdiction, examined sua sponte. The court summarily rejected the applicant’s arguments that Cypriot courts were bound to recognise such awards under the NYC. On substantially the same grounds, a similar application was dismissed in Hepp III Luxembourg Master S.A.R.L. v. Central Europe Finance (Holding) S.A., D.C. Limassol App. No.20/2012, Judgment of 24.09.2013 (per Psara-Miltiadou, PDC).

 

Base Metal Trading Ltd v. MEAT “NKAZ”

A more balanced approach was taken in Base Metal Trading Ltd v. MEAT “NKAZ”, D.C. Nicosia App. No.58/2001, Judgment of 19.12.2013 (per Michaelidou, PDC, unreported, but cited in Cruz City 1 Mauritius Holdings v. Unitech and others, D.C. Nicosia App. No.402/2014, Judgment dated 30.12.2015 (per Santis, PDC) where the District Court of Nicosia accepted jurisdiction despite both parties residing abroad. The court found that L.121(I)/2000 did not result in the Cypriot courts lacking jurisdiction to entertain applications for recognition. The contrary position would render the provisions of NYC nugatory (see also: Cruz City 1 Mauritius Holdings v. Unitech and others, D.C. Nicosia App. No.402/2014, Judgment dated 30.12.2015 (per Santis, PDC))

 

Commentary

This issue has not been decided by the Cypriot Supreme Court yet. Until it is, the conflicting judgments in Kismetia and Base Metal reveal the legal uncertainty over the jurisdictional issue, that may be faced by a successful party seeking to enforce an arbitral award in Cyprus, when neither party resides within the jurisdiction. The Base Metal approach appears to be more balanced, in line with case law of other jurisdictions and compatible with NYC and the contracting states’ obligations under it. A few of the cases mentioned above have been appealed. It is therefore a matter of time before the Supreme Court is asked to clarify the issue.

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2021 in Review: Ukraine Marks its 30th Known Investment Arbitration Case on its 30th Anniversary

Fri, 2022-02-11 01:30

The year 2021 has been the busiest year for Ukraine since 2008, with four investment arbitrations initiated against Ukraine. The odds were not always in Ukraine’s favour. Having secured the dismissal of the case for lack of jurisdiction in Littop and others v. Ukraine, Ukraine was defeated by the investor in Olympic Entertainment v. Ukraine. Another six cases remain pending. This post will examine Ukraine’s track record of concluded and pending investment arbitration cases and shed light on new proceedings initiated in 2021.

 

Investment Arbitration Involving Ukraine: Background

In 2021, Ukraine was hit with four investment treaty arbitration cases, with the most recent case registered on 28 October 2021. According to UNCTAD, as of 2020, Ukraine had the fourth-highest number of known investment treaty arbitration cases (26) among European countries with only three countries ahead: Spain (53), Czech Republic (41), and Poland (32). Out of the concluded investment arbitrations in which Ukraine was involved as of 2020, it prevailed in eight, lost in eight, and settled four.

Most cases decided in favour of Ukraine dealt with the issue of denial of justice (Krederi v. Ukraine, Amto v. Ukraine, GEA v. Ukraine and Bosh v. Ukraine). Another two (Tokios Tokelés v. Ukraine and Generation Ukraine v. Ukraine) dealt with expropriation. One case – Global Trading v. Ukraine – was dismissed outright as manifestly without legal merit, whilst another  – Littop and others v. Ukraine – was reportedly resolved in favour of Ukraine in 2021 recognizing the unclean hands doctrine. However, the award was not made public.

Amounts awarded to the investors in cases lost by Ukraine were considerably smaller than initially claimed by investors. For instance, in Lemire v. Ukraine, a claimant was awarded only 15.80% of the requested amount. Another example of shattered expectations is JKX Oil & Gas and Poltava v. Ukraine, where the claimant was awarded less than 5% of the amount claimed.

 

Cases Lost by Ukraine

In cases lost by Ukraine where the awards have been entirely published, the most frequent basis for awarding compensation to investors was the breach of fair and equitable treatment (“FET”) standard and the breach of the expropriation clause.

The most recent case – Olympic Entertainment v. Ukraineconcerned Ukraine’s gambling ban imposed in mid-2009, resulting in the cancellation of licenses granted to various gambling facilities, including the claimant’s subsidiaries, and subsequent cessation of their activities in Ukraine. Whilst the Tribunal accepted that the gambling ban was based on reasons of public health and morality, it found the measure to be disproportionate. Considering the Tribunal’s decision regarding Ukraine’s unlawful expropriation, the panel determined it was not necessary to rule on the alleged breach of the FET and full protection and security (“FPS”) standards; however, it still determined that the gambling ban and its effect of destroying the claimant’s investment, evidently supported the conclusion of the breach of the FET standard.

Similarly, indirect expropriation and breach of the FET standard were found in Alpha Projektholding v. Ukraine, Inmaris Perestroika v. Ukraine, and City-State v. Ukraine. The two former cases concerned the investors agreements’ performance with the non-State actors, and Ukraine’s interference with their operation through implied (in Alpha Projektholding), or explicit (in Inmaris Perestroika) instructions of its authorities was found critical by both tribunals.

Moreover, in Inmaris Perestroika v. Ukraine and Lemire v. Ukraine, the tribunals refused to interpret the term ‘fair and equitable treatment’ in accordance with the international minimum standard of treatment required by customary international law (i.e., only gross unfairness or actions that shocks one’s sense of legal propriety could be considered unfair and inequitable). Consequently, having studied the administrative procedure defined in Ukrainian law for the issuance of radio frequencies, in Lemire v. Ukraine, the tribunal concluded that some of the decisions of the Ukrainian broadcasting agency in relation to Gala Radio, owned by Mr Lemire, breached the FET standard. In view of the exceptional nature of the annulment remedy provided by Article 52 of the ICSID Convention, the Annulment Committee dismissed Ukraine’s application for annulment based on the Tribunal’s allegedly wrongful finding on causation.

The issue of the interpretation of the FET standard also arose in Tatneft v. Ukraine, in which the tribunal was primarily tasked with examining the conduct of Ukrainian courts as engaging in the State’s liability. The tribunal disagreed with Ukraine’s interpretation of the FET standard as prescribing no more than a prohibition of a denial of justice when applied to judicial decisions. It held that Ukraine was liable for a breach of the FET and FPS standards because of the deprivation of the Claimant’s management and control of Ukrtatnafta, a Ukrainian oil company, and, subsequently, the seizure of its ownership rights coupled with questions of due process rights and legitimate expectations.

 

Compliance with Adverse Awards

Ukraine has complied with most of the adverse awards either voluntarily or following recognition and enforcement proceedings. Only three awards have not been enforced yet.

First, Ukraine resisted enforcement of the award in JKX Oil & Gas and Poltava v. Ukraine on the grounds of (1) violation of due process, (2) lack of jurisdiction, and (3) violation of internal public order. However, on 21 November 2019, the Supreme Court of Ukraine resolved to partially enforce the award; nevertheless, there is no information available on effective compliance with the award.

Second, instead of seeking enforcement of the award in JSC Tatneft v. Ukraine in Ukraine – Tatneft sought enforcement in Russia, the US, and the UK, where Ukraine failed to overturn the enforcement of the award.

Finally, the award in Olympic Entertainment v. Ukraine was rendered relatively recently, in April 2021, and, naturally, has not been complied with yet.

 

Pending Cases

Leaving aside cases that were reportedly initiated in 2021, there are six cases yet to be decided. According to UNCTAD, the collective value of these claims exceeds USD 4.7 billion, and the awards are forthcoming, except in Wang and others v. Ukraine which was initiated by Chinese investors in late 2020 and is only gathering speed.

Of the rest of cases pending, most of them were initiated by Russian investors on various unrelated grounds (Tatarstan v. Ukraine, Emergofin and Velbay v. Ukraine, and VEB v. Ukraine). All of them, including Gilward Investments v. Ukraine – which is, reportedly, pursued by Ukrainian businessman, Mr Igor Kolomoisky – have passed the jurisdictional stage.

Finally, the case Boyko v. Ukraine brought by the Russian-US businessman in relation to an alleged expropriation of the claimant’s chocolate factory, is nearing completion with hearings on the merits held in February 2021.

 

New Cases

The 2021 figures show a rapid increase of investment treaty arbitration cases against Ukraine compared to previous years. In 2021 four cases were initiated, whilst many more threatened, but not commenced yet. These new and forthcoming cases are diverse by nature, that is, involving investors of different nationalities and economic sectors.

In the beginning of 2021, eight Philip Morris affiliates initiated an ICSID arbitration against Ukraine. The dispute arose out of the fines imposed in 2019 by the Antimonopoly Committee of Ukraine (the “AMC”) on four tobacco manufacturers and one tobacco distributor for alleged anti-competitive behaviour. The AMC decision resulted in numerous litigation proceedings initiated separately by all five companies subjected to fines. Having lost the first instance court proceedings in Ukraine, Phillip Morris reportedly paid the UAH 1.2 billion fine and initiated the ICSID arbitration against Ukraine. This decision was later overturned, which might explain Philip Morris’s decision to discontinue the proceedings on 28 January 2022.

Further, in March 2021, Misen Energy AB and its subsidiary Misen Enterprises AB, followed through on their threats raised since 2015 to initiate investment arbitration against Ukraine in response to the imposition of a 70% subsoil use charge for the production of natural gas.

Another two known cases (SREW N.V. v. Ukraine and Modus Energy International v. Ukraine) concern 2019-2020 legislative changes made to the Ukrainian feed-in tariff (“FIT”) regime, which was introduced in 2009 and gave renewable energy producers (“RES”) the right to sell energy to the state at a special preferential price until 1 January 2030. However, it soon became clear that the FIT regime required an overhaul: the increasing generation capacity of RES producers has seen an exponential growth of FIT payments, resulting in the deficit and subsequent retroactive reduction of the FIT. Some investors adversely affected by such changes did not take it lightly and, like SREW and Modus, threatened to recourse to the same remedy (investment arbitration). In fairness, Ukraine is not the first state that faces difficulties meeting expectations of RES producers. Given that the tribunals’ practice in Spanish, Italian and Czech cases is far from being uniform, it is too early to jump to conclusions.

At least three more potential disputes derived in 2021, but arbitrations were not initiated yet. Notices of dispute were reportedly filed by Arricano Real Estate Plc, Mr Tamaz Somkhishvili and, most recently, by Wellcome Limited.

Undeniably, 2021 was one of the most ‘fruitful’ years when it comes to the quantity of investment treaty arbitration cases initiated against Ukraine. Some investors fulfilled their threats to commence arbitration proceedings against Ukraine, whilst others chose to take a more cautious approach. Thus, in addition, to the long-awaited rulings in pending cases, 2022 would likely bring more investment arbitration cases against Ukraine.

 

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The Contents of the ASA Bulletin, Volume 39, Issue 4 (December 2021) – and a glimpse at Volume 40, Issue 1 (March 2022)

Fri, 2022-02-11 01:00

We are happy to report that the latest issue of the ASA Bulletin is now available and includes the following articles and case; we also add a brief glimpse of the articles of the first issue of 2022.

 

ARTICLES

Felix DASSER, Calling a Spade a Spade

In his message ASA President Felix DASSER invites arbitrators to call out counsel for overzealous lawyering and foster good faith in arbitration.

 

Boris CATZEFLIS, Dorothee SCHRAMM, Statutory Arbitration Clauses of Swiss Companies

Boris CATZEFLIS and Dorothee SCHRAMM examine arbitration clauses included in the articles of association of Swiss joint stock and limited liability companies in light of the new Article 697n of the Swiss Code of Obligations as well as statutory arbitration clauses of foreign companies.

 

Johannes LANDBRECHT, Zur Koordination von Schiedsverfahren und staatlichen Gerichtsverfahren. Anpassungsbedarf in Brüssel Ia-VO und LugÜ?

Johannes LANDBRECHT looks at the mechanisms available to coordinate consecutive or concurrent parallel arbitral and state court proceedings and whether adjustments to the Brussels Ia Regulation and the Lugano Convention are required in that regard.

 

David BOCHATAY, Du projet d’abroger l’article 372 al. 2 CPC

David BOCHATAY makes a critical assessment of the legislator’s proposed repeal of article 372(2) of the Swiss Code of Civil Procedure governing lis pendens in case of parallel arbitration and court proceedings and suggests adopting a one-way lis pendens rule in favorem arbitri.

 

Candan YASAN-TEPETAŞ, Iura Novit Curia in Turkish Arbitration Law

Candan YASAN-TEPETAŞ provides an overview of the iura novit curia principle in Turkish arbitration law, its application, and its limits.

 

Adama ZOROMÉ, L’exécution forcée en France de la sentence arbitrale impliquant les États et leurs émanations

Adama ZOROMÉ looks back at the jurisprudential developments prior to the Sapin II law of 9 December 2016, examines the changes introduced by this legislative reform and its impact on the seizabililty of assets located in France belonging to foreign States, and discusses its anticipated application.

 

Laya JONEYDI, Shahab JAFARI, Competence-Competence Principle in Iranian Arbitration Law

Laya JONEYDI and Shahab JAFARI analyse the competence-competence principle in Iranian arbitration law and, specifically, under the 1997 Iranian Law of Commercial Arbitration (LICA), which is based on the UNCITRAL Model Law on International Commercial Arbitration.

The first issue of 2022 will contain, among others, the following contributions:

  • Carine DUPEYRON, Michela LAVIANI MANCINELLI, The Emerging Practice of Assigning Arbitration Awards: Rationale, Structure and Potential Hurdles
  • Céline Deborah KELLMANN, Choice-of-Law Rules Governing Preclusive Effects On Transcending Res Judicata’s State of Ambiguity in International Commercial Arbitration
  • Robert BRADSHAW, Witness Credibility and the (Un)Reliability of Demeanour Evidence
  • Harshal MORWALE, Appealing the SIAC Court’s Decisions on Arbitrator Challenges: A Case for Reassessing Rule 16.4
  • Alexander HILLER, Arbitrating Government Contracts in Egypt. Observations on DIPCO v. Damietta Port Authority
  • Caroline DOS SANTOS, Rewriting Investors’ Claim Labelled in USD in Near Worthless Syrian Pounds not Extra Petita or Violation of Public Policy. Swiss Supreme Court Decision 4A_516/2020 of April 2021

 

DECISIONS OF THE SWISS FEDERAL SUPREME COURT

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Are Non-binding Arbitration Agreements Enforceable Under PRC Law?

Thu, 2022-02-10 01:00

A key characteristic of an international commercial arbitration award is its binding nature, although parties may still consent to non-binding arbitration. A consent to non-binding arbitration is problematic when the applicable law explicitly prescribes arbitration to be binding. Mainland China is such a jurisdiction. Thus, the issue of the validity of a non-binding arbitration agreement for which PRC law is the applicable law has been in dispute for quite some time, with different courts making diverse rulings. Recently, the Shanghai Pudong New Area People’s Court (“Court of First Instance”) and Shanghai First Intermediate People’s Court (“Appeals Court”) issued the first decision in the PRC dealing with this issue in a foreign-related case,1)In the PRC legal system, foreign-related cases are treated differently on certain issues. Even when the applicable law is the same, they may be affected by different policy concerns. jQuery('#footnote_plugin_tooltip_40402_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40402_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); affirming the validity of the arbitration agreement and holding that the court lacked jurisdiction over the dispute.

 

An Update on PRC Courts’ Attitude Towards Non-Binding Arbitration Agreements: BY.O v. Yushang Group Co. Ltd.

In May 2015, BY.O and Yushang Group Co. Ltd. contracted for BY.O to provide financial services to Yushang. Article 6 of their contract, titled “Applicable Law and Jurisdictional Agreement,” stipulated:

6.1 This agreement shall be entered into, performed and interpreted in accordance with Chinese law; Chinese law shall apply to the settlement of any dispute arising from this Agreement.

6.2 Any dispute or controversy arising from or related to this Agreement (including disputes regarding the existence, validity or termination of the agreed clauses of this Agreement, or the consequences of invalidity) shall be first resolved by arbitration at the Singapore International Arbitration Centre. If both parties fail to reach a consensus on the outcome of the arbitration at the Singapore International Arbitration Centre, either party has the right to submit the dispute to a commercial court of competent jurisdiction at the place of Party B (Yushang)’s residence for settlement by litigation.

(translation by the author; emphasis added).

In May 2020, without first arbitrating, BY.O filed suit before the Court of First Instance, arguing that Yushang had not paid the fourth-stage service fees and that the arbitration agreement in the contract is invalid. In its defense, Yushang raised a jurisdictional objection, arguing that the arbitration agreement is valid and that the case should be resolved through arbitration at SIAC.

In its judgment, the Court of First Instance first noted that the case was a “foreign-related civil case” (shewai minshi anjian) under PRC law (see Interpretation of the PRC Supreme People’s Court) since BY.O was a non-PRC party. Accordingly, based on Article 6.1 of the contract, the applicable law to a dispute between the parties was PRC law. (Under the PRC Law on Choice of Law for Foreign-related Civil Relationships, the parties may explicitly choose the applicable law.)

The Court of First Instance found that the parties had a valid arbitration agreement and, thus, the court lacked jurisdiction. A point of interest was how the Court of First Instance separated the arbitration agreement from the litigation agreement and decided that the former was valid while the latter was not.

In support of this distinction, the Court of First Instance provided four reasons. First, the first sentence of Article 6.2 of the contract clearly designates one arbitration institution. Thus, this arbitration agreement is valid.

Second, Article 9.1 of the PRC Arbitration Law provides that “[a] system of a single and final award shall be practiced for arbitration. If a party applies for arbitration to an arbitration commission or institutes an action in a people’s court regarding the same dispute after an arbitration award has been made, the arbitration commission or the people’s court shall not accept the case.” Therefore, the parties’ agreement on resorting to litigation after arbitration is invalid.

Third, in Article 6.2, the parties’ arbitration agreement and litigation agreement are separated by a period—which indicates their independence—instead of a comma or a semi-colon. Therefore, the invalidity of one does not affect the validity of the other.

Fourth, the parties’ agreements on arbitration and litigation are not parallel and thus the situation created by Article 6.2 is different from a situation where the parties have agreed that a dispute can be resolved by either arbitration or litigation.

BY.O then appealed to the Appeals Court. The Appeals Court basically upheld the first instance’s decision. The Appeals Court confirmed that the provision in the parties’ contract that any dispute “shall be first settled by arbitration through the Singapore International Arbitration Centre” clearly gave priority to arbitration over litigation, and the choice of arbitration institution was specific, clear and unique (a requirement under PRC law). Furthermore, the agreement was not characterized by alternative choices of “arbitration or litigation.” Thus, the arbitration agreement is valid; however, the litigation agreement is invalid, as it is specifically inconsistent with Article 9.1 of PRC Arbitration Law, violating the fundamental principle that arbitration precludes the jurisdiction of people’s courts.

 

Separating the Arbitration Agreement from the Litigation Agreement: Is it Really Separable?

Both the Court of First Instance and the Appeals Court divided the controversial “jurisdictional agreement” into two parts and examined the validity of the agreements on arbitration and litigation separately. Such a division is certainly beneficial in order to support the validity of the arbitration agreement but may not be internally consistent.

First, the litigation agreement explicitly refers to “the outcome of the arbitration” and thus cannot be completely detached from the arbitration agreement. Furthermore, the litigation agreement is deemed invalid by the Court of First Instance and the Appeals Court on the ground of violating the “finality of arbitration,” which references, again, the arbitration agreement. Therefore, examining the litigation agreement separately and finding its validity on the basis of arbitration law is somewhat misplaced.

Second, focusing on the punctuation, the Court of First Instance contended that the period used between the arbitration agreement and the litigation agreement indicated their independent validity. This to some extent makes sense, but a follow-up question easily comes to mind: would the result be different if the parties used a comma, semi-colon or other punctuation? Before the BY.O case, in some domestic PRC cases, non-binding arbitration agreements were deemed valid despite using a comma between the arbitration agreement and the litigation agreement. (See, e.g., the case decided by the Guangzhou Intermediate People’s Court in 2019, in which the parties used a comma and the court ruled that the arbitration agreement was valid but the litigation agreement was not.) Interestingly, although the Appeals Court affirmed the Court of First Instance’s decision, it did not address the issue of punctuation. Perhaps, then, it is reasonable to conclude that the failure to use a period in future agreements will not be fatal.

Third, there may be good reasons for the court to read the two agreements together. The two sentences containing the parties’ agreement on arbitration and litigation are under the same Article 6 of the contract, presenting the parties’ integral “jurisdictional agreement.” The parties’ consent to arbitration could be read as being only on the condition of resorting to litigation thereafter. If this is the case, it begs the question whether there was a valid “intention to apply for arbitration” under PRC Arbitration Law.

 

The Influence of the BY.O. Case

The BY.O case is the first foreign-related case in Mainland China dealing with the validity of a non-binding arbitration agreement. Despite the aforementioned questions on the courts’ analyses, the judgment clearly shows a supportive attitude toward foreign-related arbitration cases. Of note, this case was decided by Shanghai Pudong New Area People’s Court at a time when Shanghai, with the Central Government’s support, is accelerating its development as a global arbitration center in the Asia-Pacific region for, inter alia, the “Belt and Road” Initiative. (See also previous blog on the Shanghai Pilot FTZ.) In this context, the BY.O. case not only highlights Shanghai Pudong New Area People’s Court as being “arbitration-friendly,” but also features the involvement of a “Belt and Road” arbitration institution, SIAC. (On November 7, 2019, over 40 arbitration institutions, including SIAC, signed the Beijing Joint Declaration of the “Belt and Road” Arbitration Institutions.)

This case is significant particularly because it is published on the Gazette of the Supreme People’s Court. While the BY.O case should have considerable influence on future “foreign-related” cases at a minimum, cases technically do not serve as precedent in Mainland China unless published by the Supreme People’s Court according to the Provisions of the Supreme People’s Court Concerning Work on Case Guidance. It is also noted that the validity of non-binding arbitration agreements has not been particularly addressed by the Draft Amendments to the PRC Arbitration Law. As such, the saga of non-binding arbitration agreements may continue and, thus, it is still safer to avoid a non-binding arbitration agreement in a contract subject to PRC Arbitration Law.

References[+]

References ↑1 In the PRC legal system, foreign-related cases are treated differently on certain issues. Even when the applicable law is the same, they may be affected by different policy concerns. function footnote_expand_reference_container_40402_30() { jQuery('#footnote_references_container_40402_30').show(); jQuery('#footnote_reference_container_collapse_button_40402_30').text('−'); } function footnote_collapse_reference_container_40402_30() { jQuery('#footnote_references_container_40402_30').hide(); jQuery('#footnote_reference_container_collapse_button_40402_30').text('+'); } function footnote_expand_collapse_reference_container_40402_30() { if (jQuery('#footnote_references_container_40402_30').is(':hidden')) { footnote_expand_reference_container_40402_30(); } else { footnote_collapse_reference_container_40402_30(); } } function footnote_moveToReference_40402_30(p_str_TargetID) { footnote_expand_reference_container_40402_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_40402_30(p_str_TargetID) { footnote_expand_reference_container_40402_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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German Supreme Court Confirms Intra-EU BIT Does Not Give Access to Investor-State Arbitration in Light of CJEU’s Achmea Decision

Wed, 2022-02-09 01:00

The extent to which different dispute resolution fora are willing to pay deference to the Court of Justice of the EU’s (“CJEU”) seminal (and controversial) Achmea decision is being closely observed by investors and States alike. 1) Not to mention the European Commission, which has sought to make itself heard in numerous proceedings relating to intra-EU treaty arbitration outside the courts of the EU Member States as an amicus curiae. jQuery('#footnote_plugin_tooltip_40404_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); As far as the German court system is concerned, a recent decision of the German Supreme Court (Bundesgerichtshof) (I ZB 16/21, 17.11.2021, published in December 2021), confirms (if anybody had doubts in this regard) that Achmea will effectively be treated as a bar to any further arbitral proceedings based on intra-EU BITs and that any such proceedings seated in Germany are therefore extremely unlikely to succeed.

 

Procedural background

The decision relates to an arbitration initiated in February 2020 under the UNCITRAL Arbitration Rules by an Austrian and a Croatian bank, Raiffeisen Bank International and Raiffeisen Bank Austria, against Croatia based on the 1997 Agreement between the Republic of Austria and the Republic of Croatia for the Promotion and Protection of Investments (the “Austria-Croatia BIT”) in connection with certain changes made to Croatian insolvency law. 2) The arbitration appears to be unrelated to separate proceedings initiated by the same investors against Croatia in 2017 under the ICSID Convention (ICSID Case No. ARB/17/34). jQuery('#footnote_plugin_tooltip_40404_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); While Croatia objected to the initiation of the proceedings, arguing that the investor-State dispute resolution mechanism in Art. 9 of the Austria-Croatia BIT was inapplicable for being incompatible with EU law, it accepted the investors’ proposal for Frankfurt to be fixed as the seat of the arbitration. However, before a full tribunal was constituted, Croatia started proceedings before the Higher Regional Court (Oberlandesgericht) Frankfurt based on Article 1032 para. 2 of the German Code of Civil Procedure, which allows parties “[u]p to the constitution of the arbitral tribunal … [to] apply to the courts for a declaration regarding the admissibility or inadmissibility of arbitral proceedings.

In February 2021, the Higher Regional Court held that the arbitration was indeed inadmissible due to the lack of a valid arbitration agreement between the parties, as the arbitration mechanism in Art. 9 of the Austria-Croatia BIT was incompatible with EU law and could therefore not be applied. The investors appealed this decision to the German Supreme Court.

 

The Supreme Court’s decision

In a decision dated 17 November 2021, the German Supreme Court rejected the appeal and essentially confirmed the findings of the Higher Regional Court. Specifically, the Supreme Court held that disputes submitted to arbitration pursuant to Art. 9 of the Austria-Croatia BIT could involve the interpretation or application of EU law, notwithstanding the fact that the wording of that treaty was different from that of the Slovakia-Netherlands BIT at issue in the Achmea proceedings. 3)Article 11(2) of the Austria-Croatia BIT explicitly provides that “[t]he Contracting Parties are not bound by the present Agreement insofar as it is incompatible with the legal acquis of the European Union (EU) in force at any given time.” The Slovakia-Netherlands BIT does not contain any corresponding provision. jQuery('#footnote_plugin_tooltip_40404_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Referring to the CJEU’s findings in Achmea and its subsequent decisions in Komstroy and PL Holdings, the Supreme Court pointed out that a clause in an agreement between Member States providing for investor-State arbitration was invalid not only if it jeopardized the CJEU’s monopoly on rendering binding interpretations of EU law, but already if it removed disputes that potentially concerned the application or interpretation of EU law from the jurisdiction of the courts of the Member States, thus failing to guarantee the full effectiveness of EU law in breach of the principles of mutual trust and sincere cooperation between them.

The Supreme Court also gave short shrift to the investors’ argument that severe deficiencies in the Croatian judiciary exceptionally justified departing from the principle of mutual trust, stating that, based on the CJEU’s jurisprudence, even if the courts of a Member State were not in a position to guarantee the full effectiveness of EU law, neither would an arbitral tribunal. Finally, the Supreme Court concurred with the Higher Regional Court’s view that the case did not raise any questions regarding the interpretation of EU law that had not already been answered through the CJEU’s jurisprudence, thus dispensing with the need to refer the matter for a preliminary ruling to the CJEU.

 

Assessment and outlook

To anybody familiar with the German legal system, the Supreme Court’s decision will not come as a surprise. True, the Court had expressed sympathies for the view that intra-EU arbitration was compatible with EU law before the Achmea decision was rendered. As readers will remember, the CJEU’s decision in Achmea was based on a request for a preliminary ruling by the German Supreme Court in setting-aside proceedings against an award rendered in another Frankfurt-seated arbitration. In those earlier proceedings, both the Higher Regional Court Frankfurt and the Supreme Court initially took the view that there was no incompatibility between intra-EU BITs and EU law.

This notwithstanding, following the final decision of the German Supreme Court in the Achmea dispute, there could hardly be any doubt that the Court would also consider itself bound by the CJEU’s findings in any post-Achmea proceedings. 4) While Achmea is currently seeking to challenge the Supreme Court’s decision before the German Constitutional Court on the basis that the CJEU acted ultra vires when rendering its decision, that challenge could not have an impact on the Supreme Court’s findings as long as it remains undecided. jQuery('#footnote_plugin_tooltip_40404_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It also seemed clear that those findings would be regarded as pertinent not just with regard to the Slovakia-Netherlands BIT, but in relation to any intra-EU BIT with the characteristics identified by the CJEU in the Achmea decision. 5) See Judgment of the CJEU of 6 March 2018 in Case C-284/16, Slovak Republic v Achmea BV, para. 60. jQuery('#footnote_plugin_tooltip_40404_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Under the circumstances (and in the light of the CJEU’s acte clair doctrine), there was indeed little leeway for the German courts to reach a different conclusion.

At the same time, the decision again highlights the potential relevance of the unusual provision that is Article 1032 para. 2 of the German Code of Civil Procedure in that it allows German courts to review the admissibility of arbitral proceedings at the very beginning of an arbitration. While the decision is unlikely to endear investors (or tribunals in intra-EU treaty-based arbitrations for that matter) to the idea of selecting a German seat, the German courts may well have to address similar issues again before too long.

Specifically, the Netherlands are currently testing the scope of Article 1032 para. 2 in German court proceedings relating to two ECT-based intra-EU arbitrations brought against them (see here). While these proceedings are conducted based on the (de-localized) regime of the ICSID Convention and thus do not have a seat in Germany,6) Uniper SE, Uniper Benelux Holding BV and Uniper Benelux NV v the Netherlands, ICSID Case No. ARB/21/22, and RWE AG and RWE Eemshaven Holding II BV v the Netherlands, ICSID Case No. ARB/21/4. jQuery('#footnote_plugin_tooltip_40404_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the Netherlands argue that Article 1032 para. 2 applies irrespective of the existence of a German seat.7)The investors in the Uniper proceedings appear to have responded by requesting the ICSID tribunal to issue an injunction against the Netherlands ordering the State to withdraw the German court proceedings, see article of iareporter.com of 6 December 2021. jQuery('#footnote_plugin_tooltip_40404_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });In a similar vein, a representative of the European Commission recently authored a journal article arguing that “in principle all EU Member States, if they are sued by an investor from another EU Member State, can file a claim for a declaration regarding the non-existence of a valid arbitration agreement” in the German courts based on Art. 1032 para. 2 of the German Code of Civil Procedure.8)See T. Rusche, in: IPRax 2021, pp. 494-502, at p. 499 (the author states that the article reflects his personal opinion and should not be attributed to the European Commission). jQuery('#footnote_plugin_tooltip_40404_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

If the German courts were to accept this position, thus potentially expanding their review to any intra-EU treaty-based arbitrations, the already complex debate about the impact of EU law on such proceedings and who should have the last word in this regard would undoubtedly further intensify. 9)On the relationship between the ICSID Convention and EU law see H. Wehland, 17 J.W.T.I. (2016), pp. 942-963, at p. 960. jQuery('#footnote_plugin_tooltip_40404_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_40404_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Decisions in those proceedings can be expected in the coming months. Watch this space.

 

References[+]

References ↑1  Not to mention the European Commission, which has sought to make itself heard in numerous proceedings relating to intra-EU treaty arbitration outside the courts of the EU Member States as an amicus curiae. ↑2 The arbitration appears to be unrelated to separate proceedings initiated by the same investors against Croatia in 2017 under the ICSID Convention (ICSID Case No. ARB/17/34). ↑3 Article 11(2) of the Austria-Croatia BIT explicitly provides that “[t]he Contracting Parties are not bound by the present Agreement insofar as it is incompatible with the legal acquis of the European Union (EU) in force at any given time.” The Slovakia-Netherlands BIT does not contain any corresponding provision. ↑4  While Achmea is currently seeking to challenge the Supreme Court’s decision before the German Constitutional Court on the basis that the CJEU acted ultra vires when rendering its decision, that challenge could not have an impact on the Supreme Court’s findings as long as it remains undecided. ↑5 See Judgment of the CJEU of 6 March 2018 in Case C-284/16, Slovak Republic v Achmea BV, para. 60. ↑6  Uniper SE, Uniper Benelux Holding BV and Uniper Benelux NV v the Netherlands, ICSID Case No. ARB/21/22, and RWE AG and RWE Eemshaven Holding II BV v the Netherlands, ICSID Case No. ARB/21/4. ↑7 The investors in the Uniper proceedings appear to have responded by requesting the ICSID tribunal to issue an injunction against the Netherlands ordering the State to withdraw the German court proceedings, see article of iareporter.com of 6 December 2021. ↑8 See T. Rusche, in: IPRax 2021, pp. 494-502, at p. 499 (the author states that the article reflects his personal opinion and should not be attributed to the European Commission). ↑9 On the relationship between the ICSID Convention and EU law see H. Wehland, 17 J.W.T.I. (2016), pp. 942-963, at p. 960. function footnote_expand_reference_container_40404_30() { jQuery('#footnote_references_container_40404_30').show(); jQuery('#footnote_reference_container_collapse_button_40404_30').text('−'); } function footnote_collapse_reference_container_40404_30() { jQuery('#footnote_references_container_40404_30').hide(); jQuery('#footnote_reference_container_collapse_button_40404_30').text('+'); } function footnote_expand_collapse_reference_container_40404_30() { if (jQuery('#footnote_references_container_40404_30').is(':hidden')) { footnote_expand_reference_container_40404_30(); } else { footnote_collapse_reference_container_40404_30(); } } function footnote_moveToReference_40404_30(p_str_TargetID) { footnote_expand_reference_container_40404_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_40404_30(p_str_TargetID) { footnote_expand_reference_container_40404_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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Bridging the Gap Between Jurisdiction and Admissibility: Evaluation of Westbridge Ventures II Investment Holdings v Anupam Mittal [2021] SGHC 244

Tue, 2022-02-08 01:30

The distinction between jurisdiction and admissibility (the “Distinction”) has important consequences in international arbitration. Chief among these is the determination of the permissible extent of a national court’s intervention regarding a final award;1)Gretta Walters, “Fitting a Square Peg into a Round Hole: Do Res Judicata Challenges in International Arbitration Constitute Jurisdictional or Admissibility Problems?” (2012) 29(6) Journal of International Arbitration 651 at 662. jQuery('#footnote_plugin_tooltip_40418_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); a tribunal’s decision on jurisdiction would be subject to de novo review by the courts, but its decision on admissibility would not be.2)BTN v BTP [2020] SGCA 105 at [66] and [71]. jQuery('#footnote_plugin_tooltip_40418_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); While jurisdiction refers to the power of the tribunal to hear a case, admissibility involves whether it is appropriate for the tribunal to hear it.3)Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho [2019] 1 SLR 263 at [207]. jQuery('#footnote_plugin_tooltip_40418_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

In Westbridge Ventures II Investment Holdings v Anupam Mittal [2021] SGHC 244 (“Westbridge”), the Singapore High Court (“SGHC”) applied the “tribunal versus claim” test to determine whether subject matter arbitrability is an issue of jurisdiction or admissibility. First propounded by Professor Jan Paulsson in 2005,4)Jan Paulsson, “Jurisdiction and Admissibility” in Gerald Aksen et al (eds), Global Reflections on International Law, Commerce and Dispute Resolution (ICC Publishing, 2005) at 616–617. jQuery('#footnote_plugin_tooltip_40418_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); this test has been well received and adopted by the Singapore Court of Appeal (“SGCA”) in BBA v BAZ [2020] 2 SLR 481 (“BBA“) and BTN v BTP [2021] 1 SLR 276 (brief summaries of both SGCA cases can be found in this blogpost). It asks “whether the objection is targeted at the tribunal (in the sense that the claim should not be arbitrated due to a defect in or omission to consent to arbitration), or at the claim (in that the claim itself is defective and should not be raised at all)” (emphasis in original).5)BBA v BAZ [2020] 2 SLR 453 at [77]; BTN v BTP [2021] 1 SLR 276 at [69]; Westbridge at [39]. jQuery('#footnote_plugin_tooltip_40418_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Objections attacking the tribunal are classified as jurisdictional in nature, while those targeting the claims are considered objections to admissibility.6)Michael Hwang SC and Lim Si Cheng, “The Chimera of Admissibility in International Arbitration – and Why We Need to Stop Chasing it” in Selected Essays on Dispute Resolution (SIAC Publishing, 2018) at 433. jQuery('#footnote_plugin_tooltip_40418_27_6').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

This article welcomes Westbridge for being a principled judgment that correctly applied the “tribunal versus claim” test. Following this decision, the Singapore courts will be able to undertake a de novo review of a tribunal’s decision on an issue of subject matter arbitrability.

 

The SGHC’s analysis of subject matter arbitrability as a jurisdictional issue

In Westbridge, the SGHC had to decide which law applies to the issue of subject matter arbitrability at the pre-award stage. In concluding that the law of the seat applies, one of the main reasons provided by the SGHC was that “subject matter arbitrability, when raised at the pre-award stage before the seat court, is essentially an issue of jurisdiction”.7)At [23], [36] and [40]. jQuery('#footnote_plugin_tooltip_40418_27_7').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Notably, the SGHC held that a finding by the seat court as to the non-arbitrability of a particular dispute is one that strikes at the jurisdiction of the tribunal in respect of that dispute. 8)Westbridge Ventures II Investment Holdings v Anupam Mittal [2021] SGHC 244 at [36] and [40]. jQuery('#footnote_plugin_tooltip_40418_27_8').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); There are two key planks to the SGHC’s reasoning.

First, reliance was placed on several authorities that suggest that arbitrability is a question of jurisdiction.9)Westbridge at [36]. jQuery('#footnote_plugin_tooltip_40418_27_9').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); An excerpt from Bernard Hanotiau’s article on “The Law Applicable to Arbitrability” (2014) 26 SAcLJ 874 was cited, which stated that “[a]rbitrability is indeed a condition of validity of the arbitration agreement and, consequently, of the arbitrator’s jurisdiction”. Further, the SGHC noted that this point was echoed in Comparative International Commercial Arbitration (Julian David Mathew Lew QC, Loukas A. Mistelis & Stefan Kröll) (Kluwer Law International, 2003) at [9] to [18]: “[t]hough arbitrability is often considered to be a requirement for the validity of the arbitration agreement it is primarily a question of jurisdiction”. With respect, insofar as these authorities had not explicitly considered the Distinction, they may be of limited value in answering the question of whether the issue of arbitrability goes towards jurisdiction or admissibility.

Second, and more pertinently, the SGHC drew support from BBA and the SGCA’s discussion therein on the Distinction.10)At [39]. jQuery('#footnote_plugin_tooltip_40418_27_10').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In so doing, the SGHC likewise applied the “tribunal versus claim” test.11)At [40]. jQuery('#footnote_plugin_tooltip_40418_27_11').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_11', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); While the SGHC recognised that an issue of subject matter arbitrability may, at first glance, be seen as directed at the claim (and hence concerned with a question of admissibility), the SGHC took the view that non-arbitrability in fact involves a defect as to the parties’ consent to arbitration (and hence concerns a question of jurisdiction).12)At [40]. jQuery('#footnote_plugin_tooltip_40418_27_12').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_12', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The SGHC observed that the concept of arbitrability finds legislative expression in section 11 of the International Arbitration Act (Cap 143A, 2002 Rev Ed) (“IAA”), which recognises that subject matter arbitrability is subject to the limits imposed by public policy.13)At [25]. jQuery('#footnote_plugin_tooltip_40418_27_13').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_13', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Therefore, the parties’ consent would be invalid since as a matter of public policy, the parties cannot agree to submit non-arbitrable disputes to arbitration. Instead, the courts will, in such situations, recognise that the arbitration agreement is either “inoperative” or “incapable of being performed”, pursuant to section 6 of the IAA.14)At [40]. jQuery('#footnote_plugin_tooltip_40418_27_14').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_14', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The SGHC also drew parallels between the consequences of a challenge made to a seat court by a party asserting non-arbitrability, and the nature of a jurisdictional objection.15)Westbridge at [41]. jQuery('#footnote_plugin_tooltip_40418_27_15').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_15', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); If the challenge before the seat court succeeds, it means that the particular dispute cannot be arbitrated in the seat, but can still be litigated in the appropriate court. In contrast, the tribunal has no discretion to exercise in relation to whether it wishes to hear a dispute that is non-arbitrable.16)Westbridge at [41]. jQuery('#footnote_plugin_tooltip_40418_27_16').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_16', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Put in such terms, the SGHC found that the question of subject matter arbitrability, when viewed through the “tribunal versus claim” lens, cannot merely be a matter of admissibility; instead, it strikes at the tribunal’s jurisdiction.17)Westbridge at [41]. jQuery('#footnote_plugin_tooltip_40418_27_17').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_17', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Given that the SGHC was bound by the SGCA’s acceptance of the ‘tribunal versus claim’ test, which neatly categorises issues into either the “jurisdiction” or “admissibility” label, it is the authors’ view that the SGHC has correctly decided in this context that matters which do not go to admissibility must necessarily go to jurisdiction.

 

Difficulty posed by cases in the ‘twilight zone’

While Singapore jurisprudence has had the fortune of Westbridge’s guidance on the issue of subject matter arbitrability, the authors opine that the SGHC’s finding that it is a jurisdictional issue was a by-product of the Distinction’s binary treatment of jurisdiction and admissibility. Since subject matter arbitrability could not be a matter of admissibility, it necessarily had to be a jurisdictional issue.

However, outside the context of Westbridge, one could potentially argue that the non-arbitrability of one aspect of the dispute does not necessarily render the parties’ consent to arbitrate entirely invalid, in that other aspects of the dispute can still be validly heard by the tribunal. Seen in this light, non-arbitrability may not always indicate a defect in the tribunal’s jurisdiction. Support for such a view can be drawn from the Chief Justice Sundaresh Menon’s extrajudicial sentiments, wherein he noted that the doctrine of non-arbitrability “is not an indictment of the ability of arbitrators to deal with such issues, but simply a reflection of the limits of arbitration rooted in contract”.18)Sundaresh Menon, “Arbitration’s Blade: International Arbitration and the Rule of Law” (2021) 38(1) Journal of International Arbitration 1 at 9. jQuery('#footnote_plugin_tooltip_40418_27_18').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_18', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The difficulty in applying the “tribunal versus claim” is most apparent from cases in the “twilight zone”, a phrase commonly used to refer to cases that do not fit neatly under either the jurisdiction or admissibility label.19)Fabio G. Santacroce, “Navigating the Troubled Waters Between Jurisdiction and Admissibility: An Analysis of Which Law Should Govern Characterization of Preliminary Issues in International Arbitration” (2017) 33(4) Arbitration International 539 at 540. jQuery('#footnote_plugin_tooltip_40418_27_19').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_19', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In a bid to resolve this, eminent arbitration scholars have suggested alternatives; for one, Dr Michael Hwang SC suggests doing away with the “tribunal versus claim” test in favour of an open textured approach,20)Michael Hwang SC and Lim Si Cheng, “The Chimera of Admissibility in International Arbitration – and Why We Need to Stop Chasing it” in Selected Essays on Dispute Resolution (SIAC Publishing, 2018) at 434–435. jQuery('#footnote_plugin_tooltip_40418_27_20').tooltip({ tip: '#footnote_plugin_tooltip_text_40418_27_20', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); while others have suggested the “presumed party intentions” test, and the “draftsman” test. The latter two tests have been analysed in another blogpost.

Nonetheless, insofar as the Distinction remains good law in Singapore, Westbridge will remain authority for the proposition that non-arbitrability is a jurisdictional issue. This allows the Singapore courts to undertake a de novo independent review of a tribunal’s decision on the issue. Parties seeking to assert non-arbitrability can, if dissatisfied with the tribunal’s ruling on the issue, bring the matter to the seat court for redress.

References[+]

References ↑1 Gretta Walters, “Fitting a Square Peg into a Round Hole: Do Res Judicata Challenges in International Arbitration Constitute Jurisdictional or Admissibility Problems?” (2012) 29(6) Journal of International Arbitration 651 at 662. ↑2 BTN v BTP [2020] SGCA 105 at [66] and [71]. ↑3 Swissbourgh Diamond Mines (Pty) Ltd and others v Kingdom of Lesotho [2019] 1 SLR 263 at [207]. ↑4 Jan Paulsson, “Jurisdiction and Admissibility” in Gerald Aksen et al (eds), Global Reflections on International Law, Commerce and Dispute Resolution (ICC Publishing, 2005) at 616–617. ↑5 BBA v BAZ [2020] 2 SLR 453 at [77]; BTN v BTP [2021] 1 SLR 276 at [69]; Westbridge at [39]. ↑6 Michael Hwang SC and Lim Si Cheng, “The Chimera of Admissibility in International Arbitration – and Why We Need to Stop Chasing it” in Selected Essays on Dispute Resolution (SIAC Publishing, 2018) at 433. ↑7 At [23], [36] and [40]. ↑8 Westbridge Ventures II Investment Holdings v Anupam Mittal [2021] SGHC 244 at [36] and [40]. ↑9 Westbridge at [36]. ↑10 At [39]. ↑11, ↑12, ↑14 At [40]. ↑13 At [25]. ↑15, ↑16, ↑17 Westbridge at [41]. ↑18 Sundaresh Menon, “Arbitration’s Blade: International Arbitration and the Rule of Law” (2021) 38(1) Journal of International Arbitration 1 at 9. ↑19 Fabio G. Santacroce, “Navigating the Troubled Waters Between Jurisdiction and Admissibility: An Analysis of Which Law Should Govern Characterization of Preliminary Issues in International Arbitration” (2017) 33(4) Arbitration International 539 at 540. ↑20 Michael Hwang SC and Lim Si Cheng, “The Chimera of Admissibility in International Arbitration – and Why We Need to Stop Chasing it” in Selected Essays on Dispute Resolution (SIAC Publishing, 2018) at 434–435. function footnote_expand_reference_container_40418_27() { jQuery('#footnote_references_container_40418_27').show(); jQuery('#footnote_reference_container_collapse_button_40418_27').text('−'); } function footnote_collapse_reference_container_40418_27() { jQuery('#footnote_references_container_40418_27').hide(); jQuery('#footnote_reference_container_collapse_button_40418_27').text('+'); } function footnote_expand_collapse_reference_container_40418_27() { if (jQuery('#footnote_references_container_40418_27').is(':hidden')) { footnote_expand_reference_container_40418_27(); } else { footnote_collapse_reference_container_40418_27(); } } function footnote_moveToReference_40418_27(p_str_TargetID) { footnote_expand_reference_container_40418_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40418_27(p_str_TargetID) { footnote_expand_reference_container_40418_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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The Contents of Journal of International Arbitration, Volume 39, Issue 1 (February 2022)

Tue, 2022-02-08 01:00

We are happy to inform you that the latest issue of the journal is now available and includes the following contributions:

 

Kimberley A. Wade & Ula Cartwright-Finch, The Science of Witness Memory: Implications for Practice and Procedure in International Arbitration

Witness evidence plays a lead role in international arbitrations, yet the reliability of witness evidence in arbitral contexts has received little attention from legal practitioners. Hundreds of scientific studies have highlighted the fragile nature of witness memory and the ease with which memories can become unwittingly corrupted. In this article, we explain why the psychological research on witness memory is relevant to international arbitration and outline some of the key findings that have important implications for procedure and practice. Alongside the large body of science illustrating the malleability of witness memory, there exists a substantial amount of research outlining how best to preserve or maximize the quantity and quality of witness evidence. Indeed, many simple measures can be adopted by arbitrators and counsel, when eliciting and presenting witness evidence. When educated on the psychological science concerning the factors that can render even the most meticulous and honest witness prone to error, fact-finders will be in a far better position to assess witness evidence in international arbitrations.

 

Cameron Ford, The Lost Precedents of Arbitration

Concerns have been expressed that commercial common law is not developing as it should due to disputes being resolved by confidential international commercial arbitration where the majority of awards are not published, and the resultant lack of precedents. This has contributed to questions of the legitimacy of international commercial arbitration and whether the rule of law is being undermined by the non-publication of awards or by the diversion of disputes to arbitration rather than litigation. This article examines the meaning of precedents in this context and the approximate number being ‘lost’ to international commercial arbitration compared to those made in authoritative common law superior courts of record. It suggests that the number of awards of precedential value (APV) is small compared to the volume of commercial judgments of those courts, and that the perceived loss of precedents does not support either publication of awards nor determination of disputes by courts rather than by tribunals. Precedent might instead be enhanced by a wider right of appeal from awards and by publication of the appeal decisions.

 

Patrick Leonard & Hayley O’Donnell, Arbitration in Derivatives Contracts

In recent years, the International Swaps and Derivatives Association (ISDA) has increasingly facilitated the use of arbitration as a means of resolving disputes arising out of derivatives transactions. Although the financial services industry is said to have traditionally preferred court-based dispute resolution, a number of factors suggest that market participants ought to consider the particular advantages of arbitration for such disputes. In particular, factors such as the ability of arbitration to mitigate enforcement risks in the absence of the mutual recognition of judgments and to deal with competing regulatory standards both in European and international derivatives suggest that arbitration should play an important role in the resolution of such disputes.

This article reviews the history of arbitration in derivatives disputes and considers the recent moves by ISDA to facilitate the use of arbitration as a means of dispute resolution. It also considers the various options now available in this regard to market participants who seek to use ISDA standard form documentation, and the factors affecting the use of arbitration as a dispute resolution mechanism. It concludes that more research and data is required to monitor the use of arbitration in this area.

 

Lucia Bizikova, On Route to Climate Justice: The Greta Effect on International Commercial Arbitration

Climate change is the greatest global challenge that humankind has ever faced. It has changed the way in which communities, governments and businesses interact with each other, how they contract one with another and what legal disputes they face. National and international legal frameworks currently in place rarely provide the necessary mechanisms to resolve new kinds of disputes that have emerged and as a result, important gaps remain.

International commercial arbitration is uniquely placed to respond to the transboundary nature of climate change. Its inherent flexibility, innovativeness, ability to deal with complex, cross-border issues and the possibility to choose a neutral adjudicator according to his/her expertise give commercial arbitration an important advantage over court litigation. However, some of its characteristics that are seen as welcome and desired in different contexts create important challenges for achieving climate justice. Therefore, innovation in this area will be necessary if commercial arbitration is to become an attractive option for resolving climate change-related disputes between businesses. The arbitration community should try to find constructive ways in which commercial arbitration can innovate itself so that it can complement other methods of dispute resolution traditionally used for climate change disputes.

 

Alice Stocker, De-Biasing Counsel: A Call for Agile Minds in Arbitration

Unconscious biases have been a hot topic for decades and have found their way into arbitration. While the decision-making process of arbitrators has been the focus of attention, there is hardly any legal literature that deals with potential biases of counsel. Psychological studies have identified a general overconfidence bias in counsel that can have a negative impact on case assessments. As a solution to this issue, a recent study of 2018 showed how to use de-biasing techniques and how this improved case assessments: analysing almost 500 law students in the United States, the study demonstrated how overconfidence and self-serving judgments of fairness could tamper with the ability to assess the value of a case when the students were required to represent a client’s interests. This effect is called ‘partisan bias’. The study displayed its effect on specific case valuation methods and demonstrated how it could be partly eliminated by a de-biasing technique called ‘consider the opposite’. Further, the study showed that individuals with a high score of a need for cognitive closure, i.e., a motivational tendency to prefer clear answers over ambiguity, were more inclined to be susceptible to partisan bias, however were equally likely to be receptive to de-biasing.

 

Saudin J. Mwakaje & Nuhu S. Mkumbukwa, The New Arbitration Law in Tanzania: An Appraisal of Its Salient Features and Implications for Investment Disputes Settlement

Preference for arbitration as an option for dispute settlement is steadily on the rise, partly because of its perceived efficacious proceedings and enforceability. In 2020, Tanzania enacted a new legislation on arbitration with a detailed and defined framework, cascading through the entire qualifying process of arbitrators, initiating the arbitration proceedings, enforcement and recognition of foreign arbitral awards. This article analyses the corpus of the new legislation, its pertinent structural features, the gaps, and future prospects. The analysis is predicated on the ramifications of the new arbitration law for investment dispute settlements, particularly, state versus investors disputes, as envisaged under the national investment legislation. It concludes by highlighting several aspects which need to be revisited, such as the independence of arbitrators, duty to refer disputes to arbitration, and determination of arbitration costs. Further, a case is made for amendment of the existing national investment legislation in respect of dispute settlement provisions in order to create a harmonious arbitration regime in Tanzania.

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Hungary: Enforcing Arbitration Agreements by Applying Foreign Law

Mon, 2022-02-07 01:14

Conflict of laws issues can have a pivotal effect on the effectiveness of arbitration when state courts are asked to enforce arbitration agreements. Has the approach of Hungarian courts crystalized in the last few years in this respect? Can the contemporary Hungarian judicial practice and the new domestic legislation be characterized as arbitration friendly? This post provides the answers to these questions.

 

The Importance of Law Governing the Arbitration Agreement

The law applicable to arbitration agreement is an evergreen topic of international arbitration, primarily because of its decisive impact on the effectiveness of arbitration agreement. Not only is an arbitration agreement the principal gateway to arbitration, but its existence and validity may also come up in various phases of arbitral proceedings. These matters, of course, are almost always decided against the backdrop of the applicable law to arbitration agreement.

However, the dual nature of arbitration agreements – namely their debated classification as substantive or procedural contracts – complicates the search for the proper law of arbitration agreement.

Since the issue of governing law emerges mostly in front of state courts, which decide on their own jurisdiction when enforcing arbitration agreements, the old principle of “forum regit processum” calls for the application of the lex fori to this issue.

At the same time, the classification of arbitration agreements as substantive contracts and the principle of separability supports the application of other law, as lex causae, to assess the existence and validity of arbitration clauses.

When it comes to legal sources, except for Article VI (2) of the European Arbitration Convention, the leading international legal instruments of contemporary arbitration (like the New York Convention or the UNCITRAL Model Law) remain silent on conflict of laws issues in relation to arbitration clauses. It is also relatively rare that national laws expressly regulate the law governing the arbitration agreement.

In Hungary, the issue of applicable law to arbitration agreements has not been regulated until recently. Although this situation has changed with the adoption of the new Private International Law Code (“PIL”), effective from 2018, there is no yet case law under the new regime.

For this reason, before summarizing the provisions of the new law, we examine the Hungarian case law. Specifically, we analyse two appellate court decisions and trace the evolution of the domestic approach in relation to the law governing the arbitration agreement in the pre-award phase.

 

Traditional Approach – Lex Fori

Since the law governing the arbitration agreement had not been regulated previously in Hungary, state courts traditionally applied the lex fori approach to arbitration agreements.

A good example of this approach is the judgment of the Appellate Court of Budapest from 2011,1)Case No. 10.Gf.40.417/2011/12. jQuery('#footnote_plugin_tooltip_40549_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40549_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); rendered in a dispute involving a share purchase agreement in relation to the business shares of a Hungarian limited liability company (target company).

The contract had been entered into in Budapest by a Cyprian company as the seller and a Swiss company as the buyer, and it contained an arbitration clause in favour of the Arbitration Court of the Russian Chamber of Commerce and Industry.

The seller sued the buyer in front of the Hungarian courts, challenging the existence of both the share purchase agreement and the arbitration clause by arguing that the contract was concluded on its behalf by a false representative, who acted based on a power of attorney executed in Cyprus five years before the sales transaction.

The buyer disputed the jurisdiction of Hungarian courts based on the arbitration clause. However, in the opinion of the Hungarian courts, the power of attorney issued in Cyprus and the share purchase contract concluded 5 years later in Budapest had to be examined as one transaction. According to the courts, this transaction had the closest connection with Hungary, so they applied the Hungarian law in the case.

Since the sale of the target company did not fall into the subject matter scope of the power of attorney, the Hungarian courts ruled that the false representative could not enter into a binding arbitration agreement on behalf of the seller.

The above decision can be criticized mainly for ignoring the principle of separability of the arbitration agreement, which prevented the court to examine the issue of representation, and the existence of the arbitration clause in light of any other law than the lex fori.

 

A More Sophisticated View – Lex Causae

In a (more) recent case from 2020, the Appellate Court of Győr has taken a more sophisticated approach.2)Case No. Gf.20.108/2020/5. jQuery('#footnote_plugin_tooltip_40549_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40549_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); This case involved a legal dispute between an Austrian seller and a Hungarian buyer in relation to a supply contract for gas engines. It also involved a subsequent service contract concluded between the same parties through representatives to repair one of the engines broken down in the post-warranty period.

The seller’s general terms and conditions (“GTC”) stipulated Austrian law as the governing law of the contract, and an ICC arbitration clause with a seat of arbitration in Innsbruck (Austria).

The buyer sued the seller for damage, arising out of the unsuccessful repair and subsequent forced sale of the engine, while the seller raised an exceptio arbitri, relying on the arbitration clause in the GTC.

While the GTC had been duly incorporated in the supply contract, the buyer argued that, despite the seller sending the GTC to him together with the service contract, he had not expressly accepted it. The buyer went on to argue that, given the damage claim had arisen from the service contract, the Hungarian courts had jurisdiction.

The court of first instance, taking the traditional lex fori approach, applied Hungarian law to the arbitration agreement, according to which in the absence of express acceptance of a “surprise clause” in the GTC, like the arbitration agreement, the latter does not become part of the parties’ agreement. Consequently, the first instance court ruled that no valid arbitration agreement had been entered into by the parties.

However, the Appellate Court of Győr, acting as court of second instance, modified the first instance decision and applied Austrian law to the arbitration clause, according to which in case the parties do business in the same sector, or they have a continuous business relation, the provisions of the GTC become part of the contract if one of the parties intends to use it, and the other party is aware of this fact.

Based on the above, the second instance court ruled that the GTC and the arbitration clause had become part of the service contract by tacit acceptance of the buyer, and therefore, it terminated the litigation in that part that fell under the arbitration agreement.

 

Analysis and the New Hungarian PIL

The two above decisions showcase a paradigm shift in the approach of Hungarian courts in finding and applying the proper law of the arbitration agreement.

In the first case the courts took the traditional lex fori approach, and they applied domestic law to the contract and to the arbitration agreement, despite the apparent international dimensions of the case.

The second judgment indicates a departure from the strict lex fori approach towards the examination of the proper law of the arbitration agreement, which, as a so-called lex causae, can be distinct from the law of the state court, or from the law of the main contract, as well.

When it comes to the linking factor, the appellate court in the second case tacitly applied the lex loci arbitri principle, according to which, in the absence of choice of law by the parties, the arbitration agreement shall be governed by the law of the seat of the arbitration, reflecting the majority view of scholars.3) BERGER, Klaus Peter: Re-Examining the Arbitration Agreement Applicable Law: Consensus or Confusion? 315-316. jQuery('#footnote_plugin_tooltip_40549_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40549_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Even if the new Hungarian PIL was not yet applicable in the second case – because the facts arose before 2018 – it seems that the second instance court was inspired by this new piece of domestic legislation.

This new law introduced arbitration-friendly provisions regarding the law applicable to the arbitration agreement with effect from 1st January 2018.

According to Section 52 of the Hungarian PIL, in the absence of law chosen by the parties, the substantive validity of the arbitration agreement shall be governed by the law governing the main contract, or by the law of the seat of arbitration, provided that the latter is in closer connection with the contract than the former.

When it comes to formal validity, the PIL sets forth a provision, based on which the arbitration agreement shall be valid, if it complies with any of the abovementioned laws or with the lex fori.

The above provisions clarify that instead of lex fori, the existence and substantive validity of an arbitration agreement can be evaluated based on separate law as lex causae, reflecting the principle of separability on the conflict of laws level.

In addition, the provisions in respect of formal validity can be interpreted as statutory expressions of the so-called validation principle.4)BORN Gary B.: The Law Governing International Arbitration Agreements: An International Perspective. 834. jQuery('#footnote_plugin_tooltip_40549_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_40549_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

Hopefully, when applying the provisions of the PIL in the future, Hungarian state courts will follow the pro-arbitration approach taken by the Appellate Court in the second case, and they will give effect to international arbitration agreements under the new arbitration-friendly domestic conflict-of-laws rules.

References[+]

References ↑1 Case No. 10.Gf.40.417/2011/12. ↑2 Case No. Gf.20.108/2020/5. ↑3 BERGER, Klaus Peter: Re-Examining the Arbitration Agreement Applicable Law: Consensus or Confusion? 315-316. ↑4 BORN Gary B.: The Law Governing International Arbitration Agreements: An International Perspective. 834. function footnote_expand_reference_container_40549_30() { jQuery('#footnote_references_container_40549_30').show(); jQuery('#footnote_reference_container_collapse_button_40549_30').text('−'); } function footnote_collapse_reference_container_40549_30() { jQuery('#footnote_references_container_40549_30').hide(); jQuery('#footnote_reference_container_collapse_button_40549_30').text('+'); } function footnote_expand_collapse_reference_container_40549_30() { if (jQuery('#footnote_references_container_40549_30').is(':hidden')) { footnote_expand_reference_container_40549_30(); } else { footnote_collapse_reference_container_40549_30(); } } function footnote_moveToReference_40549_30(p_str_TargetID) { footnote_expand_reference_container_40549_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_40549_30(p_str_TargetID) { footnote_expand_reference_container_40549_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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Enforcing Arbitration Agreements Against Non-Signatories in Canada

Sun, 2022-02-06 01:30

Canadian courts are frequently asked to rule upon the effects of arbitration agreements in the context of potential class actions. For example, the Supreme Court of Canada (“SCC”) has upheld arbitration clauses for most, if not all issues, disallowing class action recourse in Dell Computer Corp. v. Union des consommateurs(2007), Rogers Wireless Inc. v. Muroff (2007) and Seidel v. TELUS Communications Inc (2011). Conversely, it refused to refer disputes to arbitration, either on grounds of legislative override or the doctrine of unconscionability, allowing proposed class actions to proceed, in TELUS Communications Inc. v. Wellman (2019)1) The Supreme Court of Canada allowed the class action proposed by physical persons, i.e. consumers, to proceed. Business customers, however, were bound by the arbitration clauses contained in their contracts with Telus. jQuery('#footnote_plugin_tooltip_40295_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40295_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); and Uber Technologies Inc. v. Heller (2020). Recently, the Supreme Court of British Columbia (the “Court”), which is the province’s first instance court, faced a similar situation in Wittman v. Blackbaud, Inc. However, unlike the cases decided by the SCC, the country’s highest court, in which plaintiffs had undoubtedly concluded contracts that contained arbitration clauses, the plaintiff in this case, Mr. Wittman, had no contractual relationship (and, consequently, no arbitration agreement) with the defendants. While the defendants had an arbitration agreement with a third party, the Court refused to refer the matter to arbitration because said agreement did not bind the plaintiff. In concluding that Mr. Wittman was not a “party claiming through or under a party” to the arbitration agreement, the Court distinguished his case from other Canadian and international authorities, including the judgment of the Indian Supreme Court in Chloro Controls v. Severn Trent (“Chloro Controls”), which was previously discussed on this blog (e.g. here and here).

In Wittman, the plaintiff had made a donation to the British Columbia Cancer Foundation (the “Foundation”), which was thereafter subject to a cyber attack. As the plaintiff’s personal information had been potentially compromised, he sought to commence a class action against the Foundation’s data management and service provider, Blackbaud Inc. and its wholly owned Canadian subsidiary, Blackbaud Canada, Inc. (collectively referred to as “Blackbaud”). The defendants moved to stay the action and refer the dispute to arbitration under the provincial International Commercial Arbitration Act (“ICAA”) because their contract with the Foundation (the “Solutions Agreement”) purportedly called for arbitration. The Court refused to extend the arbitration agreement to a non-signatory who “had no knowledge of or involvement in” the Solutions Agreement and also shone the light, albeit briefly, on the allocation of competence for determining parties to arbitration agreements.

 

Proving the existence of the arbitration agreement through affidavits

When a party claims that the dispute is to be resolved through arbitration, it will presumably provide the court with the enabling arbitration agreement. Blackbaud, however, did not. Instead, it furnished two affidavits from its chief information officer. The first affidavit reproduced the relevant provisions of the standard agreement that “nearly all of Blackbaud US’s Customers, including the BC Cancer Foundation” entered into. Though Blackbaud appended this standard agreement (including the arbitration clause) to the first affidavit, it did not provide a copy of the Solutions Agreement actually executed with the Foundation. The second affidavit explained that the Solutions Agreement was not disclosed because it “contained confidential pricing and other terms”.

Understandably, the plaintiff contested the sufficiency of such evidence. He argued that, first, the absence of proof of the Foundation’s acceptance required the Court to draw an inference that the Foundation had not accepted Blackbaud’s standard agreement. Second, stating that “nearly all” customers entered into standard agreements left doubt as to whether the Foundation was actually subject to such an agreement. The Court dismissed the plaintiff’s concerns, concluding that even though the first affidavit left “room for the possibility that not all of Blackbaud US’s customers may be subject to the standard form Solutions Agreement, the only plausible reading of the [first affidavit] [was] that the BC Cancer Foundation [was]” (para. 51).

 

(Not) binding the clueless non-signatory to the arbitration agreement

British Columbia courts have previously enforced arbitration agreements against non-signatories where:

  1. a contractual agreement between a party and a non-signatory incorporates an arbitration agreement by reference;
  2. an agency agreement exists between a party to an arbitration agreement and the non-signatory;
  3. it is appropriate to pierce the corporate veil; and,
  4. a non-signatory is bound by estoppel (para. 26).

Conceding that most of these circumstances were inapplicable to the matter at hand, Blackbaud’s main arguments focused on the doctrine of equitable estoppel and international authorities that purportedly gave the phrase “claiming through or under a party” an “expanded” meaning.

Blackbaud’s estoppel argument had several components, some of which were derived from domestic and international caselaw, whereas others were inspired by the general notion of “fairness”. The Court dismissed the estoppel argument, first, because the plaintiff’s conduct in no way indicated to Blackbaud that he would be bound by the terms of the arbitration agreement. After all, how could it when the plaintiff had no knowledge of or involvement in the Solutions Agreement, having only discovered it during the proceedings? (paras. 18, 74). Blackbaud’s reliance on the doctrine of “direct benefit estoppel,” an American doctrine the applicability of which in Canada was not demonstrated, was also futile since the plaintiff did not appear to have received any “direct benefit” from the Solutions Agreement (paras. 80-85). Blackbaud’s argument that plaintiff’s claims were so intertwined with the Solutions Agreement that they had to be determined by reference thereto was equally ineffective (paras. 86-98).

In the Court’s view, Mr. Wittman’s case was based on Blackbaud’s duties under privacy legislation and the torts of negligence and intrusion of seclusion, not on its contractual duties to the Foundation. Finally, the Court held that in a world “replete with agreements between product and service providers and supply chain intermediaries that are unknown to the end consumer and the public,” binding a totally unsuspecting person such as the plaintiff to an arbitration agreement he had not signed would be anything but fair (paras. 102-106).

The two international authorities cited by Blackbaud, Tanning Research Labs Inc. v. O’Brien (“Tanning”) from Australia and Chloro Controls from India, did not prompt the Court to expand the situations in which non-signatories could be bound by arbitration agreements. This is because, unlike here, in both of those instances there was a direct relationship with the non-signatory (para. 119). Neither Tanning nor Chloro Controls added anything new to the analysis. The premise in Tanning was akin to agency, which is already a recognized ground in British Columbia, whereas the statement in Chloro Controls that the words “claiming through or under” are “incapable of being construed narrowly and must be given expanded meaning” was taken out of context. The Court rightly pointed out that Chloro Controls concerned a very different factual scenario and the “group of companies” doctrine.

Hence, despite concluding that Blackbaud had demonstrated the existence of the arbitration agreement, the Court refused to bind the plaintiff to it and stay the proposed class action.

 

Concluding remarks

The Court’s judgment raises several questions for prospective litigants and counsel. Had the Court ultimately decided to refer the plaintiff to arbitration, would it have accepted an unsigned standard form agreement as opposed to the agreement actually executed between the parties? Article II of the New York Convention which empowers a court to “refer the parties to arbitration, unless it finds that the said agreement is null and void, inoperative or incapable of being performed,” clarifies that an “agreement in writing” is signed by the parties or is contained in an exchange of written communications. While the definition of the “arbitration agreement” contained in section 7 of the ICAA omits the signature requirement, is it proper to allow a party not to provide the actual arbitration agreement solely because doing so might reveal commercially sensitive terms?  Especially when such confidentiality concerns can be allayed otherwise (e.g., through “attorneys eyes only” orders, by filing the documents under seal, etc.)?

Apart from determining the different bases for binding non-signatories to arbitration agreements, a vital question is also who gets to conduct this inquiry: an arbitral tribunal or a national court. Positions vary, though the Model Law’s-consistent view is to give preference to arbitral tribunals. 2) See e.g. G. B. Born, International Commercial Arbitration, Kluwer Law International (2021), pp. 1616-1619. jQuery('#footnote_plugin_tooltip_40295_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40295_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The question, therefore, is: once the Court found that there was an arbitration agreement, should it not have referred the matter to arbitration right away? Was proceeding to decide whether the plaintiff was bound to an arbitration agreement not impinging on the kompetenz-kompetenz principle?

In Canada, the companion principle to kompetenz-kompetenz is the rule of systematic referral, which provides that “for questions of mixed law and fact, courts must also favour referral to arbitration, and the only exception occurs where answering questions of fact entails a superficial examination of the documentary proof in the record and where the court is convinced that the challenge is not a delaying tactic or will not prejudice the recourse to arbitration” (Uber, para. 34, citing previous SCC jurisprudence). Since the question of whether to add parties to an arbitration by piercing the corporate veil has already been considered as a mixed question of fact and law (DNM Systems Ltd. v. Lock-Block Canada Ltd., para. 87), the Court’s examination of evidence in Mr. Wittman’s case must have been “superficial” if it departed from the rule of systematic referral.

In the context of non-signatories, however, this rule is framed somewhat differently. The Court’s judgment provides:

[21] Where a party is alleged to be a party to an arbitration agreement, the discretion to decline the stay will only be invoked where that party “clearly establishes” that it is not a party […].

[22] Where it is arguable that a claim falls within an arbitration agreement or where it is arguable that a party is bound by the agreement, the stay should be granted and the issue resolved in the arbitration unless, as set out in s. 8(2), the arbitration agreement is “null and void, inoperative or incapable of being performed” […].

Though the issue of competence occupies only six paragraphs, it is arguably one of the more salient portions of the judgment as it addresses the rule of systematic referral in the context of non-signatories. It is only when there is an arguable case that the issue of whether to bind a non-signatory will be referred to an arbitral tribunal. This is true not only under the ICAA, as demonstrated in this case and earlier decisions (such as in AtriCure, Inc. v. Meng, para. 62), but also under the domestic Arbitration Act, as appears from the judgment of the same Court in Beck v. Vanbex Group Inc. (para. 23), rendered only a week after the judgement in the plaintiff’s case, where applying the same principles the Court reached a different conclusion, referring most of the parties’ issues to arbitration.

 

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

References[+]

References ↑1 The Supreme Court of Canada allowed the class action proposed by physical persons, i.e. consumers, to proceed. Business customers, however, were bound by the arbitration clauses contained in their contracts with Telus. ↑2 See e.g. G. B. Born, International Commercial Arbitration, Kluwer Law International (2021), pp. 1616-1619. function footnote_expand_reference_container_40295_30() { jQuery('#footnote_references_container_40295_30').show(); jQuery('#footnote_reference_container_collapse_button_40295_30').text('−'); } function footnote_collapse_reference_container_40295_30() { jQuery('#footnote_references_container_40295_30').hide(); jQuery('#footnote_reference_container_collapse_button_40295_30').text('+'); } function footnote_expand_collapse_reference_container_40295_30() { if (jQuery('#footnote_references_container_40295_30').is(':hidden')) { footnote_expand_reference_container_40295_30(); } else { footnote_collapse_reference_container_40295_30(); } } function footnote_moveToReference_40295_30(p_str_TargetID) { footnote_expand_reference_container_40295_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_40295_30(p_str_TargetID) { footnote_expand_reference_container_40295_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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Arbitration Tech Toolbox: Lessons from the First Ever International Arbitration Gathering in Virtual Reality

Sun, 2022-02-06 01:05

A lot has been said about virtual reality (VR) and the metaverse in recent months, but what is it like to actually use it? With one of the authors having recently organised the first-ever gathering in VR for international arbitration practitioners, we share some thoughts on the potential and limitations of this new medium for international dispute resolution. As we spend more time and money in the digital world, important questions arise about the disputes that may arise there and how they should be resolved.

 

The Metaverse, VR and their relevance to international dispute resolution

There is growing excitement about the metaverse. Bloomberg predicts that the “global Metaverse revenue opportunity could approach $800 billion in 2024”. There are “business opportunities for participants in every sector, from consumer-driven industries, such as retail and events, to manufacturing, construction and beyond”.

But what is the metaverse? Investor and writer Matthew Ball describes it as a persistent, live, digital experience in which we each have an individual “presence”. What this means exactly is contested. Some argue that the metaverse is already here because the internet itself already meets Ball’s definition, as do many open-world digital games played today.

But advances in VR technology seem to herald a new chapter in the metaverse’s evolution. As Meta (formerly Facebook) Founder Mark Zuckerberg explains, “we’ve gone from desktop to web to mobile; from text to photos to video”; the next platform “will be even more immersive – an embodied internet where you’re in the experience”.

While it is still early days, VR does make you feel like you are in the experience. The authors have been using an Oculus Quest 2 (a Meta product) for the past few weeks to explore this new, immersive digital world through our avatars – our digital selves. We flew over Mount Everest using YouTube VR. We met strangers in Horizon Venues, where we could talk and attend shared experiences. And we fought zombies in The Walking Dead, and put motion to music in Beat Saber.

Yes, VR is a bit rough around the edges today. But as the technology improves, we envision people’s digital lives becoming an even more important part of their real lives. This matters to international dispute resolution because disputes arise everywhere there are commercial transactions – including the digital world. This is already happening: for example, Hermès has sued an artist selling non-fungible tokens (NFTs) similar to Hermès’ line of physical Birkin bags for trademark infringement. In turn, this raises interesting questions of law: which forum will have jurisdiction over virtual disputes? Could there be investment treaty disputes? Are digital assets covered investments under a bilateral investment treaty? Etc.

Practically speaking, VR is an advance in communication not dissimilar to smartphones, email and video-conferencing – each making it more convenient and cheaper to conduct international commerce or to manage complex legal proceedings across countries and time zones. So could VR be used to facilitate alternative dispute resolution (ADR) proceedings?

There was only one way to find out.

 

The First Ever International Arbitration Gathering in VR

On 27 January 2022, I (Lizzie) hosted the first ever gathering for international arbitration practitioners in VR, with support from ArbTech. The purpose was to see what it was like organising an event in VR.

It was straightforward. I used Horizon Workrooms, a customisable VR meeting room. I decorated the room with my own posters as you will see from the short video clip below.

 

http://arbitrationblog.kluwerarbitration.com/wp-content/uploads/sites/48/2022/02/First-Virtual-Reality-International-Arbitration-Gathering-the-Party-Room-3.mp4

 

This was a “hybrid” event, where participants could join as avatars (if they had VR headsets) or by video-link (if they did not).

 

 

The event

Around 10 participants joined, with three avatars and everyone else by video.

 

 

The top image shows a video participant’s perspective. Video participants could see the avatars, as well as my shared screen. The bottom left image is from my perspective, where I could see video participants on a screen. The bottom right image is how another avatar saw me.

 

 

In the top right, you see the view out the window. The options are cityscape, cabin and lake. In the bottom image, you can see an avatar drawing on the blackboard.

 

The VR experience

The good

VR makes you feel like you are there in person, like being in the same room as someone in the physical world. In some ways, it feels more natural than seeing people in 2D on Zoom.

Avatars, while cartoonish, feel “real” because they reflect the physical person’s body movement and gestures. You can also tailor your avatar’s appearance, down to its body shape, skin colour, clothes and eyebrows.

You can also connect your computer to see and use your screen in VR. This allows you to take notes, share presentations and even check your emails – just like you would in a meeting in the physical world.

 

The less good

At this point, the technology is glitchy. Some of us had difficulties pairing our headsets to the Oculus app on our laptop/phones and others had difficulties accessing someone else’s workroom. I had trouble figuring out how to draw on the virtual blackboard.

Horizon Workrooms are only accessible in VR to those with Oculus headsets as both are made by Meta. This excludes those with other branded headsets.

The avatars are not entirely natural. No one has legs! Only floating torsos. And as a friend commented, it’s hard to make your avatar look older than twelve years old.

It takes a while to get used to your avatar self. One attendee ended up sitting on the floor for a couple of minutes without knowing how to return to her chair. At one point, I was muted and only realised when someone else noticed that I had been vigorously gesturing for several minutes without saying anything. In my “test run” for this event, my friend had not properly configured his physical desk so his virtual seat almost touched the floor.

While you can stand to write on the virtual blackboard, you have to stay in your designated physical play area because your system will otherwise disengage for your safety.

It can get tiring wearing the headset.

And a VR headset is not cheap, with an Oculus Quest 2 retailing for USD299.

 

The Video Experience

Joining by video-link works well but it is a limited and somewhat artificial experience.

 

The good

It is easy to join via a desktop link. Many video-link participants felt envious seeing us avatars though, and immediately wanted to buy their own VR headsets!

 

The less good

Joining by video-link where the action is focused on the avatars can make you feel like you are a bystander.

 

Lessons for international dispute resolution

VR technology today is analogous perhaps to where smartphones were with the iPhone 2. So what will the iPhone 13 of VR look like?

In the meantime:

Hybrid events for participants with and without VR headsets are possible.

I think we can successfully use Horizon Workrooms to host small-scale presentations, panel discussions and even a mock arbitration. And while it would be better if everyone attended as avatars, it’s not essential. Note though that Horizon Workrooms is not yet capable of hosting more than fifty participants.

 

It will take some time to get used to seeing avatars as a legitimate alternative self.

One participant thought it would be difficult to take an avatar seriously in a formal professional context. He was not sure he would appoint an arbitrator nominee if he had met them (only) in VR.

The issue of appearance raises questions too about our identity (or identities) in the metaverse. Will it become good etiquette for people’s avatars to resemble their appearance in the physical world? And will we expect people to have a single, consistent digital identity across all experiences in the metaverse?

For now, it may be controversial for a witness to give testimony in VR through an avatar. It may therefore be more acceptable at this stage for only the tribunal and counsel to speak; for example, to deliver opening or closing submissions or to conduct a straightforward procedural conference.

 

There needs to be more flexibility to customise rooms so that they are fit for purpose.

For larger conferences especially with networking opportunities, being able to engage in spontaneous conversation is important. This is already possible in Horizon Venues, where the closer you get to other avatars, the more clearly you can hear (and overhear) them. Imagine if you could shake someone’s hand and actually feel it; this could be reality soon thanks to haptic gloves being developed by Meta.

As for hearings, it would be important to customise rooms to the needs of the case, e.g. a U-shaped room with the required number of seats. There are specialists in customising virtual spaces, for example, Allseated.com and Remo.co.

And just how close can virtual spaces simulate real life? Will we be able one day to whisper to a colleague without everyone else overhearing?

 

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

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

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What if Peru (or Another Country) Leaves the ICSID Convention? Possible Recourses for Investors Facing a Potential Change in the Game

Sat, 2022-02-05 01:18

Before winning Peru’s presidential race in June 2021, Peruvian President Pedro Castillo vowed to withdraw Peru from the ICSID Convention and to renegotiate several of the country’s Bilateral Investment Treaties (“BIT’s”). According to the then-presidential candidate’s government plan (chapter XXI), ICSID tribunals are biased and “at the service of the multinational companies” in prejudice of the State’s interests, and thus Peru should reconsider its situation.

Peru signed the ICSID Convention in September 1991 and ratified it in August 1993. Since then, Peru has been a key player in international investment disputes, showing a solid track-record with a favorable outcome in 15 out of 18 ICSID disputes as of March 2021. It is estimated that Peru has been compelled to pay only 0.086% of the total claims presented by investors before ICSID. In fact, Peru has recovered more than double the amount the country has had to pay in indemnities.

Despite the country’s outstanding statistics, Peru has recently been inundated with claims, having been sued in 15 new ICSID cases since 2020. As these proceedings are still ongoing, it is impossible to gauge Peru’s performance. However, last August, Peru enjoyed a new victory in the ICSID case Hydrika v. Peru over jurisdictional grounds, maintaining the country’s legacy of favorable arbitral awards.

Nevertheless, Peru’s tumultuous political situation creates unpredictability as to whether the current President will ultimately withdraw from ICSID. If so, Peru would follow the path of other South American countries such as Bolivia, Ecuador (recently rejoined), and Venezuela.

Under these circumstances, foreign investors might wonder what implications an ICSID withdrawal, or the potential termination and renegotiation of BIT’s, could have on the international protection of their investments. This article explores some available recourses for investors who foresee its host state might change the rules of the game.

It must be noted that the following sections aim to merely describe both sides of the debate. This post does not advance, nor does it intend to advance any position of the authors nor their respective law firms or clients on these topics.

 

Are ICSID contract-based disputes safe?

Peru is one of the few countries that has signed state contracts which contain an arbitration clause that provides for ICSID as the  forum for contractual disputes. These contracts are the preeminent framework for concessions to build, operate and maintain public infrastructure through large-scale investment projects. All in all, one third of Peru’s ICSID arbitration proceedings have or are being arbitrated based on an ICSID contractual arbitration clause rather than on the legal framework established in a BIT.

This legal practice raises the question: would a state contract providing for ICSID as the dispute resolution forum survive ICSID’s jurisdiction under Article 25, despite denunciation by one of the Contracting Parties? The History of the ICSID Convention may already give us a hint.

When asked about the effects of denunciation of the Convention, Mr. Aron Broches, the main drafter of the ICSID Convention and founding Secretary-General of ICISD, explained that under current Article 72 of the Convention (equivalent to Article 73 during the Convention’s original discussion)

“If a State had consented to arbitration, for instance by entering into an arbitration clause with an investor, the subsequent denunciation of the Convention by that State would not relieve it from its obligation to arbitration if a dispute arose” (p. 1009), adding that “if the agreement with the company included an arbitration clause and that agreement lasted for say 20 years, that State would still be bound to submit its disputes with that company under that agreement to the Centre” (p. 1010).

The reasoning behind would be that in such cases the consent of both parties, the State and the investor, has been perfected already since the signing of the agreement, unlike Treaty arbitration clauses that need the future consent’s perfection from the investor. In theory, this would apply to any state contract that contains an ICSID arbitration clause, including investment agreements.

The applicability of this reasoning to contractual ICSID disputes has not been tested yet, to the authors knowledge. However, it’s likely that States would challenge such an argument since Article 25 of the ICSID Convention requires that a dispute arise between an investor and “a Contracting State.” As the National Gas v. Egypt tribunal stated, Article 25 requirements set “an objective Convention limit beyond which ICSID jurisdiction cannot exist” (¶ 133). Given the amount of state contracts including an ICSID arbitration agreement, if Peru denounces the Convention, we will see a very interesting battle on this topic.

 

The sun may not yet have set for some treaty-based disputes

An investor must also consider that, even if the host state withdraws from the ICSID Convention, the effects of the termination are not immediate. Article 71 of the Convention indicates that “[t]he denunciation [of the ICSID Convention] shall take effect six months after receipt of such notice.” This is the so-called “sunset clause” period. In principle, during the six months immediately after the withdrawal, the rights and obligations arising from the Convention continue to apply to the denouncing state. However, there is a debate as to whether the six-month period exclusively covers disputes initiated before the host state denounced ICSID or whether they are also applicable to disputes which initiate within the six-month period.

The issue was explored in Blue Bank v. Venezuela where claimant perfected its consent to arbitration on June 25, 2012, five months after Venezuela’s denunciation to the ICSID Convention in January 24, 2012, i.e. within Article 71’s sunset clause period. Venezuela challenged the tribunal’s jurisdiction arguing, among others, that “once a notice of denunciation is given under Article 71, consent can no longer be perfected” (¶ 79). Ultimately, the majority of the tribunal rejected such objection, highlighting the effet utile of the sunset clause contained in Article 71 (¶ 119) and concluding that given that the investor perfected its consent within such sunset clause period “then the agreement to arbitrate was formed before the expiry of the six-month period during which Venezuela, despite its denunciation, was still party to the ICSID Convention” (¶ 120).  In other words, for the Blue Bank tribunal’s majority, investors have standing to perfect consent even after the denunciation within the sunset clause period.

However, a different approach is found in Favianca v. Venezuela where claimant perfected its consent on July 20, 2012, i.e. before the expiration of the six month period after Venezuela’s denunciation. As discussed in a previous post,  after analyzing Articles 71 and 72 of the ICSID Convention, the Favianca tribunal declined jurisdiction holding that “only where consent to arbitration to the jurisdiction of the Centre is perfected, such that it generates rights and obligations under the ICSID Convention, that those rights and obligations persist following the receipt of a notice of denunciation by a Contracting State pursuant to Article 71” (¶ 282). In other words, the Favianca tribunal required that consent be perfected before the denunciation of the ICSID Convention, contrary to the majority in Blue Bank.

Given the lack of consensus, investors should also review the applicable BIT’s, as most of them provide for longer sunset clauses and alternative dispute resolution forums such as UNCITRAL and ICSID Additional Facility. For instance, most BIT’s subscribed by Peru in the 90s, including the BIT’s with France, Germany and Spain, provide both for 15-year sunset clauses and for UNCITRAL as an alternative forum. If the BIT provides for other forums, the investor may be able to initiate arbitration proceedings for the stipulated duration of sunset clauses before those other forums, regardless of whether access to ICSID is available.

 

The widely debated procedural application of the MFN Clause

Even if the BIT resorts exclusively to ICSID, there may be other alternatives for investors. One notable example is the Most Favored Nation Treatment clause (MFN), whose applicability to import a dispute resolution forum from one Treaty to another is still widely debated.

A landmark case is Venezuela US, S.R.L. v. Venezuela, a dispute under the Barbados-Venezuela BIT. Article 8 of this BIT provided for UNCITRAL as a forum only as long as Venezuela was not a Member to the ICSID Convention and ICSID Additional Facility was unavailable. Given that when claimant filed its claim before UNCITRAL Venezuela had already become a member of the ICSID Convention and subsequently withdrawn from it, Venezuela objected to jurisdiction claiming that UNCITRAL had only been available in the pre-ICSID period (¶ 81).

However, since article 3(3) of the Barbados-Venezuela BIT stated that the BIT MFN provision specifically applied to the dispute resolution clause, the majority of the tribunal decided to extend the MFN to arbitration matters. Since Venezuela is a contracting party to several BITs which provide for UNCITRAL as the main or default means of arbitration, the tribunal held that Barbados investors were entitled to the same “treatment” as other investors in terms of access to the same dispute resolution forums (¶¶ 129-130).

In contrast, in Wintershall v. Argentina, claimant invoked the MFN clause contained in Article 3 of the Argentina-Germany BIT to demand access to a more favorable dispute settlement procedure provided in other BIT’s. However, in this case the MFN clause was not specific about its application to the dispute resolution clause. As such, the tribunal concluded that the investor could not use the MFN clause to avoid complying with the procedure and dispute resolution forum stipulated in the relevant BIT (¶ 156). Most recently, the Kimberly-Clark v. Venezuela tribunal also declined jurisdiction, ruling, among others, that the MFN provision could not be imported to procedural matters (¶ 235).

 

Corporate Restructuring may also be an option

Finally, investors may have the option of restructuring their investment to secure greater guarantees.

In this regard, some arbitral tribunals have held that corporate restructuring with the sole purpose of gaining international protection is not per se forbidden. For example, the Gremcitel v. Peru tribunal stated that “it is now well-established, and rightly so, that an organization or reorganization of a corporate structure designed to obtain investment treaty benefits is not illegitimate per se, including where this is done with a view to shielding the investment from possible future disputes with the host state” (¶ 184). However, investors must avoid restructuring when the dispute has already arisen or when the dispute is foreseeable. What qualifies or not as “foreseeable” depends on the specific circumstances.

 

Conclusion

In sum, Peru’s uncertain future in the arbitral landscape should not be interpreted as an unavoidable risk for investors. Recent arbitral rulings demonstrate that diverse mechanisms exist to protect investors from a potential change in policy. However, the sooner the investor prepares for a change in circumstances, the better. It is up to investors to assess their relevant risk and define which avenue suits them and when to activate it.

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Arbitration of Corporate Law Disputes in Turkey: Is the Tide Turning?

Fri, 2022-02-04 01:16

Arbitration of commercial disputes is a common practice in Turkey, especially for those with an international element. The same, however, cannot be said for corporate law disputes, i.e. intra-corporate claims based on or concerning statutory rights, articles of association (“AoA”) or corporate resolutions. This has been the case due to a couple of judgments rendered by the Turkish Court of Cassation (the “TCC” or the “Court”) that have cast doubt over the arbitrability of such disputes as well as the validity of arbitration clauses in AoAs. Yet, there are signs that a more favorable approach to corporate arbitration is gaining the upper hand in Turkish law. This post explains the reasons for and the consequences of the said jurisprudence, the recent developments signalling that a more prominent role for arbitration in corporate law disputes might be on the cards, and how such change could be expected to come to fruition.

 

Background

There are two separate though interrelated issues that need to be addressed concerning the arbitration of corporate disputes. The first is whether these disputes are arbitrable. Disputes arising from issues “subject to parties’ consent” are considered arbitrable in Turkish law. It is accepted that an issue being subject to parties’ consent means that parties may freely dispose of the matter in dispute by way of settlement. This criterion is satisfied in most corporate law disputes. Yet, decisions rendered in certain corporate law disputes, such as corporate dissolution and invalidity of general assembly resolutions, bind even those who are not parties to the dispute. In turn, these practically erga omnes effects raise difficult questions; because an arbitral award may, in principle, be enforced only between the parties to the dispute (inter partes effect). The second issue is validity of arbitration clauses stipulated in the AoA. The concern that minority shareholders may not be afforded adequate protection in arbitral proceedings makes this a contested matter.

In fact, the more traditional and conservative views in the Turkish legal literature had long opposed arbitration of corporate law disputes mainly for these reasons. Although the TCC found disputes concerning the request for registration in the stock ledger and directors’ liability are arbitrable,1)See 11th Civil Chamber, 7.4.1983, 1983/1595, 1983/1780, and 15.2.2010, 2008/9429, 2010/1780 respectively jQuery('#footnote_plugin_tooltip_40184_27_1').tooltip({ tip: '#footnote_plugin_tooltip_text_40184_27_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); the Court later changed its attitude towards arbitrating corporate disputes. In 2012, the TCC adopted the conservative view when it ruled that claims for annulment of a general assembly resolution cannot be resolved by arbitration and an arbitration clause to that end in the AoA was thus not valid.2)11th Civil Chamber, 5.12.2012, 2011/13485, 2012/19915; also see 1.7.2019, 2019/2226, 2019/5000 jQuery('#footnote_plugin_tooltip_40184_27_2').tooltip({ tip: '#footnote_plugin_tooltip_text_40184_27_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Again, a few years later, the Court decided that disputes concerning corporate dissolution are also non-arbitrable in a nearly identically worded judgment.3)11th Civil Chamber, 9.4.2014, 2014/141, 2014/6951. An in-depth analysis of the case law and scholarly views concerning arbitration of corporate disputes can be found here and here jQuery('#footnote_plugin_tooltip_40184_27_3').tooltip({ tip: '#footnote_plugin_tooltip_text_40184_27_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); In light of the case law, companies and shareholders have been understandably reluctant to include an arbitration clause in the AoAs. As a result, not many new cases on the issue have appeared before the Court since the aforementioned judgments.

 

Recent Developments

A series of recent developments indicate that the role of arbitration in Turkish corporate law is likely to grow in the future. Sketching out the developments in approach to corporate arbitration in comparative law might be useful in this context, given its guiding role in the growing pro-arbitration trend in Turkey. In Germany, the Federal Supreme Court found that disputes concerning validity of shareholder resolutions can be submitted to arbitration provided that the arbitration agreement abides by certain conditions regarding the procedure. The Swiss legislator has recently passed a legislative amendment confirming that the AoA of joint stock-companies can contain an arbitration agreement and corporate disputes can be resolved by arbitration. Given many rules and principles of Turkish corporate law have their origins in these two jurisdictions, it should be no surprise that there is increasing support for arbitration in the Turkish legal literature.

Indeed, a clear majority of Turkish scholars now argue that disputes regarding the validity of general meeting resolutions are arbitrable.4)For a non-exhaustive list of proponents of this view, see footnote 39 here jQuery('#footnote_plugin_tooltip_40184_27_4').tooltip({ tip: '#footnote_plugin_tooltip_text_40184_27_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); According to the majority view, such disputes can indeed be resolved by way of settlement, this being a clear indication of their arbitrability under Turkish law. The question of whether the board needs prior authorization from the general assembly to settle the dispute is deemed as a corporate law issue that has no bearing on arbitrability. Moreover, the specific procedural rules prescribed by the Turkish Commercial Code, such as pending of the case until the term of litigation expires and consolidation of actions concerning the same general meeting resolution, are no longer viewed as obstacles to arbitration. Rather, scholars largely agree that the aforementioned rules can and should be integrated into the arbitral procedure. Therefore, the focus of the debate seems to be shifting from the question of arbitrability to the procedural aspect of corporate arbitration. Accordingly, it is also proposed that arbitral awards in such disputes should be granted erga omnes effect, because the interested third parties – shareholders in particular – will be provided with sufficient protection within the adequate procedural framework. Similarly, there is a growing acceptance that an arbitration clause can be validly inserted into the AoA, despite the persisting discussion as to whether such clauses would bind the shareholders joining the company later on.

Other actors have also signalled a favorable view of corporate arbitration. In a symposium held in October, officials from the Istanbul Commercial Registry (“ICR”) expressed openness to registration of arbitration clauses in AoAs, with representatives from the Ministry of Trade echoing the ICR’s positive attitude. This was followed by the registration of an arbitration clause in the AoA of a joint-stock corporation in November last year upon inspection by the ICR and the Ministry. Finally, ITOTAM, one of the leading arbitral institutions in Turkey, has shared with its members a sample arbitration clause for AoAs based on the arbitration clause registered earlier.

 

Looking Ahead

It is now clear that there is a growing interest in and support for corporate arbitration in Turkey. That being said, the TCC decisions still give rise to reservations about arbitrability and validity of statutory arbitration clauses in AoAs. There are two principal ways in which those question marks can be eliminated. First, the TCC can reverse or at least soften its previous jurisprudence in the light of evolving liberal scholarly views and the institutional support by the Ministry, the ICR and prominent arbitration centers. Second, the legislator can step in and amend the Turkish Commercial Code to clarify that corporate law disputes are arbitrable and the AoA may contain an arbitration clause. The Ministry of Trade’s supportive stance could be a sign that such an amendment is not a distant possibility. Moreover, the legislator has been aggressively promoting (and even requiring) mediation for commercial disputes in the last few years to ease the caseload of commercial courts. Thus, a similar legislative approach to arbitration of corporate law disputes would not come as a surprise.

Even without a legislative amendment or a change in the case law, we believe that the current legal framework can accommodate arbitration in the field of corporate law. The concerns about referring disputes to arbitration in this context boil down to the protection of shareholders with procedural mechanisms. This requires ensuring that shareholders can use their rights of action effectively in multi-party arbitral proceedings. Shareholders should also be provided with the necessary procedural safeguards even when they are not a party to the dispute but would nevertheless be legally affected by its outcome. To that end, a set of carefully designed arbitration rules that include provisions addressing the problems peculiar to corporate law disputes is needed. Such rules should integrate specific procedural rules for corporate disputes regulated in the Turkish Commercial Code. In particular, the rules should cover the notification of shareholders about the proceedings, requirements for consolidation of actions, and participation of other concerned parties (e.g. shareholders, directors and/or the company) in the arbitral proceedings, either as a party or an intervenor. Similar procedural rules pertaining to corporate law disputes which were enacted by the DIS (see Annex 5 to DIS Arbitration Rules) provide a good example in this respect.5)Also notable is the set of draft rules currently under discussion in Switzerland jQuery('#footnote_plugin_tooltip_40184_27_5').tooltip({ tip: '#footnote_plugin_tooltip_text_40184_27_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Therefore, we recommend that arbitral institutions draft supplementary rules for corporate law disputes and model clauses for AoAs. Doing so would not only help remove the existing reservations about arbitration of corporate law disputes but also serve as a basis for legislative changes and court decisions in the future.

References[+]

References ↑1 See 11th Civil Chamber, 7.4.1983, 1983/1595, 1983/1780, and 15.2.2010, 2008/9429, 2010/1780 respectively ↑2 11th Civil Chamber, 5.12.2012, 2011/13485, 2012/19915; also see 1.7.2019, 2019/2226, 2019/5000 ↑3 11th Civil Chamber, 9.4.2014, 2014/141, 2014/6951. An in-depth analysis of the case law and scholarly views concerning arbitration of corporate disputes can be found here and here ↑4 For a non-exhaustive list of proponents of this view, see footnote 39 here ↑5 Also notable is the set of draft rules currently under discussion in Switzerland function footnote_expand_reference_container_40184_27() { jQuery('#footnote_references_container_40184_27').show(); jQuery('#footnote_reference_container_collapse_button_40184_27').text('−'); } function footnote_collapse_reference_container_40184_27() { jQuery('#footnote_references_container_40184_27').hide(); jQuery('#footnote_reference_container_collapse_button_40184_27').text('+'); } function footnote_expand_collapse_reference_container_40184_27() { if (jQuery('#footnote_references_container_40184_27').is(':hidden')) { footnote_expand_reference_container_40184_27(); } else { footnote_collapse_reference_container_40184_27(); } } function footnote_moveToReference_40184_27(p_str_TargetID) { footnote_expand_reference_container_40184_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_40184_27(p_str_TargetID) { footnote_expand_reference_container_40184_27(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Statistically Confirmed Arbitration Friendliness: Recognition and Enforcement of Arbitral Awards in Ukraine in 2006 – 2020

Thu, 2022-02-03 01:24

In 2019 – 2020 a group of Ukrainian arbitration practitioners set out on an ambitious study of Ukrainian court decisions on recognition of arbitral awards. In this blog post, members of the group describe the background and methodology of the study and, most importantly, share its results.

 

Ukraine as an Arbitration Jurisdiction

Ukrainian law incorporates a ‘minimum set’ of international arbitration instruments. Ukraine is party to the New York Convention and its International Arbitration Law is nearly a verbatim translation of the UNCITRAL Model Law (1985 version). Ukraine also has its own international arbitration centre – the International Commercial Arbitration Court at the Ukrainian Chamber of Commerce and Industry, with a solid annual caseload and focus on international commerce.

In 2017, Ukraine significantly amended the procedural rules governing arbitration-related matters (“2017 Reform”). All recognition and enforcement cases are now heard by two courts: the Kyiv Appellate Court (as a first instance court) and the Supreme Court (as a court of appeal). No third level of review (cassation) is available. This model was designed to make proceedings quicker and focus arbitration-related expertise at these courts.

However, the legal framework is only as good as its practical application by courts. And objective data to assess Ukrainian courts’ efficiency and adherence to the internationally accepted standards was quite scarce and sporadic.

To fill this gap, arbitration practitioners from several Ukrainian law firms established a Working Group (“Group”) under the auspices of the Ukrainian Arbitration Association with the aim of analysing recognition and enforcement cases decided between 2006 and 2020.

In 2021, initial results of the Group’s work were presented at the UAA Annual Arbitration Conference. We share the key findings in this piece.

 

Methodology and Limitations

The Group’s primary data source was the Ukrainian Unified State Register of Court Decisions (“Register”). All research was done manually due to lack of effective automatic filtering in the Register. The Group therefore used several keywords to locate the recognition and enforcement cases among of other decisions. A system of quality checks was established to ensure the maximum coverage of relevant decisions.

When the Register started to function in 2006-2009, the courts were less disciplined in submitting information to it. This may be the reason why the number of cases that were identified and included in the dataset in this period is relatively low. Therefore, the charts below usually group data for the years 2006-2009 together. In any event, given the considerable number of cases in the dataset, the Group does not believe that any missing decisions may significantly affect the findings.

The Group’s research only considered cases where the courts (1) accepted an application to recognise and give leave to enforce an arbitral award, and (2) reviewed it in substance and rendered a final judgement. This caught nearly 600 cases.

 

Findings

Case flow

The number of applications for recognition and enforcement of arbitral awards fluctuated between 34 and 56 in 2010-2018. Years 2019 and 2020 showed noticeable spikes of 60 and 81 applications. The statistics appear to confirm a common perception among practitioners that the number of Ukraine-related disputes (including arbitrations) increased quite significantly after the 2014-2016 crisis in the Ukrainian economy.

Success rate

The annual success rates were fairly high, with an average of over 90%, reaching up to 97% in some years (2010, 2017).

However, to put this in context, we note that the Group considered only final decisions. Therefore, if, for example, the first instance court granted an application in December 2013, the court of appeal dismissed it in April 2014, and the court of cassation once again granted the application (upholding the first instance court decision) in January 2015, only the judgment of the cassation court would be reflected in the statistics for the year 2015.

This is important because an award creditor often had to go through several rounds of judicial review (with the lower courts potentially adopting a less arbitration-friendly approach) before getting the award recognised (the chances of which were still very high, as demonstrated by the success rates below). This was particularly so under the procedural rules in effect before 2017, which provided for three levels of review (as opposed to two levels now) and allowed the cassation court to remand the case for a new review to the lower courts.

Duration of proceeding and ‘anti-records’

As with findings on the Success rate above, the duration is attributed to a given year based on the date of the final decision (e.g., if the case lasted for two years, from 2013 to 2015, the duration of this case will be recorded in the 2015 statistics).

Once again, the context is important for drawing conclusions from this data. The average, by its nature, combines the data of all cases, mixing those which were not contested and decided in two months, and those which were hard-fought and went through several court instances over several years. An average duration in most of the 2006-2020 period is less than a year. Only in cases finally decided in 2018 and 2019 the duration of proceedings slightly exceeded one year.

Despite the quite positive statistics, the Group also identified several record-breakers. These cases demonstrate how long the proceedings could have lasted in the worst-case scenario under the pre-2017 rules. Still, out of around 600 cases in the dataset, only 46 lasted over three years. The graph below shows the distribution of those 46 cases by length.

Finally, as we describe above, one of the key ideas behind the 2017 Reform was to increase the efficiency of recognition and enforcement proceedings. Naturally, the Group wanted to assess the 2017 Reform’s effects.

After the 2017 Reform, courts reviewed and rendered decisions on applications brought under the pre-Reform and post-Reform rules. It would therefore not be entirely correct to measure the Reform’s effect based on the total average duration of cases in 2018-2020. Therefore, we also looked separately at the cases that were filed under the new rules of procedure (since 2018).

The chart below compares the average duration of all cases decided in 2018-2020 (191 cases) with the average duration of cases commenced under the post-Reform rules of procedure and decided in 2018-2020 (143 out of 191 cases). The difference of 185 days (375 – 190) speaks convincingly in favour of the 2017 Reform’s efficiency.

Grounds for refusal

The Group sought to establish which grounds for refusal of recognition and enforcement under Article V of the New York Convention were ‘most popular’ (since it was not possible to discern raised and applied grounds in each and every case, the charts below may be less representative than other charts in this post).

The first chart shows that lack of proper notice (V(1)(b)) and public policy (V(2)(b)) are the two most popular grounds among litigating parties, while arbitrability (V(2)(a)) received the least attention.

The second chart confirms that it is quite hard to persuade Ukrainian courts to accept any of the Article V grounds. For instance, out of 86 times public policy was pleaded, only in 12 decisions (or 14%) did the courts dismiss the application based on it. Importantly, lack of proper notice is the most ‘dangerous’ ground for refusal under Article V – both in terms of how often this ground is invoked and how likely it is to succeed. This is an alert to any party that is likely to get involved in a Ukraine-related arbitration.

Most popular arbitral rules

Finally, the Group analysed the dataset to establish under which arbitral rules the awards considered by Ukrainian courts are commonly rendered. Ukrainian ICAC dominates the field, accounting for 56% of the awards. Russian ICAC and Belarus IAC are second most common, with 15% in total. The third biggest group are western arbitral institutions, with LCIA, ICC, VIAC, SCC and GAFTA/FOSFA together accounting for 10%.

Conclusions

Although the dataset is still being analysed, there are already a lot of helpful findings. Analysis reveals that Ukrainian courts’ average rate of granted applications for recognition and enforcement is over 90%. Furthermore, the study showed an average duration of cases and allowed us to trace the first positive effects of the 2017 Reform. The elimination of cassation review and transfer of all cases to the Kyiv Appellate Court seems to have decreased the average duration significantly.

These findings will be helpful for practitioners assessing prospects of bringing an arbitral award before Ukrainian courts (and to those who are about to commence Ukraine-related arbitration) and increase positive perception of Ukraine as an arbitration-friendly jurisdiction.

We are looking forward to monitoring future developments in Ukrainian arbitration-related case law. Stay tuned!

 

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Special thanks go out to all members of the Group: Serhii Uvarov, Zoriana Matiiash, Mykola Krys, Oleksii Maslov, Dmytro Izotov, Kristina Mysenko, Alina Danyleiko, Olexander Droug, Olesia Gontar, Serhii Yaroshenko, Oksana Varakina, Maksym Khitrykh, Viktoria Ivasechko, Anastasia Polishchuk, Iryna Vivcharyk, Olha Nosenko

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