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One Year Anniversary of British Columbia’s New Arbitration Act

Kluwer Arbitration Blog - Tue, 2021-11-23 00:59

British Columbia (“BC”) was the first Canadian jurisdiction to introduce modern arbitration legislation based on international standards in the UNCITRAL Model Law in 1986. Despite being an early leader in arbitration in Canada, BC did not update its domestic legislation for over two decades, which caused some increasing discrepancies between BC’s arbitration legislation, the UNCITRAL Model Law amendments in 2006, the Uniform Commercial Arbitration Act in 2016, and evolving best practices in arbitration.

Last year, BC introduced a new Arbitration Act, SBC 2020, c 2 (the “New Act”), replacing the Arbitration Act, RSBC 1996, c 55 (the “Old Act”). The New Act is an attempt to modernize and streamline domestic arbitration and to enhance the efficiency and speed of proceedings.

The New Act applies to all arbitrations not expressly excluded (it does not just apply to commercial arbitrations). The New Act limits judicial intervention in an arbitration proceeding (specifically stating that a court must not intervene unless so provided in the New Act), underscoring that arbitration is an alternative form of dispute resolution. Arbitral tribunals have the jurisdiction to determine questions of their own jurisdiction. This article provides an overview of what’s gone from the Old Act, what’s new in the New Act, and then provides tips for drafting arbitration clauses in BC in light of these recent changes.

 

What’s Gone?

The New Act eliminates the default application of the British Columbia International Commercial Arbitration Centre (“BCICAC”, now “VanIAC”) Rules, which applied under the Old Act unless the parties agreed otherwise. VanIAC’s Rules must now be specifically incorporated into the arbitration agreement in order to apply, or the parties must agree to use the VanIAC Rules and have VanIAC administer the arbitration.

In parallel, also effective last year, the BCICAC changed its name to VanIAC, introduced new domestic arbitration rules (which are harmonized with the New Act), and is in the process of rebranding and modernizing the center. VanIAC’s new domestic rules now include provisions for expedited proceedings, emergency arbitrators, optional appeals and virtual hearings. VanIAC is also in the process of revising and updating its international arbitration rules, which will be released sometime in 2022.

Under the New Act, regardless of whether the arbitration is administered by VanIAC, VanIAC has the power to appoint arbitrators and to make decisions regarding arbitrator fees and only where they do not make the appointment is recourse available to the BC Supreme Court (section 14).

 

What’s New?

The New Act has essentially filled its prior procedural gaps by taking the BCICAC rules and incorporating them into the legislation directly.

Some of the new key provisions are as follows:

  • section 11(2): arbitral tribunals have the power to determine whether the arbitral proceeding was brought within the time limit specified in the arbitration agreement or the relevant limitation period;
  • section 25: where an arbitration agreement is silent on the law applicable to the dispute, the arbitral tribunal may choose the applicable law;
  • section 28: direct evidence in written form unless otherwise agreed or ordered;
  • section 29: empowers arbitral tribunals to issue subpoenas to order a person who is not a party to give evidence or produce records, which have the same effect as if they were issued in court proceedings and can be issued to a person in BC or to a person outside of BC via a request to a court of competent jurisdiction;
  • section 34: empowers arbitral tribunals to appoint experts to assist the tribunal;
  • sections 36-45: clear regime for interim measures and preliminary orders; and
  • section 63: ascertains the confidential nature of arbitration proceedings (unless otherwise agreed by the parties).

 

Setting Aside Awards

The BC Supreme Court maintains its jurisdiction to set aside awards where the arbitration agreement is void, the award deals with a dispute beyond the scope of the arbitration agreement, or there is a lack of procedural fairness. Section 58 explicitly provides that doubts as to the arbitrator’s independence or impartiality may result in the setting side of an award. The time limit to set aside awards is 30 days.

 

Appeals

The New Act significantly alters the appeals process. Under the New Act, parties can appeal arbitration awards by seeking leave from the BC Court of Appeal within 30 days of the award. Under the Old Act, appeals could be made within 60 days to the BC Supreme Court. However, section 59 of the New Act provides that parties can opt out of appeal rights (see drafting tips on this below).

Section 60 provides that the jurisdiction over appeals on questions of law, on leave, will now reside directly with the BC Court of Appeal. The Court of Appeal may confirm, amend, or set aside the arbitral award, or remit the award to the tribunal, together with the Court of Appeal’s opinion on the question of law at issue.

The limitation period for appeals has also been shortened from 60 days under the Old Act to 30 days.

 

Enforcement

Under the Old Act, there was no process provided for the recognition and enforcement of arbitral awards from other Canadian jurisdictions. The New Act contains specific provisions governing the recognition and enforcement of such awards on application to the BC Supreme Court.

Awards from other provinces must be recognized and enforced save very limited circumstances, such as where the court does not have jurisdiction to grant the relief sought or where the award has been set aside by a court of competent jurisdiction.

 

Tips for Drafting Arbitration Clauses in BC

The new model VanIAC Clause is as follows:

All disputes arising out of or in connection with this agreement, or in respect of any legal relationship associated therewith or derived therefrom, shall be referred to and finally resolved by arbitration administered by the Vancouver International Arbitration Center (VanIAC) pursuant to its applicable rules by [one/three arbitrator(s)] appointed in accordance with the said rules.  The place of arbitration shall be [City, Province].  The language of the arbitration shall be [Language].  The governing law is the law of [Province/Country].

The New Act does not list which provisions are mandatory, but it does state that certain articles apply “unless the parties agree otherwise”. Therefore, unless the parties agree otherwise, the following default provisions will apply under the New Act:

  • the number of arbitrators is one;
  • the designated appointing authority is VanIAC;
  • the arbitration must be commenced and (substitute) arbitrators appointed pursuant to the New Act;
  • a challenge to the arbitrator must be pursuant to the New Act;
  • the arbitral tribunal chooses the law applicable to the substance of a dispute (e.g. law of the contract);
  • the arbitral tribunal control the procedure of the arbitration (including the granting of (ex parte) interim measures);
  • direct evidence is presented in writing;
  • an arbitral award must provide reasons;
  • arbitral tribunal may award pre- and post-award (compound) interest and determine rate;
  • costs are in the discretion of the arbitral tribunal; and
  • appeals are available.

Some other optional components parties can include in the arbitration clause are the following:

  • negotiation prior to arbitration or med-arb (place a time limit on length of negotiations);
  • multi-party arbitration;
  • arbitrator qualifications/language/technical skills;
  • document disclosure limits;
  • preliminary adjudication of threshold issues;
  • allocation of costs and fees;
  • interest;
  • currency of award;
  • virtual hearing and/or paperless hearing; and
  • expedited arbitrations.

If the parties wish to provide for a right of appeal, they should draft the clause as follows:

The parties agree that either (any) party shall have a right of appeal pursuant to the VanIAC Rules with the grounds of appeal to be:

  • on a question of law with leave of the Appeal Tribunal;
  • on a question of law;
  • on a question of law or a question of mixed fact and law; or
  • on a question of law, a question of mixed fact and law or a question of fact, in which case the appeal shall be only on the record.

If the parties wish to provide for no right of appeal, they should draft the clause as follows:

  • Except for the appeal process under the VanIAC Rules, the parties agree that they will not appeal any arbitration decision, or decision of an Appeal Tribunal, to any court; or 
  • The parties agree that they will not appeal any arbitration decision to any court.

 

Conclusion

Counsel should review and beware of precedents. This analysis will be particularly important where parties agree to use “boiler plate” arbitration clauses found in previous contracts. First, counsel should ensure that arbitration clauses are drafted in a manner that is consistent with the New Act and be mindful of the tips provided above, in particular with regard to appeals. Second, if counsel wish to have VanIAC’s rules to apply, they must specifically provide for this in their arbitration clause. Third, counsel should be wary of the default provisions that apply under the New Act and specifically agree otherwise if the parties don’t want all default provisions to apply.

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Mixed Mode Dispute Resolution Papers featured at Fordham Conference

ADR Prof Blog - Mon, 2021-11-22 10:27
Posted on behalf of BFOI Jacqueline Nolan-Haley (Fordham): At the 16th Annual Fordham Conference on International Arbitration and Mediation held on November 19, 2021, the International Task Force on Mixed Mode Dispute Resolution launched the initial set of final papers by the seven working groups. The Task Force which began in 2004 responds to the … Continue reading Mixed Mode Dispute Resolution Papers featured at Fordham Conference →

Pre-Arbitration Conditions: the English High Court Provides Further Clarity in the Admissibility v Jurisdiction Debate

Kluwer Arbitration Blog - Mon, 2021-11-22 00:47

Arbitration agreements often provide that certain procedural steps must be undertaken before arbitration is commenced, such as mediation or negotiation. This provides a ‘cooling-off period’ in which the parties can seek to resolve their dispute amicably before resorting to formal proceedings.

When a party fails to satisfy a pre-arbitration procedural step and launches prematurely into arbitration, a respondent party wishing to challenge such conduct may claim that an arbitral tribunal has no jurisdiction to hear the dispute.

The approach to this issue varies across different jurisdictions as has been noted in prior blog posts. Until relatively recently, there was some uncertainty as to the correct approach under English law. Earlier this year, Sierra Leone v SL Mining Limited [2021] EWHC 286 (“Sierra Leone”), a case in which the authors’ firm acted, provided welcome clarity on this issue after a jurisdiction challenge to an arbitral award was brought under s.67 of the Arbitration Act 1996 (the “Act”). The Court found that a failure to wait until the end of a pre-arbitration notice period before commencing arbitration did not deprive the tribunal of jurisdiction. Rather it was an issue which concerned the admissibility of the dispute and so was one on which the tribunal could rule without being amenable to challenge under s.67 of the Act. The Court reached this finding having considered leading commentary and international authorities on the issue as there was no clear guidance under English law.

An even more recent High Court decision from October 2021 which is the focus of this post, NWA and others v NVF and others [2021] EWHC 2666 (“NWA”), has endorsed the approach taken in Sierra Leone and provides further guidance on the issue.

These judgments are of significance because the characterization of a failure to satisfy pre-arbitral conditions as a matter of admissibility rather than jurisdiction would prevent an aggrieved party from using such failure as a basis to appeal an arbitral award under s.67 of the Act.

Arbitration as a ‘One-Stop Shop’

In NWA, the dispute resolution clause required that the parties first attempt to resolve their dispute through an LCIA mediation before commencing an LCIA arbitration. The claimants filed a request for arbitration with the LCIA in which they requested that the arbitration be immediately stayed prior to the constitution of the tribunal to allow the parties to settle the dispute by mediation in accordance with the dispute resolution clause. The claimants also communicated their proposal to mediate via email, which the defendants refused.

Following a decision of the sole arbitrator that he had jurisdiction to hear the dispute, the defendants brought a s.67 challenge on the basis that the sole arbitrator wrongly reached that conclusion. The defendants’ position was that the failure to mediate deprives the tribunal of substantive jurisdiction within the meanings at section 30(1)(a) and (c) of the Act. These subsections require, respectively, that there is a valid arbitration agreement, and that matters are submitted to arbitration in accordance with the arbitration agreement.

Admissibility v Jurisdiction  

The central question for the Court was whether the alleged non-compliance with the requirement for prior LCIA mediation goes to the admissibility of the claim or to the tribunal’s substantive jurisdiction to determine the claim.

The Court’s starting point was to consider the wording of the arbitration clause and apply ordinary principles of contractual interpretation. When interpreting the clause, the Court emphasized the importance of firmly keeping in mind the seminal dictum of Lord Hoffmann in Fiona Trust which highlights that parties who choose to arbitrate want their dispute to be decided in a ‘one-stop shop’ by a tribunal, and not before the national courts.

The Court held that it was clear from the dispute resolution clause that the parties agreed to refer any dispute arising out of or in connection with their agreement to arbitration and that they should first seek to settle their dispute by LCIA mediation. The Court rejected the defendants’ interpretation that the failure to mediate before referring the dispute to arbitration goes to jurisdiction. In the Court’s view, that interpretation would be “absurd” and would not accord with “business common sense” because it would mean that where one party refuses to mediate, the tribunal would never gain jurisdiction over the dispute.

The Court was also persuaded by the decision in Sierra Leone and leading practitioner texts on arbitration which favour an “admissibility” construction rather than a “jurisdiction” approach to pre-arbitration conditions. Accordingly, the Court concluded that the dispute had been validly submitted to arbitration in accordance with the dispute resolution clause and that it was for the arbitrator to decide the consequences of the alleged breach of the procedural requirement to mediate prior to arbitration.

Competence of Tribunal to Rule on its Own Jurisdiction

Having concluded that the requirement to mediate was a question of admissibility, the Court went on to consider whether the defendants’ arguments regarding section 30(1) of the Act would alter its conclusion. Specifically, the defendants argued that (i) the arbitration agreement was “inoperative” because of the failure to comply with the mediation provision and accordingly there was not a “valid” arbitration agreement for the purposes of s.30(1)(a); and (ii) the failure to comply with the mediation provision meant that no matters had “been submitted to arbitration in accordance with the arbitration agreement” and so the arbitrator could not have had jurisdiction as per section 30(1)(c) of the Act.

The Court rejected both of these arguments. As to (i), the Court held that the arbitration agreement was plainly valid and the failure to mediate did not impact its validity or its operability. On (ii), the Court held that the issues covered by s.30(1)(c) of the Act concern whether matters referred to arbitration are within the scope of the arbitration agreement, not whether the procedure has been followed. The Court also endorsed the view of Sir Michael Burton in Sierra Leone where he held that section 30(1)(c) was not engaged in respect of a challenge to a claim made prematurely. The defendants’ attempt to distinguish Sierra Leone on the basis that it involved a claim being brought too early, rather than a claim that should not have been brought to arbitration at all because mediation had not taken place, was rejected by the Court which characterized it as “a distinction without substance”.

Can a Failure to Satisfy Pre-Arbitration Conditions Ever Engage a Tribunal’s Jurisdiction Under English Law?

The much criticized decision of Emirates Trading Agency LLC v Prime Mineral Exports Pte Ltd [2015] 1 WLR 1145 had arguably suggested that pre-arbitration procedural requirements may be relevant to a tribunal’s jurisdiction. However, the Court in Sierra Leone, and again in NWA, distinguished Emirates Trading on the basis that it was simply assumed in that case that the failure to satisfy a pre-condition was a jurisdictional question rather than one related to admissibility. In other words, the issue was apparently never considered by the court. Now that it has been considered by two recent High Court decisions, the matter appears settled at first instance.

However, this does not necessarily mean that a failure to satisfy pre-arbitration conditions will never engage a tribunal’s jurisdiction. As the Court noted in NWA, the outcome of each case depends on the proper construction of the arbitration agreement at issue. For example, in Laker Vent Engineering v Jacobs [2014] EWHC 1058 (a case relied on by the defendants but distinguished on the facts), the arbitration agreement specifically provided that if the parties failed to agree an arbitrator in a specified time frame, then the dispute would be settled under the terms of the main contract, under which disputes were settled by court proceedings. In those circumstances, where there was a clear intention for the forum of the dispute to change after a certain time period, an arbitration agreement was deemed to have become inoperative.

Practical Considerations

While NWA has provided further clarity as to the English law position and reinforces the pro-arbitration policy of the English courts, it remains the case that parties would be well advised to follow any pre-arbitration conditions. A failure to do so may have practical consequences.

Specifically, arbitral tribunals have the power to stay or adjourn proceedings to allow time for the pre-condition to arbitration to be satisfied, and there may be cost consequences for a party that refuses to comply. A tribunal may rule that a claim submitted prematurely is inadmissible, which could lead to delay and cost should a party need to initiate a fresh claim after having followed the procedural steps.

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Ninth Circuit Holds Article II, Section 3 of the New York Convention is “Self-Executing” and Not an “Act of Congress,” Thereby Affirming Order to Compel Arbitration

Kluwer Arbitration Blog - Sun, 2021-11-21 00:00

In CLMS Mgmt. Servs. et al. v. Amwins Brokerage et al., the U.S. Court of Appeals for the Ninth Circuit considered whether a state law (by operation of the federal McCarran-Ferguson Act, which gives states the authority to regulate the business of insurance) voiding arbitration agreements in insurance contracts reverse-preempted Article II, Section 3 of the New York Convention. Normally, Article VI, Clause 2 of U.S. Constitution (the “Supremacy Clause”) mandates that state law gives way to conflicting federal law, but the McCarran-Ferguson Act provides that state insurance law preempts conflicting federal law. Faced with this question, the Ninth Circuit held that Article II, Section 3 of the New York Convention is “self-executing,” not an “act of Congress,” and not subject to reverse-preemption by the McCarran-Ferguson Act. Accordingly, the Ninth Circuit affirmed the district court’s order compelling arbitration, as further discussed and analyzed in this post.

 

The Interplay Between the Supremacy Clause, the McCarran-Ferguson Act, State Law, and the New York Convention

The U.S. Constitution’s Supremacy Clause provides: “This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land” (emphasis added). This means that “state law gives way to conflicting federal law.”

However, Congress enacted the McCarran-Ferguson Act in 1945, which was “in response to the U.S. Supreme Court’s decision in United States v. South-Eastern Underwriters Ass’n, 322 U.S. 533, 552-53 (1944),” holding that insurance is subject to federal regulation under the U.S. Constitution’s Commerce Clause. In pertinent part, the Act provides that “[t]he business of insurance, and every person engaged therein, shall be subject to the laws of the several States which relate to the regulation or taxation of such business.” § 1012(a). And, “[n]o Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance, or which imposes a fee or tax upon such business, unless such Act specifically relates to the business of insurance.” § 1012(b) (emphasis added). Thus, in the insurance industry, “the McCarran-Ferguson Act transformed the legal landscape by overturning the normal rules of pre-emption” (internal quotation marks omitted).

Within this legal framework, the State of Washington enacted laws to regulate insurance within its state. Relevant here, § 48.18.200 of the Revised Code of Washington provides: “No insurance contract … shall contain any condition, stipulation, or agreement … depriving the courts of this state of the jurisdiction of action against the insurer … Any such condition, stipulation, or agreement in violation of this section shall be void …” (emphasis added). The Ninth Circuit explained that “[t]he Washington Supreme Court has interpreted § 48.18.200 to ‘prohibit binding arbitration agreements in insurance contracts,’ and held that pre-dispute binding arbitration provisions in insurance contracts are unenforceable.”

However, central to the matter in CLMS Mgmt. Servs., Article II, Section 3 of the New York Convention provides: “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall, at the request of one of the parties, refer the parties to arbitration, unless it finds the said agreement is null and void, inoperative or incapable of being performed.” The Ninth Circuit stated that the New York Convention obligates courts when seized of a matter where the parties have agreed to arbitrate: “(1) to recognize and enforce written agreements to submit disputes to foreign arbitration and (2) to enforce arbitral awards issued in foreign nations” (quoting ESAB Grp., Inc. v. Zurich Ins. PLC, 685 F.3d 376, 381 (4th Cir. 2012)).

Therefore the issue on appeal was whether the State of Washington’s law, by operation of the McCarran-Ferguson Act, reverse-preempts the New York Convention.

 

The Ninth Circuit Holds Article II, Section 3 of the NYC is Self-Executing and Not an Act of Congress

The Ninth Circuit analyzed the foregoing issue by considering whether it was the treaty of the New York Convention, itself, that compels enforcement of an arbitration agreement, or whether it was certain federal laws which amended the Federal Arbitration Act (i.e., acts of Congress) “to accommodate implementation” of the New York Convention that compel enforcement of the arbitration agreement.

The Ninth Circuit explained that the U.S. Supreme Court has “‘long recognized the distinction between treaties that automatically have effect as domestic law, and those that – while they constitute international law commitments – do not themselves function as binding federal law’” (quoting Medellin v. Texas, 552 U.S. 491, 504 (2008)). “A treaty is self-executing and has automatic force as domestic law ‘when it operates of itself without the aid of any legislative provision.” Id. at 505. “When, in contrast, ‘treaty stipulations are not self-executing they can only be enforced pursuant to legislation to carry them into effect.’” Id. “We have said that, ‘at its core, the question of self-execution addresses whether a treaty provision is directly enforceable in domestic courts’” (quoting Republic of Marshall Islands v. United States, 865 F.3d 1187, 1193 (9th Cir. 2017)).

To interpret Article II, Section 3 of the New York Convention, the Ninth Circuit began with the “time-honored” approach of beginning with the text of the treaty itself. In particular, the Ninth Circuit focused on the words: “The court of a Contracting State, when seized of an action in a matter in respect of which the parties have made an agreement within the meaning of this article, shall … refer the parties to arbitration …” (emphasis added). The Ninth Circuit ultimately concluded that Article II, Section 3 is self-executing and not an act of Congress.

The Ninth Circuit supported its decision with U.S. Supreme Court precedent, legislative history, and secondary, scholarly authority (citing H.R. Rep. No. 90-1181, at 3603 (1970) and Gary B. Born, The New York Convention: A Self-Executing Treaty, 40 Mich. J. Int’l L. 115, 147 (2018) (arguing that the enactment of the New York Convention shows “only that Congress wanted to ensure the effective and efficient enforcement of the Convention’s self-executing substantive terms in U.S. courts” by providing “procedural and ancillary mechanisms” that “could not sensibly” be addressed by a multilateral treaty with a large number of Contracting States)).

The Ninth Circuit importantly relied on the U.S. Supreme Court’s decision in Medellin to explain the difference between a self-executing a non-self-executing treaty. Medellin addressed an International Court of Justice (ICJ) judgment which held that, “based on violations of the Vienna Convention, 51 named Mexican nationals were entitled to review and reconsideration of their state-court convictions and sentences in the United States.” Medellin, 552 U.S. at 497-98. In addressing this judgment, the U.S. Supreme Court “considered whether a judgment of the [ICJ] was directly enforceable as domestic law. The Court explained that ‘the obligation on the party of signatory nations to comply with ICJ judgments derives … from Article 94 of the United Nations Charter,’ which provides that ‘each Member of the United Nations undertakes to comply with the decision of the ICJ in any case to which it is a party.’ The Court concluded Article 94 is non-self-executing, and therefore ICJ decisions are not automatically enforceable, because Article 94 ‘is not a directive to domestic courts’ and ‘does not provide that the United States ‘shall’ or ‘must’ comply with an ICJ decision, nor indicate that the Senate that ratified the U.N. Charter intended to vest ICJ decisions with immediate legal effect in domestic courts.’” The Ninth Circuit noted it had previously relied “on similar textual clauses [in another Ninth Circuit decision] to conclude that Article VI of the Treaty on the Non-Proliferation of Nuclear Weapons is non-self-executing.” See generally Republic of Marshall Islands v. United States, 865 F.3d 1187 (9th Cir. 2017).

The Ninth Circuit reasoned that Article II, Section 3 of the New York Convention “stands in stark contrast” to the treaty provisions in Medellin and Marshall Islands, which speak rather in “broad, aspirational terms.” In particular, as noted above, the Ninth Circuit focused on the word “shall” in Article II, Section 3 of the New York Convention as evidence that the Convention is self-executing and directly applicable to U.S. federal and state courts. Therefore, the Ninth Circuit found that “[t]he plain text of Article II, Section 3 and the Convention’s relevant drafting and negotiation history leads us to conclude that Article II, Section 3 is self-executing.”

 

Conclusion

There are additional reasons why the Ninth Circuit’s decision in CLMS Mgmt. Servs. et al. v. Amwins Brokerage et al. upheld the U.S.’s “liberal federal policy favoring arbitration agreements.” Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, 473 U.S. 614, 625 (1985). While not exhaustive for purposes of this blog, as discussed in Gary Born’s law article entitled The New York Convention: A Self-Executing Treaty, 40 Mich. J. Int’l L. 115 (2018), the Ninth Circuit’s holding affirms “one of the Convention’s fundamental objectives: the establishment of uniform rules of international law governing the international arbitral process.” Id. at 116. To that point, Born correctly posits that if the New York Convention were non-self-executing, “its terms would not apply directly in either state or federal courts. As a consequence, international arbitration agreements and awards would be subject to a confusing array of different and uncertain legal rules in different American courts, with, on any view, state law being applicable to significant categories of such agreements and awards in U.S. state courts.” Id. at 131. That is, if the New York Convention were non-self-executing, then the acts of Congress which amended the Federal Arbitration Act to accommodate implementation of the New York Convention would have been applicable to only U.S. federal courts and not U.S. state courts. Such a result would run counter to the fundamental objective of the New York Convention. See e.g., id. at 151.

The Ninth Circuit’s holding is also in line with many other New York Convention Contracting States’ interpretation of the treaty as being self-executing. As Born further explains, a 2008 report published by the UNCITRAL Secretariat found that “for a vast majority of States, the New York Convention was considered as ‘self executing.” Id. at 169. Therefore, while U.S. jurisprudence is controlling on whether a treaty is self-executing in the U.S., the Ninth Circuit’s holding reaffirms the New York Convention’s principal objective of establishing uniform rules of international law governing the international arbitral process.

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Party Nominated Co-Arbitrators: Battle of the Titans

Kluwer Arbitration Blog - Sat, 2021-11-20 00:02

On 12 October 2021, the Africa Arbitration Academy organized its annual debate themed “Battle of the Titans” as part of its 2021 Flagship Training Programme. The debate was moderated by Dr. Emilia Onyema, Professor of International Commercial Law, SOAS University of London and featured two pre-eminent arbitration practitioners – Prof. Gary Born and Prof. Jan Paulsson – discussing the motion: Party-Appointed Co-Arbitrators: Yes, or No?

To kick off the debate, the topic was put to the audience as a poll question and the result was 87% in favour of party-nominated co-arbitrators while 13% voted against it.

 

The Debate: Titans on the Battlefield

Prof. Gary Born argued in favour of the motion, noting that the topic is truly important, foundational, and critical to the health and future of international arbitration. His perspectives were two-pronged – historical origin and contemporary commercial practice.

Prof. Born described the practice of party-appointed arbitrators as ancient in its historical origin and ubiquitous in the contemporary practice of international law, arbitral institutional rules, and customary practice among parties and in different countries. It has enjoyed the status of being a fundamental aspect of international arbitration for nearly twenty centuries, as elaborated below. Therefore, opposing the motion poses a threat to the very foundation of international commercial and investment arbitration by taking away the right of parties to appoint co-arbitrators – an action that could drive parties away from arbitration.

He described consent as the foundation of international arbitration whereby parties choose to resolve their disputes through arbitration in a particular way and by a particular procedure. These procedural rights rooted in party autonomy are enshrined in the New York Convention under Articles 2(1) and 2(3). The right of parties to constitute a tribunal in the way they think best is further confirmed in Article (5)(1)(d) which permits non-recognition of awards where parties’ agreed procedures in selecting arbitrators have not been followed. Interfering with this right would be a strike on the very basis of the legitimacy of international arbitration, not only violating the New York Convention but also undermining the very reasons for international arbitration. He argued, “Arbitration is about allowing parties to decide how to resolve their dispute rather than imposing procedures/other means of dispute resolution on them.”

In demonstrating the historical context, Prof. Born noted that the practice of party-appointed co-arbitrators goes back to the first recorded uses of arbitration. The ancient Greeks used arbitration to resolve state-to-state and commercial arbitration invariably with three- or five-person tribunal; with one-or-two arbitrators appointed by each of the respective disputants. The co-arbitrators would agree on a presiding arbitrator. The Romans also used co-arbitrators in a similar way.

Throughout the Middle Ages, the practice was used. Similarly, in state-to-state arbitration, party-appointed co-arbitrators were the norm. For example, in a 1254 treaty, German States provided for resolution of state-to-state disputes among German principalities by a tribunal in which the disputing States themselves selected co-arbitrators. This is similar to the position in the treaty between Switzerland and France in the thirteenth century.

Moreover, contemporary practice affirms the preference of party appointed arbitrators. Exemplifying this, Prof Born referred to the QMUL 2012 Survey where a majority of respondents (76%) preferred selection of the two co-arbitrators in a three-member tribunal by each party unilaterally.

To bolster his argument, Prof. Born explained that commercial arbitration agreements, pragmatic commercial decisions and national legislation include provisions for parties to appoint their co-arbitrator, reflecting the fundamental characteristic of arbitration practice. Article 11 of the UNCITRAL Model Law provides a default solution where parties have not agreed how to constitute the tribunal. Several jurisdictions including Ethiopia, Kenya, Nigeria, Tanzania, Morocco, Rwanda have adopted Article 11 into their national laws. Leading arbitral institutions’ rules such as LCIA, ICC, SCC, KIAC and CRCICA among others follow uniformly in providing the default solution of party-appointed arbitrators. This default solution in institutional rules reflects the pragmatic learning, practical desires, and aspirations of practitioners over decades as to the desirability of the process.

The practice has been affirmed by stakeholders because in international arbitration where differences in perspectives, culture, legal regime, and language exist, parties need direct involvement in the constitution of the arbitral tribunal. This ensures that the tribunal consists of members who are familiar with the party’s case, background, and importantly, able to provide adequate attention and motivation to resolve the parties’ dispute.

In precis, Prof. Born argued that the notion that leading arbitral institutions are better placed to select arbitrators is incorrect as parties have greater incentive to select the tribunal properly and appropriately; an expert version of how their dispute can be resolved. Prof. Born also stressed that most institutional arbitrators are “male, stale and often pale”, therefore parties’ freedom to select their arbitrators is judicious.

Prof. Paulsson, on the other hand, prefers to use the term “unilaterally appointed arbitrators” rather than “party-appointed co-arbitrators”, as discussed in this previous post. Quoting Prof. J. Martin Hunter, Prof. Paulsson stated that parties analyze their case and appoint a person whose intellectual disposition favors their thesis of the case. This is why he labels such arbitrators as unilaterally appointed arbitrators.

Prof. Paulsson was not against the motion; as he opined that unilaterally appointed arbitrators should not be forbidden, rather he posited that parties must consider, from the inception of a case, whether they want unilaterally appointed arbitrators. He believes his position on parties’ right to appoint arbitrators had been misconstrued as favoring curtailing such right.

To exemplify his position, Prof. Paulsson narrated how he came to think about the dangers of unilaterally appointed arbitrators. During his tenure as President of the LCIA, he overheard two young staff members commenting on what in their opinion was a well-conducted arbitration that resulted in a laudable award. Upon further engagement with them on what a well-conducted arbitration and laudable award would entail from an institutional perspective, he concluded on a list of requirements – (1) the award was rendered on time, (2) the arbitrators did not ask for more money – the deposit was enough, and (3) the award made sense – it was clear and easy to understand.  He further noted that the default LCIA rule which allows the Institution to appoint arbitrators where parties failed to agree to three arbitrators had been applied in that case.

This moment prompted him to further probe into LCIA arbitrations and he found that the “good arbitrations” tend to be the ones where the three arbitrators were appointed by the institution. While in other arbitrations which involved unilaterally appointed arbitrators, there was usually a dissenting opinion and, in many instances, respondents sabotage the proceedings and make life impossible for claimants. He noted that such challenges take time, cost more money, and present a high risk of the tribunal not reaching a final award.

Hence, he noted that the debate is not about what is allowed and what is not; rather, it is about strategically considering the ways to avoid the danger of unilaterally appointed arbitrators. He proposed that parties should include a clause in their arbitration agreement for the appointment of good individuals from the beginning and this can be achieved by allowing the institution to appoint the arbitrators. Admitting that not all institutional appointments are great (there are challenges of transparency, the fight against clientelism and the fight against culture), Prof. Paulsson argued that institutional appointments save parties from a respondent who is dead set on harming claimants at any cost including any conceivable way of sabotaging the arbitration such as appointing an arbitrator who may resign at critical times, or appointing an arbitrator whose sole aim may be to defend respondent’s case.

In further consideration of the issue of dissenting opinions, Prof. Paulsson noted that many studies on dissenting opinions including those at the ICC, reveal that over 98% of dissenting opinions were given by the arbitrators appointed by the losing party. In his opinion, this fact suggested that unilaterally appointed arbitrators are often not appointed for the progress of the arbitral reference and relying on the presiding arbitrator to be a buffer may not be sufficient.

 

Conclusion

The debate was a real contest between the two international arbitration gladiators with a lot of dicing and slicing. Prof. Born underscored the reasons for the continued practice of party-appointed co-arbitrators. In support of his arguments, he noted how the practice of party-appointed arbitrators was ubiquitous, uniquely applied throughout history and supported by contemporary commercial practices. Prof. Paulsson, on the other hand, retreated from arguing against party-appointed arbitrators. Rather, he explained the dangers of unilaterally appointed arbitrators and the usefulness of default rules which allow the institutions to appoint the three arbitrators.

While Prof. Paulsson deviated somewhat from the main motion at hand, he successfully swayed a portion of the audience as the final poll results were 66%-34% after the debate.

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Wolters Kluwer Launches Data-Driven Enhancements to Arbitrator Tool within Kluwer Arbitration Practice Plus

Kluwer Arbitration Blog - Fri, 2021-11-19 00:31

Wolters Kluwer Legal & Regulatory U.S. announced enhancements to Arbitrator Tool and a new Relationship Assessment Tool within Kluwer Arbitration Practice Plus (KAPP). Integrating artificial intelligence and machine learning with Wolters Kluwer’s arbitration expertise, the new features will provide arbitration professionals with valuable insights to assess arbitrators, properly advise their clients, and increase their rate of success.

Launched in December 2019, KAPP is a practical extension to Kluwer Arbitration, the world’s leading research solution for international arbitration. The Arbitrator Tool within KAPP will provide data-driven information about arbitrators and their experience. Drawn from a wide range of sources – including appointment data from core international institutes and Wolters Kluwer’s rich collection of international awards – the information will assist practitioners in selecting an arbitrator. Additionally, the Relationship Assessment Tool will allow users to research the connections of arbitrators, expert witnesses, counsel, tribunal secretaries and other stakeholders to uncover potential conflicts of interest. Together, these two data-driven features will empower arbitration professionals to find, compare, or challenge arbitrators, helping them to minimize involved risks.

“Choosing the right arbitrator for a case is an important and strategic decision, and due to confidentiality in commercial arbitration, it is hard for practitioners to assess potential conflicts of interest, current and past connections with other stakeholders, and other critical factors to get the full picture,” said David Bartolone, Vice President and General Manager for the International Group within Wolters Kluwer Legal & Regulatory U.S. “The new features for the Arbitrator Tool within KAPP will expand its capabilities to provide a full workflow solution for arbitration practitioners, empowering our customers to confidently advise their clients and drive to the best possible outcomes during the arbitral process.”

 

“In today’s world, access to objective, data-driven information is ever more critical for transparency and understanding, yet it often remains a challenge to obtain such reliable data,” said Jan K. Schäfer, an arbitrator and Partner at King & Spalding, Frankfurt, head of dispute resolution in Germany. “The different tools developed by Wolters Kluwer are a timely and welcome contribution to enhance transparency in the field of international arbitration, allowing easy access to information that will help users make informed choices.”

 

The new enhancements, combined with the Arbitrator Tool’s existing functionalities – such as linking an arbitrator with related publications and awards – will give a comprehensive assessment of an arbitrator to match the merits of a particular case and discover potential conflicts of interest. In addition, the data provided on each arbitrator will support the credibility of self-reported information, such as experience with arbitral institutes and their rules, sector, applicable laws, or language.

To learn more, visit: https://www.wolterskluwer.com/en/solutions/kluwerarbitration/practiceplus

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Navigating the Sea Change in Law Firm Finance and Ownership in the U.S.

Kluwer Arbitration Blog - Thu, 2021-11-18 00:22

For years, Australia and the U.K. have been the pioneering jurisdictions regarding ownership of law firms. Now, there’s a new kid on the block.  Recent developments in a few U.S. states, predominantly Arizona, and a new approach by the American Bar Association (ABA) signal a broad reexamination of the long-entrenched prohibition on non-lawyer participation (ownership and management) in law firms. Regulation of American lawyers and law firms takes place at the state level, with regulatory innovations in one state often inspiring others. It is unsurprising, therefore, that other states are already following Arizona and actively considering making similar changes. If the precedent of the global rise of third-party funding is any guide, the changes in the U.S. will likely lead to an acceleration of non-lawyer participation in the practice of law globally.  This post surveys and analyzes the recent changes in the U.S., identifies some of their likely effects on international arbitration, and concludes with a call for action to the international arbitration community and, in particular, arbitral institutions.

The prohibition on non-lawyer participation in the practice of law has long been the rule in every U.S. state, typically under each state’s version of ABA Model Rule 5.4 of their Rules of Professional Conduct, which includes a prohibition on fee-sharing and joint law firm ownership between lawyers and non-lawyers. The District of Columbia, however, is not (yet) a state, and for decades, the sole exception to the fee-sharing prohibition in the U.S. has been Rule 5.4(b) of the D.C. Rules of Professional Conduct, which allows partial, limited non-lawyer ownership of law firms.  In the 1980s, D.C. adopted this exception to Rule 5.4’s general prohibition on fee-sharing with non-lawyers to allow law firms to recruit former government employees, lobbyists, politicians, and other non-lawyers by offering them lucrative ownership positions in law firms, rather than employee positions.  Although there have been a few notable instances of non-lawyer owners of D.C. firms, there has never been large-scale, non-lawyer ownership of law firms in D.C.  Instead, other states have led the changing conversation regarding how law firms are owned, lawyer fees are shared, and legal services are funded.

New York provides a recent example of a state reinforcing, and then rethinking, its Rule 5.4 prohibitions. The proliferation of portfolio funding—the funding of pools of cases with funding being provided directly to law firms rather than to clients—garnered the attention of the New York City Bar Association (NYCBA).  The practice raised questions concerning compliance with Rule 5.4 of New York (State) Rules of Professional Conduct, which prohibits fee-sharing between lawyers and non-lawyers. In July 2018, the NYCBA reaffirmed in Formal Opinion 2018-5 that “a lawyer [who] enter[s] into a financing agreement with a litigation funder, a non-lawyer, under which the lawyer’s future payments to the funder are contingent on the lawyer’s receipt of legal fees or on the amount of legal fees received in one or more specific matters” violates Rule 5.4’s prohibition on fee-sharing with non-lawyers.

After issuing this opinion, the NYCBA was pressured to rethink and revise its guidance since many New York law firms, including several prominent ones, were already engaged in the practice of portfolio litigation funding. In response, the NYCBA created a Working Group to revisit its position. In 2020, the Working Group issued its final report which reiterated its understanding regarding the existing state of the law but went a step further to conclude that “lawyers and the clients they serve would benefit if lawyers have less restricted access to funding.” Due to the controversial nature of the emerging practice and its implications to law firms and lawyers, especially among different factions of the New York legal profession, no consensus was achieved on a concrete proposal for a change of the rules. Instead, the Working Group offered two alternative proposals for reform without endorsing either one. Both proposals relied heavily on disclosure of the funding to the clients as the main regulatory mechanism but differed on whether client consent should be required. To date, the debate in New York remains just that—a debate; the law in New York has not (yet) changed.

On the other end of the spectrum, Arizona has emerged as the vanguard state. In January 2021, Arizona eliminated its traditional Rule 5.4 prohibition on non-lawyers sharing in lawyers’ fees. Instead, Arizona now allows non-lawyers to hold an economic interest in a law firm through an Alternative Business Structure (ABS), and to participate in the management of a law firm.  Specifically, Arizona implemented significantly looser restrictions on who can legally own a law firm (pretty much anyone) and how much ownership they can have (a majority) as well as a framework for licensing, regulation, and sanctions for misconduct of ABSs under the auspices of the Arizona Supreme Court.  Interestingly, however, Arizona has rejected the notion that disclosure is the sole, or even main, component of the proper regulation of non-lawyer participation in law firms. Instead, Arizona opted to apply the main pillars of its legal ethics regulations to the non-lawyer participants and to add new ethical requirements to ABSs. ABSs and their non-lawyer owners and managers are all subject to the core ethics requirements that apply to lawyers, such as avoiding conflicts of interest, guarding their independent judgment, and upholding their commitments as officers of the courts.

Still, Arizona is not the only U.S. jurisdiction to consider jettisoning Rule 5.4.  Utah currently has a “regulatory sandbox” in which experimentation in the same vein as the Arizona regime is conducted to determine whether to make a permanent regulatory change.  California, Florida, and Illinois are considering similar liberalization of their legal professions.  And, in a stunning reversal, on September 8, 2021, more than 35 years after the ABA had recommended to states the adoption of the original prohibitive Rule 5.4, the ABA’s Standing Committee on Ethics and Professional Responsibility published Formal Opinion 499 titled “Passive Investment in Alternative Business Structures” stating that a lawyer may passively invest (but not actively practice) in a licensed ABS—in Arizona or D.C., for example—even if that lawyer is admitted to practice in a jurisdiction that does not allow ABSs (i.e., the other 48 states).

The further growth and acceptance of non-lawyer ownership and management of law firms around the world will have broad implications in international arbitration for individual counsel, law firms, tribunals, and arbitral institutions. For example, international arbitration lawyers practicing in a law firm with a U.S. presence may now face increased conflicts and interference with their independent professional judgment due to the presence of non-lawyer investors and managers. Lawyers who passively invest in ABSs may create new conflicts requiring disclosure. The trend toward spinning off international arbitration practices in large firms into independent boutiques will likely accelerate as the investment proposition becomes ‘invest in a law firm’ rather than ‘invest in a lawsuit.’ The increased conflicts and ethical challenges will likely play out in individual cases forcing tribunals, and consequently arbitral institutions, to develop doctrines and rules to address the new landscape.

Principally, arbitral institutions will be pushed to rethink the disclosure-based approach they have taken in response to the rise of litigation funding, even though disclosure has only recently become the norm.  Arizona has demonstrated a regulatory structure in which disclosure of the funder’s identity is assumed and the emphasis is instead placed on the ethics of lawyers and their investors. Arizona’s approach reflects an acknowledgment of and concern for the possible erosion of the traditional characteristics of the fiduciary attorney-client relationship as lawyers and ABSs become “servants of two masters” —clients and investors—whose interests will not always align.

Certainly, not all (or even most) law firms in the common law world will choose the ABS route, but international arbitration boutiques may embrace the innovation at higher rates than other legal services businesses. And investors may instinctively resist the regulation of non-lawyer participation at the transnational level, but many jurisdictions are already suspicious of the ABS model—especially absent robust regulation. The international arbitration community should carefully examine the effects of the likely acceleration of non-lawyer participation given the already varying reactions of different jurisdictions as the ABS model steadily gains traction around the world.  Disclosure requirements in international arbitration rules and tribunal procedural orders likely will not sufficiently address the conflicts of interest scenarios and public policy questions raised by direct non-lawyer participation. Institutions and tribunals should model prioritizing clients’ interests above investors’ profit-maximization, ensuring the autonomy and independence of lawyers’ professional judgment, avoiding arbitrator conflicts of interest, and maintaining the integrity of the international dispute resolution system as a whole.

Victoria Shannon Sahani is the Associate Dean of Special Projects and Professor of Law at Arizona State University Sandra Day O’Connor College of Law. She can be reached at [email protected]

Maya Steinitz is the Charles E. Floete Distinguished Professor of Law University of Iowa College of Law and an arbitrator. She can be reached at [email protected]

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Paris Arbitration Week: Non-Monetary Relief in International Arbitration of M&A Disputes

Kluwer Arbitration Blog - Thu, 2021-11-18 00:01

This post is a non-exhaustive summary of a hybrid conference organised during the Paris Arbitration Week 2021 by Jeantet. The panel discussed international arbitration of M&A Disputes, and in particular the types of non-monetary relief which parties to such transactions may seek. The panel, moderated by Dr. Ioana Knoll-Tudor (Jeantet, partner), was composed of Francois de Verdière (The Goodyear Tire & Rubber Company, Associate General Counsel), Beata Gessel-Kalinowska vel Kalisz (GESSEL Attorneys at Law, Founder and Senior Partner), Edward Poulton (Baker & McKenzie LLP, Managing Partner), Sverker Bonde (Delphi, Partner), and Dr. Ali Baydoun (Jeantet, Counsel).

 

General Causes of Disputes in the M&A Sector

Mr. de Verdière’s comments laid the background to the discussion by describing in general terms the causes of disputes in M&A. Disputes are usually triggered when (1) the terms of the deal are ambiguously drafted, (2) the purchasing company conducted insufficient due diligence (DD) into the target company, leading to failed expectations, or (3) extraordinary situations arise. One example of the latter is Covid-19, during which time there has been a lot of focus on pre-closing undertakings and selected provisions such as financing conditions, force majeure, frustration of purpose, or impossibility to perform. While such clauses were usually ‘boilerplate’ provisions to which not a lot of consideration was given in the past, recently they received a lot of attention from practitioners. In Mr. de Verdière’s experience, parties were able in most cases to resolve their differences out of court, as long as there was a clear understanding of the value of the target company and of the content of the Share Purchase Agreement (SPA). In those cases, however, where parties have not managed to resolve amicably their differences and turned to arbitration, they sought monetary or non-monetary relief.

 

Circumstances in Which a Party to an M&A Deal Finds it Necessary to Seek Non-Monetary Relief

Mr. Baydoun went through the anatomy of an M&A deal to speak about the situations in which parties may want to seek non-monetary relief (as opposed to monetary compensation), elaborating on the type of clauses and obligations that are particularly susceptible to generating such disputes.

Such clauses and obligations may be divided depending on moment of the transaction when they are due.

 

Prior to the signing of a binding agreement, the main issue which arises is the sudden termination of commercial negotiations once some, but not all, of the aspects of the deal were agreed upon. In such scenarios, a potential buyer would perhaps like to obtain an order obliging the seller to go through with the signing. The chances of success of such a claim, in France at least, are almost nil based on existing case law to date.

 

Once the Share Purchase Agreement (SPA) is signed, there are two types of obligations which are of interest:

(1) The primary obligations are linked to the main object of the agreement, namely the obligation to transfer the shares and the corresponding duty to pay the purchase price. In this period between signing and closing, non-monetary relief seems to fit well the commercial needs of the parties: should a seller refuse to go through with the sale (maybe because it received a better price in the meantime), the best remedy for the buyer would be to seek an order obliging the seller to go through with the transaction, rather than obtain monetary damages.

(2) Ancillary obligations relate to confidentiality, non-compete, non-solicitation or non-poaching duties. Again, monetary damages are of little value when a party is breaching its confidentiality obligations and the main concern of the aggrieved party is to protect its business secrets; in such a case a cease and desist order forcing the breaching party to cease the breach (e.g. from spilling corporate secrets in connection with a confidentiality obligation) will better protect the commercial interests of an entity wishing to safeguard its competitive advantage than money will do.

(3) A distinct type of obligation is the management in the ordinary course of business of the target company. Here, in case of breach, ordering specific performance (SP) would be complicated because the period between signing and closing is usually very short and the target company is not part to the agreement. De Verdière confirmed that from an in-house perspective management of the target company prior to closing is probably the most complex aspect, as there are commercial interests to close the transaction as soon as possible and to preserve the value of the target company.

 

Types of Non-Monetary Relief Available to the Parties to an International M&A Arbitration

Mr. Poulton went on to present the types of relief available to the parties. He noted that arbitral tribunals will have similar powers to grant remedies as are available to the courts, with the caveat that much will naturally depend on the seat of the arbitration and the substantive law applicable to the contract. Within the discretionary power of the arbitrators, the principal remedies which are usually granted are: specific performance, prohibitory injunctions, restitution, declaratory relief, rectification.

 

Specific Performance

Further, Mr. Poulton underlined that SP can occur in the form of specific performance of an obligation to make a payment (to be distinguished from compensation/damages) or a specific obligation either to do or refrain from doing certain things. In practice, it is not unusual for parties to seek this remedy, since it is the purest form of remedy and makes the defaulting party do exactly what it said it would do!

This is very much the case in M&A transactions: if the commitment is to buy/sell shares for a particular price, then an order requiring the defaulting party to take the shares/make payment, or accept payment/transfer the shares, is the most straightforward way of ensuring the right remedy is provided.  On the other hand, damages, while offering some relief/compensation, will never quite replace the original performance. This is explained by the unique features of the assets transferred: shares in a distinct company with certain assets such as brand, know-how, and employees which may not be acquired somewhere else on the market. Therefore, SP as a remedy becomes attractive.

That being said, obtaining an award for SP and successfully enforcing it may be an entirely different story altogether. Certain hurdles exist in practice which may make SP or enforcement thereof difficult:

  • A first layer of complexity is given by the cross-border nature of the M&A transaction and the impact on enforceability. If the target company is located in a different jurisdiction than the parties, assets, directors or employees, enforcement of the award may be challenging. Needless to say, arbitral tribunals tend to be wary of issuing awards difficult to enforce because the enforceability statistics ultimately reflects on their image and re-appointment prospects. One could however argue that from a philosophical standpoint, such concerns should be trumped by their duty to give the remedy most appropriate.
  • Another barrier to SP is a significant change in position, in cases where SP ceases to be a feasible remedy. This arises, for example, if a company to be sold divested itself of a chunk of its business, and it becomes impossible to reconstitute such that even if SP is granted, it would not be the same performance. In such situations, one solution would be to seek (in addition to SP) monetary compensation in the form of damages for the carve-out.
  • Barriers to SP outside the parties’ control – a third obstacle concerns situations in which the transfer of shares is subject to prior authorisations from regulatory bodies, such as competition clearances for instance, or where the object of the transfer are shares in regulated financial institutions.

 

Declaratory Relief

Another type of non-monetary relief is declaratory relief (DR). In practice, DR may be sought either alongside another coercive measure (such as an order to pay), or by itself.

Mrs. Gessel conducted a review of all ICC M&A arbitration awards rendered in English in the period between 2010 and 2012. Her conclusions were that in 13 out of the 79 M&A awards (slightly over 10%) declaratory relief was sought by the claimants. While this is not a particularly large number, the figure is not insignificant either as it tends to show that the remedy can be useful in practice. In terms of the situations in which this declaratory relief was sought, most prevalent were cases in which the disputed issues referred to declaration of price adjustment, put-call options, validity of the expert opinion and third-party claims against the target company for breach of representations and warranties.

The parties may want to seek DR in two types of scenarios:

  • The first is illustrated by the Aramco Arbitration having as its parties Aramco, a British oil company, and Saudi Arabia. In the SPA, the two parties authorised the arbitral tribunal to only grant DR, because they did not want to jeopardise their long-standing business relationship by granting the tribunal the right to grant monetary relief. The case showcases the commercial function of such a declaration, which is its capacity to be an instrument in the furtherance of mediation and negotiations, which can safeguard the parties’ commercial relationship.
  • The second scenario in which DR is particularly useful is where at the time of the breach of contract or covenant, damage had not been incurred, but is anticipated to materialise in the future. Arbitral tribunals can rely on this tool therefore where the damage cannot be evaluated at the time the tribunal is asked to rule on the disputed issue.

 

The conditions for granting DR vary depending on the legal tradition of the courts in which such a declaration is sought. In Germanic traditions, on the one hand, the conditions are defined with a certain degree of precision. A legal interest must be ascertained, which require certain pre-requisites that the applicant must show:

  • The nature of its interest is legal – not factual
  • There is a controversy (real dispute) which gives rise to uncertainty
  • The uncertainty relates to the legal relationship of the parties
  • The uncertainty is no longer acceptable to the parties
  • A declaration, if granted, will finally settle the dispute
  • Finally, a declaration will only be granted if there is no other alternative by which the applicant may achieve its goal, ie monetary damages are inadequate.

In England, on the other hand, the two conditions which crystallised from case-law are formulated in a much more general way, requiring only that the declaration (1) will achieve a useful purpose and that (2) it is just.

As it happens with a multitude of other issues, international arbitration bridges the divide between the common law and the civil law worlds and sees arbitrators taking a middle-way approach, called converged interest – on which, see here.

 

Recommendations for Creating Synergies Between M&A and Arbitration Teams

Finally, the speakers gave some recommendations that would help disputes lawyers work better with M&A transactional teams in order to avoid disputes or mitigate risk for the clients:

  • From a drafting perspective, Bonde advised M&A lawyers to make as many obligations of the seller as possible occur prior to closing (such as conditions precedent, closing deliveries etc). Additionally, often contracts expressly stipulate that the ‘only’ remedy for certain breaches are monetary damages. This should change, when reviewing the draft contracts, lawyers should ensure that SP or DR are not excluded. Finally, attaching monetary-relief provisions such as liquidated damages or penalties to clauses where SP or DR are sought (such as non-compete, non-solicitation clauses) will always enhance the deterrence effect and make such clauses more powerful.
  • Another drafting advice came from Mrs. Gessel, who noted that multi-contract disputes related to M&A transactions are on the increase. To ensure that all claims are heard in one-go and avoid the danger of parallel and potentially inconsistent findings, she advises M&A lawyers to (i) ensure that the same arbitration clause is included in all contracts related to the deal, and to (ii) explicitly provide for the possibility that all claims under the different contracts be brought in one single arbitration procedure.
  • Finally, both Poulton and Mr. de Verdière emphasized the fact that the dispute and transactional teams must understand the context of their respective work and set up communication channels throughout the deal. The anecdotal 1 am deal-closings are actually a reality, leaving little time for thoughtful consideration of some provisions. Disputes lawyers should therefore show understanding and do not expect perfection, while transactional lawyers should seek a second pair of eyes from disputes lawyers. Such an approach would enhance synergies between transactional and disputes teams, would result in better drafted clauses, fewer disputes and happier clients.
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Arbitration Training Institute and Arbitration Practice Program – June 1-3, 2022

ADR Prof Blog - Wed, 2021-11-17 15:23
From Harrie Samaras: The ABA Section of Dispute Resolution will hold its 15th Annual Arbitration Training Institute and Inaugural Arbitration Practice Program on June 1-3, 2022. It will in person at Loyola University Chicago School of Law. This two-day comprehensive training in advanced arbitration skills will be presented by nationally recognized experts. It will feature … Continue reading Arbitration Training Institute and Arbitration Practice Program – June 1-3, 2022 →

Is the End of Nationality Planning Nigh? Key Parallels between Double Taxation Treaties and IIAs

Kluwer Arbitration Blog - Wed, 2021-11-17 00:10

The two worlds are not that apart. In March 2021, UNCTAD released a report which addresses the potential implications of International Investment Agreements (IIAs) for tax-related measures. According to UNCTAD, both the IIAs regime and double taxation treaties (DTTs) address similar challenges, eg. indirect ownership, mailbox companies and time-sensitive restructuring. The report emphasizes that some tax policy measures may “provide insight for harmonizing the treatment of indirect ownership and for reducing the potential for treaty shopping in both tax and investment policy making”.

In parallel, the OECD published a series of measures designed to prevent aggressive tax planning (BEPS project). Some of the measures are to be implemented in double taxation treaties (DTTs) and consequently, 96 jurisdictions have signed a Multilateral Convention (MLI) to modify more than 1,200 DTTs. The MLI includes inter alia the “Principal Purpose Test” (PPT rule), a new general anti-abuse rule designed to defeat treaty shopping. The PPT rule is the single best example, which illustrates the potential of DTTs to impact the IIA regime.

This post aims to assess whether this new clause in the existing DTTs may impose restrictions on nationality planning in the area of IIAs. To that end, it starts by outlining the key elements which distinguish DDTs from IIAs. It then addresses the issue of treaty abuse in the field of international taxation with a focus on the PPT rule. It concludes by assessing to what extent this new anti-abuse clause in DTTs may restrict nationality planning under IIAs.

 

How DTTs Operate

The vast majority of DTTs are bilateral in nature. One of their main purposes is to foster the development of economic relations between the contracting States by eliminating double taxation which may arise among them when each contracting State applies its domestic tax law. DTTs eliminate double taxation by allocating taxing rights among the concerned States and by employing credit mechanisms.

 

 

At this stage, it is important to emphasize two differences with regard to how IIAs and DDTs operate:

  • In principle, DTTs alleviate double taxation resulting mostly from the direct ownership of an investment. Whereas in the area of IIAs, indirect investments are also protected.

 

  • Under DDTs, the jurisdictional link between the Home State and the Investor is rooted in the concept of tax residence. While in the framework of IIAs, this link is established by nationality.

 

Treaty Shopping in International Taxation

In the field of DTTs, treaty shopping can be defined as circumstances where a person who is a resident of a third State acts through a legal entity located in a contracting State to obtain treaty benefits which would not be available directly. It is regarded as inappropriate, because it results in DTT benefits being in effect extended in a way unintended by the parties to the treaty.

Similarly to IIAs, DTTs include various types of clauses which aim at preventing treaty shopping. One of these clauses is especially pertinent, because it will seem familiar to every investment treaty law practitioner or scholar – the PPT rule.

 

The Principal Purpose Test Rule

The PPT rule focuses on the reasons why a specific arrangement is implemented. Regarding ownership structures, it provides essentially that a holding company will not be in a position to claim the application of a DTT if one of the principal purposes of setting up or maintaining this entity is to obtain such benefits:

“Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement” (Art. 29(9) of the 2017 OECD Model Tax Convention on Income and on Capital).

According to the OECD MC Commentary, “principal purposes” would often mean the availability of qualified human resources in the State of residence of the direct owner to carry out investment activities and in any event coherence with a business model. Absent such reasons and/or business rationale, the tax authorities of the host State could reasonably conclude that one of the principal purposes of setting up or maintaining a holding vehicle was for this entity to be entitled to rely on a DTT to reduce the host State’s taxing rights.

In some circumstances, the PPT rule thus may in its effect resemble “substantive link” requirements attached to the definition of Investor in IIAs (eg., “substantial business activities”, “real economic activities”, “effective economic activities”).

The following example illustrates when a holding vehicle may rely on the network of DTTs of its State of residence:1)OECD MC Commentary, Art. 29, para. 182, example K. jQuery('#footnote_plugin_tooltip_39348_48_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39348_48_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); a Fund located in Terraria decides to set up an entity (RCO) in Ruritania to own and manage investments located in a regional grouping countries Ruritania is a member of. The decision to establish RCO in Ruritania is mainly driven by the availability of directors with knowledge of regional business practices and regulations, the existence of a skilled multilingual workforce, Ruritania’s membership in the regional grouping and its extensive DTT network. RCO employs an experienced local management team to review recommendations from the Fund to perform other functions including maintaining RCO’s books, and ensuring regulatory compliance in states where it invests. The board of directors of RCO is appointed by the Fund and comprises Ruritania’s residents with expertise in investment management, as well as members of the Fund’s global management. RCO now contemplates investing in SCO, a company resident of Sedonia. Under Sedonia’s tax law, dividends paid by SCO are subject to a 30% withholding tax. Under the DTT S-R, this tax could be reduced to 5% whereas on the basis of the DTT S-T, the residual rate would be 10%:

Here, the reasons for establishing RCO in Ruritania as well as its investment functions support the fact that claiming the benefits of the DTT S-R was not the principal purpose of the decision to invest in SCO. Hence, the benefit of DTT S-R should not be denied under the PPT rule.

 

Anticipated Impact of the PPT Rule on How Investors Structure Their Investments

The introduction of the PPT rule simplifies ownership structures, whereby tax haven jurisdictions are likely to lose in attractiveness. This conclusion is supported by the following:

  • Taxes levied in host States on investment proceeds (dividends, capital gains) can generally be alleviated only by using a DTT concluded with the State of residence of the direct owner of the investment.

 

  • Where the direct owner (investor) is a corporate vehicle, host States would likely apply the benefits of DTTs, if the investor in its State of residence maintains the resources required to carry out its activities and/or that routing of the investment through this entity is justified by sound business reasons.

 

  • Investment hubs with a large network of DTTs (and IIAs) often also subject dividends from local entities to withholding taxes which can be avoided only by use of DTTs. Hence, a long chain of ownership could end up being quite costly if at each level the local tax authorities would scrutinize if the investor maintains an appropriate level of economic substance in its State of residence.

 

  • Host States and onshore investment hubs generally do not conclude DTTs with tax havens. Routing investments through tax havens may thus result in significant tax leakage.

 

What is Left for Nationality Planning?

Experience shows that tax issues are always looked at in great details when designing or revisiting ownership structures. Therefore, new anti-abuse requirements resulting from the PPT rule will inevitably impact how investors own assets. And as mentioned, these new provisions will simplify structures, whereby greater attention needs to be paid to economic substance and business rationale.

Quite logically, the more limited the number of entities in an ownership structure, the less room for nationality planning from the perspective of IIAs. Hence while the PPT rule may not bring nationality planning in the area of IIAs to an end, it will certainly reduce its scope. And that will happen even absent corresponding provisions in IIAs.

Interestingly, substance requirements resulting from the PPT rule may also strengthen the position of potential Claimants when claiming their qualification as “investor” and the concept of “contribution” (eg. OI European Group v. Venezuela, paras. 239-242).

More fundamentally, this also illustrates the interactions between international tax and investment law and how policy developments in both areas can impact each other despite each regime having its specific reform priorities. This also emphasizes the increasing need for a dialogue between tax and investment communities, both on the side of policy makers and of investors as well as their advisors.

More than ever, investment structuring ought to be addressed in a holistic fashion and timely manner!

 

References[+]

References ↑1 OECD MC Commentary, Art. 29, para. 182, example K. function footnote_expand_reference_container_39348_48() { jQuery('#footnote_references_container_39348_48').show(); jQuery('#footnote_reference_container_collapse_button_39348_48').text('−'); } function footnote_collapse_reference_container_39348_48() { jQuery('#footnote_references_container_39348_48').hide(); jQuery('#footnote_reference_container_collapse_button_39348_48').text('+'); } function footnote_expand_collapse_reference_container_39348_48() { if (jQuery('#footnote_references_container_39348_48').is(':hidden')) { footnote_expand_reference_container_39348_48(); } else { footnote_collapse_reference_container_39348_48(); } } function footnote_moveToReference_39348_48(p_str_TargetID) { footnote_expand_reference_container_39348_48(); 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_39348_48(p_str_TargetID) { footnote_expand_reference_container_39348_48(); 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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New National Mediation Bill in India

ADR Prof Blog - Tue, 2021-11-16 13:12
There has been an ongoing effort in India for at least the past 5 years to try and introduce a national mediation bill in Parliament.  It now appears these efforts are finally bearing fruit. The Ministry of Law and Justice recently released a first-ever draft mediation bill, and there is talk that Parliament could take … Continue reading New National Mediation Bill in India →

Exercising Jurisdiction in Spite of an Arbitration Clause: UAE Courts’ Practice

Kluwer Arbitration Blog - Tue, 2021-11-16 00:47

The United Arab Emirates (“UAE”) has taken strides in increasingly accepting arbitration as the parties’ chosen dispute resolution mechanism. It is now well established that UAE courts would respect the parties’ agreement on arbitration and uphold valid arbitration clauses. In fact, Article 8(1) of the Federal Law on Arbitration, No. 6 (2018) (“UAE Arbitration Law”) requires the court to dismiss a claim brought before it when the parties have concluded an arbitration agreement and the defendant invokes the arbitration agreement prior to raising any substantive claim or defense.

In spite of all the progress made, UAE courts still disregard the parties’ choice of arbitration in one specific scenario: they appear to exercise jurisdiction over a defendant who has a valid arbitration agreement with a claimant when court proceedings are filed against a number of defendants, which include one or more parties that are not part of the arbitration agreement. The Blog recently published a post focused on a recent case arising from such practice, Dubai Court of Cassation No. 209/2021 (dated 21 April 2021). This post will examine a different case where the same practice was implemented by the Dubai Courts and highlight the prevalence of this practice by referencing other similar cases.

 

Case Summary

In a recent case brought before the Dubai Courts, a developer (“Developer”) had concluded a consultancy agreement (“Agreement”) with an engineering consultancy firm (“Engineer”) which contained an arbitration clause. The project subject matter of the Agreement was a hotel. Few years after the completion of the hotel, a fire erupted causing huge losses to the Developer. The latter’s losses were paid by its insurer (“Insurer”), who filed proceedings to recuperate the amounts paid to the Developer.

The Insurer filed proceedings against the three engineers and the three contractors who were involved in the initial construction of the building and in further works to the building. In total, there were six main defendants (there were a number of joined parties as well) and the claim amount exceeded AED one billion.

The Engineer invoked the arbitration clause in the Agreement and challenged the court’s jurisdiction on the argument that the arbitration clause is binding upon the Insurer.1)This argument is based on the assignment of right from the Developer to the Insurer, which would lead to the assignment of the arbitration clause. jQuery('#footnote_plugin_tooltip_39265_51_1').tooltip({ tip: '#footnote_plugin_tooltip_text_39265_51_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Some of the other defendants invoked the arbitration clauses in their contracts with the Developer as well. The Court of First Instance (“CFI”) issued a preliminary decision rejecting the plea to dismiss the case on the basis of the arbitration clauses. The CFI concluded that the arbitration clause in the Agreement is invalid.2)It was held invalid because of the doubt around the signatory’s powers to bind the Developer to arbitration. jQuery('#footnote_plugin_tooltip_39265_51_2').tooltip({ tip: '#footnote_plugin_tooltip_text_39265_51_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It then explained that there was no need to examine the arbitration defenses raised by the other defendants as the existence of arbitration clauses in their contracts do not prevent the Dubai Courts from hearing the case as a whole vis-à-vis all the defendants.

While the Engineer appealed the decision of the CFI to the Court of Appeal (“COA”), the other parties did not do so. The COA upheld the decision of the CFI explaining that when proceedings are filed against more than one party to hold them jointly liable in a dispute that may not be divided, the courts would have jurisdiction in the circumstance where only some of the parties have concluded arbitration agreements while the others have not.

Thereafter, the Engineer challenged the decision of the COA before the Court of Cassation (“COC”) on the basis that the Insurer filed the proceedings against the Engineer and the other defendants on different legal grounds and that the proceedings contain claims which are based on separate contractual relations. Therefore, the proceedings can be divided. The COC dismissed the challenge and upheld the decision of the COA. It adopted the same reasoning and added that the proceedings were filed on the basis of provisions in the Civil Transactions Law no. 5/1985 (“CTL”) which impose joint liability on contractors and the engineers.3)See Article 880 of the UAE Federal Civil Transactions Law. jQuery('#footnote_plugin_tooltip_39265_51_3').tooltip({ tip: '#footnote_plugin_tooltip_text_39265_51_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); It explained that the proceedings against the Engineer and the other defendants are premised on them designing, executing and supervising the works. As such, they are jointly liable for the compensation due. This renders the claims linked in a manner that requires that they all be heard by the same forum to ensure the proper administration of justice. In this respect, the COC stated that the courts have “original jurisdiction” and that arbitration is the exception.4)This sentence reflects the courts’ view that courts are the default forum for hearing disputes and that as such arbitration is a deviation from that route. jQuery('#footnote_plugin_tooltip_39265_51_4').tooltip({ tip: '#footnote_plugin_tooltip_text_39265_51_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Consequently, the court determined, in Dubai Court of Cassation No. 1270/2020 (Commercial) that it has jurisdiction over the entire dispute.

 

Similar Decisions

The reasoning adopted in the above decisions is very common. In Dubai Court of Cassation No. 1112/2018 (Commercial), the court explained that arbitration is an exceptional route. Hence, when a case is filed against a number of defendants and some of them are not bound by an arbitration clause, the proper administration of justice requires that the proceedings not be divided and the dispute should be heard by the court, which has the “original” jurisdiction.

The same logic appears in Dubai Court of Cassation No. 153/2019 (Commercial) where the court nullified an award on the basis that it was issued against a number of defendants, of which only one had signed the arbitration clause. Although the award creditor argued that partial nullification could have been granted, i.e. nullifying the award against the non-signatories, the court nullified the entire award.

These court decisions collectively show that the Courts will not exercise jurisdiction over a defendant who has concluded an arbitration agreement even where other defendants  have not concluded an arbitration agreement in one instance: when it becomes clear to the courts that the defendant who has not concluded the arbitration agreement does not have capacity in the proceedings. In other words, that defendant should not have been a party to the proceedings in the first place. (See Dubai Court of Cassation No. 300/2019 (Real Estate)).

 

Analysis

The Dubai courts’ approach raises concerns. Some decisions mention that the proper administration of justice necessitates the dispute not to be divided. Other decisions state that the case cannot be divided. Either way, the courts do not provide an explanation as to why a certain dispute cannot be divided or why the proper administration of justice requires that the dispute not be divided. The only common thread is that this scenario usually arises in construction disputes where several parties have participated in the project and the relationships are memorialized in several disparate contracts that are not mutually consistent.

The fact that the Dubai Court of Cassation explained in Case No. 1270/2020 (Commercial) that the reason for not dividing the case is the joint liability of the parties based on provisions of the CTL does not provide much consolation for a variety of reasons:

  • First, this is a rare occasion where the court has relied on a specific provision of the law to justify its decision. In all other decisions, general statements are made about the need not to divide the dispute or the need for proper administration of justice.
  • Second, in relying on the provisions of the CTL, the court did not verify whether these provisions were indeed relevant. It accepted at face value the Insurer’s assertions that these provisions are applicable.
  • Third, in many such disputes, it will be possible to apportion liability if detailed examination of the facts takes place but the courts seem to be trying to avoid such exercise.

Moreover, this approach is a violation of Article 8(1) and a violation of the freedom of contract principle. The UAE legal system upholds the principle that a contract is the law of the parties. As a result, whatever agreement concluded by the parties cannot, in principle, be amended by the courts or by law. The law may only interfere with the agreement of the parties when there is a need to protect public interest.5)See Dubai Court of Cassation 142/2014 Civil, Dubai Court of Cassation 105/2011 and 106 /2011 (Real Estate). jQuery('#footnote_plugin_tooltip_39265_51_5').tooltip({ tip: '#footnote_plugin_tooltip_text_39265_51_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

The decisions reviewed in this post do not comply with this principle because interfering with the parties’ agreement can only be done through the law, i.e. legislation, and not through court decisions. Further, the public interest that is being protected is not clearly identified in the reviewed decisions. One could argue that the public interest is the proper administration of the law but this is not always expressly set out in the decisions. More importantly, the UAE courts should provide detailed reasoning when they decide to exercise jurisdiction over a party that has concluded an arbitration agreement and aim to avoid exercising jurisdiction over parties who have concluded valid arbitration clauses. This requires the courts to very closely examine the facts of the dispute rather than make general sweeping conclusions.

 

The author of this Blog post has been involved in the case discussed as party counsel.

References[+]

References ↑1 This argument is based on the assignment of right from the Developer to the Insurer, which would lead to the assignment of the arbitration clause. ↑2 It was held invalid because of the doubt around the signatory’s powers to bind the Developer to arbitration. ↑3 See Article 880 of the UAE Federal Civil Transactions Law. ↑4 This sentence reflects the courts’ view that courts are the default forum for hearing disputes and that as such arbitration is a deviation from that route. ↑5 See Dubai Court of Cassation 142/2014 Civil, Dubai Court of Cassation 105/2011 and 106 /2011 (Real Estate). function footnote_expand_reference_container_39265_51() { jQuery('#footnote_references_container_39265_51').show(); jQuery('#footnote_reference_container_collapse_button_39265_51').text('−'); } function footnote_collapse_reference_container_39265_51() { jQuery('#footnote_references_container_39265_51').hide(); jQuery('#footnote_reference_container_collapse_button_39265_51').text('+'); } function footnote_expand_collapse_reference_container_39265_51() { if (jQuery('#footnote_references_container_39265_51').is(':hidden')) { footnote_expand_reference_container_39265_51(); } else { footnote_collapse_reference_container_39265_51(); } } function footnote_moveToReference_39265_51(p_str_TargetID) { footnote_expand_reference_container_39265_51(); 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_39265_51(p_str_TargetID) { footnote_expand_reference_container_39265_51(); 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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Can’t Budge: The Curious Case of Kabab-Ji and the New York Convention

Kluwer Arbitration Blog - Mon, 2021-11-15 00:46

On 27 October 2021, the Supreme Court of the United Kingdom (the Court) issued a judgment in Kabab-Ji SAL v Kout Food Group [2021] UKSC 48. The Court upheld the earlier decision of the Court of Appeal finding that the law applicable to the arbitration agreement was the English choice of law for the whole agreement, and not the French law applicable as the law of the seat, despite arbitrators’ findings to the contrary.

 

Background of the Proceedings

The Court was asked to consider what law governs the validity of the arbitration agreement. The appeal was brought by Kabab-Ji asking the Court to overturn the Court of Appeal’s decision (discussed on the Blog here) and grant enforcement of an award. The earlier judgment of the Court of Appeal determined that English law governed the arbitration agreement making the award not enforceable against a non-signatory – Kout Food Group (KFG). The arbitral tribunal in the case unanimously agreed that French law, as the law of the seat, would apply to the arbitration agreement and bind KFG to pay the damages awarded.

It is not the first time English and French courts had to decide on the enforceability of the same award and questions of validity of the arbitration agreement. And they have again landed at diverging decisions. The award was upheld by the Paris Court of Appeal which dismissed the annulment action holding that under French law the arbitration agreement extended to KFG. That decision was appealed by KFG and is currently pending before the Court of Cassation. This left Kabab-Ji in a rather uncertain situation where the award was held valid in France, but not enforceable in England.

 

Choice-of-Law Rules under Article V(1)(a) of the New York Convention

Article V(1)(a) of the New York Convention sets out a two-limb choice-of-law rule for determining the law governing the arbitration agreement:

  1. The first limb, or the basic rule, provides that the validity of the arbitration agreement is determined pursuant to the “law to which the parties [have] subjected it” – the law chosen by the parties.
  2. The second limb, or the default rule, comes into play where no choice has been indicated and the applicable law is that of “the country where the award was made” – the law of the seat.

The Court evaluated both limbs noting that although “the conflict rule contained in article V(1)(a) New York Convention … has developed into a truly transnational conflict rule for the determination of the law governing the substantive validity of the arbitration agreement”, there is still a lack of uniformity, as demonstrated in the present case, which “makes no sense and results in … uncertainty”. Nevertheless, the Court shed some light on the application of the choice-of-law rules under Article V(1)(a).

 

The Basic Rule: Parties’ Choice of Law

Choice-of-Law for the Contract Extends to the Arbitration Agreement

The Court, recalling its ruling in Enka Insaat Ve Sanayi AS v OOO “Insurance Company Chubb” & Ors [2020] UKSC 38 (discussed on the Blog here and here) noted that “[w]here the law applicable to the arbitration agreement is not specified, a choice of governing law for the contract will generally apply to an arbitration agreement which forms part of the contract”.

In this case, the Franchise Development Agreement (FDA) contained a governing law clause which specified a choice of English law. The dispute resolution clause, at the same time, was silent on any other law to be applied to the arbitration agreement separately. On this basis, the Court noted that a general choice-of-law clause will usually be sufficient to satisfy the first limb of Article V(1)(a) of the New York Convention. The Court further noted that it “would be illogical if the law governing the validity of the arbitration agreement were to differ depending on whether the question is raised before or after an award has been made”. The key rationale behind this is to have consistency of interpretation of the arbitration agreement.

On the other hand, French commentators underline that such “forced” extension would not be possible because the parties may have not given a separate thought to the law applicable to the arbitration clause, and it would therefore be “going too far to interpret such clauses as containing an express choice of law governing the arbitration agreement”. This is in line with French judgments where the courts have not agreed that the choice-of-law of the whole contract should extend to the arbitration agreement. With this in mind, the Paris Court of Appeal’s decision to apply French law as the law of the seat of arbitration – under the default rule – has a valid reason.

UNIDROIT Principles and their Effect on the Arbitration Agreement

Kabab-Ji, to resist the application of English law, argued that reading the FDA as a whole does not indicate which law should apply to the validity of the arbitration agreement. Therefore, this is where the default rule (i.e. second limb) under Article V(1)(a) of the New York Convention comes into effect and French law becomes applicable. Kabab-Ji relied on Articles 1.7, 1.8, 2.1.1 and 2.1.18 of the UNIDROIT Principles of International Commercial Contracts (which both parties agreed to be referred to: “[t]he arbitrator(s) shall also apply principles of law generally recognised in international transactions”) to prove that KFG consented to becoming a party to the arbitration agreement through conduct and therefore no written consent was needed. Kabab-Ji argued that the parties were free to agree to the application of the UNIDROIT Principles under Article 21(1) of the ICC Rules (2012) which allows the parties to “agree upon the rules of law” to be applied by the arbitral tribunal “to the merits of the dispute”.

The Court, however, found that Kabab-Ji was wrong to assert that the UNIDROIT Principles could be considered “rules of law” or rules of a national system. The Court noted that the latter is a broader term and that UNIDROIT Principles cannot substitute national law. Furthermore, the Court noted that the case related to the issue of establishing the law which determines validity of the arbitration agreement, and not the merits of the dispute.

The Validation Principle and the Formation of the Arbitration Agreement

Where there is a serious risk that, if governed by the same law as the main contract, the arbitration agreement would be ineffective, it may be inferred that a choice of law to govern the contract does not extend to the arbitration agreement” – relying on the essence of the validation principle, Kabab-Ji argued that should English law apply, the arbitration agreement, allegedly entered between Kabab-Ji and KFG, would be invalid. However, the Court noted that the validation principle does not apply to the questions of “validity in the expanded sense in which that concept is used in article V(1)(a) of the Convention”. The very purpose of the validation principle is to determine validity of an existing arbitration agreement, and not to address matters of its formation and to “create an agreement which would not otherwise exist”.

 

The Default Rule: Law of the Seat

The second limb of the choice-of-law rule provides that in cases where parties have not agreed on the law applicable to the arbitration agreement, the law of the seat – as the parties’ implied choice of law – would apply by default under Article V(1)(a) of the New York Convention.

The Court, however, in its recent judgment, preferred the choice of law rule over the law of the seat rule. In contrast, the Paris Court of Appeal did the opposite and applied the default rule when deciding to uphold the award, though this was mandated by French law, and not the New York Convention. In holding so, the Paris Court of Appeal underlined the separability of the arbitration agreement, which is a long-established principle under French law, and its subsequent evaluation under the mandatory rules of French law.

In general, this default rule is a widely recognised approach also reflected in such major international instruments as the Inter-American Convention (Article 4), the European Convention (Article 58), UNCITRAL Model Law (Articles 34 and 36), and the Hague Convention (Article 9(a)). It is therefore a generally recognised default route for when the parties’ intentions on the law governing the arbitration agreement are unclear.

 

Concluding Remarks

The Court’s decision is another illustration after Enka v Chubb of how choice-of-law rules under Article V(1)(a) of the New York Convention may operate in practice. This does not however mean that this approach will be reflected uniformly across jurisdictions (at least not at the moment), and the Paris Court of Appeal’s decision is proof of that. Having observed the finale of Kabab-Ji’s English “story”, we shall now await the French Court of Cassation’s decision and observe what the finale of Kabab-Ji’s French “story” will be.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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Maryland Law Seeking Director of Restorative Approaches in Education Program

ADR Prof Blog - Sun, 2021-11-14 12:57
From FOI Deborah Eisenberg: The Center for Dispute Resolution at Maryland Carey Law is hiring a Director for our Restorative Approaches in Education Program. This is a 12-month academic staff (non-faculty) position. A description of the position is available at the link below. Director, Restorative Approaches in Education Program: https://umb.taleo.net/careersection/jobdetail.ftl?job=210001LX&lang=en I’d be happy to answer questions … Continue reading Maryland Law Seeking Director of Restorative Approaches in Education Program →

Arbitration In Dubai After Decree 34 of 2021: It Has Wings, But Will It Fly?

Kluwer Arbitration Blog - Sun, 2021-11-14 00:00

Dubai’s Decree 34 of 2021 (“Decree”) and its appended statute on DIAC (“Statute”) were promulgated on 14 September 2021. The Decree consolidates the local arbitration centres under a new-and-improved DIAC (“DIAC 2.0”), and notably abolishes the DIFC Arbitration Institute (“DIFC-LCIA”), marking the beginning of a new era for arbitration in Dubai.

From the outset, DIAC 2.0 will face challenges related to the transition. Whether the new arbitration regime improves the former landscape largely will be determined by the extent to which DIAC 2.0 adopts a forward-looking approach in interpreting the Decree, as well as its ability to mobilize stakeholders (i.e., the Dubai Courts and the DIFC Courts) to coordinate their actions.  This post will provide the background of the Decree, identify potential challenges under the Decree’s transitional provisions and their solutions, and analyze the new position of the DIFC Courts as Dubai’s default arbitration jurisdiction.

 

I. Landscaping Dubai’s arbitration terrain: Background story

The starting point for the Decree was in 2016, during Dr. Habib Al Mulla’s tenure as DIAC’s chair. Dr. Al Mulla’s vision for a single arbitration centre – one under the (mainland) Dubai brand, that would promote Dubai as an arbitration hub – was presented to the Dubai government.

Despite no action being taken at the time, the recommendation was revived by Dubai government authorities in the context of the recent comprehensive legal reforms (including notably the abolishment of limitations on foreign ownership of local companies under Federal Decree 26 of 2020 of 27 September 2020). In March 2021, Dr. Al Mulla was asked by the Dubai government to draft the original text of the Decree and Statute (“Proposal”). The Proposal is not public, and the reporting of its contents – which are not subject to any third-party proprietary rights – is based on Dr. Al Mulla’s account.

The Decree differs from the original Proposal in four main aspects. Firstly, the Proposal was to abolish all existing arbitration centres – including DIAC – and start with a clean slate. Instead of a one-step merger, the Decree opts for a two-step approach that includes an acquisition of the abolished centres, and a comprehensive restructuring resulting in DIAC 2.0. Secondly, the Proposal was to seat DIAC 2.0 in the DIFC, not in mainland Dubai. Thirdly, in contrast to the Decree’s immediate effect, the Proposal provided that all three arbitration centres would continue to operate under their current structure during the six-month transition period. Finally, the Proposal did not include an arbitration court.

Although, as discussed below, the Decree falls short of being optimal, it is a significant step forward for Dubai’s arbitration landscape and provides some comfort to non-Arabic speakers and common law practitioners that the spirit of the common law is strongly present – more than ever – under the new regime.

 

II. Challenges ahead: Upholding party autonomy while managing transition

The main focus of the Decree is upholding party autonomy. In that vein, it stipulates that arbitration agreements predating it remain valid, and that any proceedings that were underway when it was enacted may continue; only DIAC 2.0 would replace the abolished institutions in administering the arbitration.

The Decree expressly allows parties to amend their arbitration agreements, and agree to have their proceedings administered by an institution other than DIAC 2.0. In that case, tribunals may seek express consent from the parties – for example, in the terms of reference or a procedural order – regarding the modification of the arbitration institution to avoid any future concerns.

While the Decree attempts to validate the parties’ prior contractual agreements, a number of issues remain unclear. Here, DIAC 2.0, in coordination with mainland Dubai Courts and the offshore DIFC Courts – where appropriate – should step in to fill the gaps.

The first question will be the impact on the parties’ consent to arbitration. While it has been established in caselaw that the abolishment of an arbitration centre does not render the arbitration agreement inoperative in its essence (see for example SAS ADB v. Société Reo Inductive Components AG, Court of Appeal of Paris, 20 March 2012), disputes are expected as some parties may attempt to argue the invalidity of the arbitration agreement by calling into question their consent to arbitration. In addition, parties may disagree on how to proceed under the new regime; for example, with one party attempting to frustrate the arbitration by opposing administration by DIAC 2.0, but without selecting another institution.

Here, tribunals, the mainland Dubai Courts and the offshore DIFC Courts will play an important role in setting out the guidelines. It is particularly important to avoid conflicting judgments between the courts of Dubai. To that end, if – ahead of potential litigation – DIAC 2.0 succeeds in engaging the courts of Dubai in coordinating their views on jurisdiction regarding DIFC-LCIA arbitrations, such that the first judgments issued by each court reflect a unified front, this will provide assurance to anxious parties and discourage dilatory tactics.

Other issues require direct guidance from DIAC 2.0, such as the default arbitration rules. Although Article 6(b) provides that the rules of the abolished institutions continue to apply to ongoing arbitrations, Article 6(a) makes no provisions regarding institutional rules for future disputes. This raises the question of which rules – DIFC-LCIA or DIAC 2.0 – apply to future proceedings as a default.

In addition, for future arbitrations under Article 6 of the Decree, it is unclear whether the Rules of DIAC 2.0 would allow parties to provide for DIAC arbitration under the rules of another institution. Here, further guidance from DIAC 2.0 is needed.

Furthermore, parties with ongoing DIFC-LCIA arbitrations would have paid fees to the DIFC-LCIA Centre. Under Article 5 of the Decree, these fees have been transferred to DIAC 2.0 (see a prior post on the Blog for a discussion of transition challenges related to different fees in DIAC and LCIA, as well as other potential issues). The issue of party funds is a concern for both parties and tribunals.

Establishing a simple protocol in a timely manner would build DIAC 2.0’s credibility, and avoid any unnecessary issues, especially where the parties are in agreement on how to proceed. Drafting the protocol in consultation with the Dubai Courts and DIFC Courts will ensure that the protocol serves to guide, rather than to further confuse.

The protocol should describe the actions – if any ­– to be taken by the parties and tribunal. It is also important that information be provided on the process of obtaining parties’ consent for the transfer of funds previously held by the DIFC-LCIA to DIAC 2.0, to alternative institutions or to the parties and tribunal directly, as well as a timeline. For future arbitrations, the protocol should address whether a clause providing for DIAC arbitration under the rules of another institution would be valid.

 

III. Default Dubai seat: Vote of confidence for the DIFC Courts and the common law system

The Statute makes the seat the determinative factor for court jurisdiction over the supervision of arbitration proceedings, as well as the execution and annulment of arbitral awards. It thus clarifies the delimitation regarding arbitration seats between the two different jurisdictions in Dubai: mainland Dubai and the DIFC.

Article 4 of the Statute stipulates that, when the arbitration agreement provides for arbitration in Dubai, the applicable law would be Federal Decree 6 of 2018 (the UAE arbitration law), and the Dubai Courts (mainland) would have jurisdiction over the arbitration. Likewise, when the arbitration agreement provides for arbitration in the DIFC, the DIFC arbitration law of 2008 would apply, and the offshore DIFC Courts would have jurisdiction over the arbitration. As for instances where parties fail to specify a seat in their arbitration agreement, the DIFC would be the default seat, and the DIFC arbitration law would apply.

The above provisions are adopted from the 2017 draft DIAC Rules. However, by including them in the Decree, the Dubai legislator endowed them with the force of law, which they would not have as DIAC-made rules. In light of this, it is expected that going forward, the Joint Tribunal (“JT”) will update its position and shift the weight from the choice of institution (see for example Cassation No. 1/2018 (JT), where the JT found that DIFC Courts have jurisdiction to enforce a DIFC-LCIA award, where the seat was mainland Dubai and the applicable law was UAE civil law, discussed in a previous blog post), or the location of the assets subject of enforcement claim (see for example, Cassation No. 3/2017 (JT) and Cassation No. 1/2017(JT), both discussed in a previous blog post) to the choice of seat – or lack thereof.

The question of the impact on the conduit jurisdiction of the DIFC Courts also arises. Although there is no express provision on the interplay between non-DIFC awards (whether local or international) and the DIFC Courts, adopting the default jurisdiction of DIFC Courts crowns the DIFC Courts as the ultimate authority on arbitration, and sends a strong signal to mainland Dubai Courts and the JT. While the JT has softened its approach recently, and appears open to a more equal distribution of jurisdiction between the two courts (see, for example, Cassation No. 8/2020 (JT)), it remains to be seen whether it would go so far as to expressly approve the conduit jurisdiction of DIFC Courts.

Finally, the question of how these provisions apply to arbitration agreements that precede the Decree remains outstanding. In the event of an arbitration clause that provides for DIAC arbitration without selecting a seat, the DIAC Rules of 2007 provide that the default seat is Dubai. Article 6 of the Decree appears to provide that DIAC Rules of 2007 will continue to apply to ongoing arbitrations and potentially to future arbitrations as well, while stipulating in Article 4 that the default seat is the DIFC. It remains to be seen which court will have jurisdiction in the event of a dispute over such a clause. Preemptive coordination between the various stakeholders – including Dubai Courts and DIFC Courts – would provide some welcome insight, and avoid a jurisdictional tug-of-war between the courts.

 

IV. Concluding remarks

DIAC 2.0 has all the markings of a world-class arbitration institute, and the flexibility to adopt any measures that will further its mission, but whether it will rise to the occasion remains to be seen. The challenges will be especially high over the next few months.

At the same time, DIAC 2.0 will have the support of the DIFC Courts and the onshore Dubai Courts, which stand to play an important role in facilitating the transition process for the parties, while signaling their endorsement of DIAC 2.0.

In the meantime, the arbitration world will be watching as it develops its wings and prepares for takeoff.

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Inaugural World Arbitration Update: Deconstructing Chorzow – Assessing Damages in Non-Expropriatory Breaches

Kluwer Arbitration Blog - Sat, 2021-11-13 00:52

The first edition of the World Arbitration Update (WAU) founded by Ian Laird (Crowell) and Jose Antonio Rivas (Xtrategy) took place on-line from October 11 to October 15, 2021, hosting 15 panels with over 4,000 registrations and 1,476 attendees. The WAU addressed key and novel topics of investment and international commercial arbitration, and public international law in a decentralized forum. This post covers the panel on damages in non-expropriatory breaches as a salient and discrete issue amongst the WAU discussions on investment arbitration.

Miguel Nakhle (Compass Lexecon) moderated the panel consisting of both experts and counsel, featuring Craig Miles (King & Spalding), Julie M. Carey (NERA Economic Consulting), Cristina Ferraro (Miranda & Amado), and Isabel Kunsman (AlixPartners). The speakers explored the full reparation standard as set forth in Chorzow, from both legal and economic points of view, and highlighted various approaches to calculating historical and future damages.

 

Compensation for Non-Expropriatory Breaches: An Uncharted Territory

Following a positivist approach of the compensation standard of expropriation breaches, most investment agreements include an explicit compensation provision, for example Art. 13 of the Energy Charter Treaty provides that “compensation shall amount to the Fair Market Value (FMV) of the investment expropriated at the time immediately before the expropriation or impending expropriation became known in such a way as to affect the value of the investment (hereinafter referred to as the “Valuation Date”)”. Whilst there is still uncertainty surrounding creeping expropriations, there is usually no mention in treaties of how to assess damages caused by other breaches such as of the Fair and Equitable Treatment (FET) standard, prompting a customary law-based approach by arbitral tribunals.

 

The Chorzow Factory Two Step Approach

Mr. Nakhle initiated the conversation by indicating that the topic often does not get the publicity it deserves in comparison to expropriatory breaches. To some extent, valuation of non-expropriatory breaches is uncharted territory, both in literature and investment treaties. What has served as guidance for tribunals and parties, is the principle of full reparation encompassed in the Chorzow Factory case and the articulation of its two-step methodology.

The landmark Chorzow Factory PCIJ Case from 1927 posed fundamental questions that guided the analysis of the panel:

1a) What was the value on the date of expropriation;

1b) What would have been the financial results which would probably have been given by the undertaking from the date of expropriation to the date of the judgement, if not for the expropriation; and

(2) What would be the value at the date of the judgment?

Stressing the difference between whether a revenue was earned, or would have been earned, Mr. Miles deconstructed Chorzow and comparatively analyzed CMS v Argentina and Mobil v Argentina through the lens of Chorzow.

Mr. Miles explained that in CMS the tribunal got it right with regard to future damages, but wrong concerning historical damages; conversely, in Mobil the tribunal reached a correct conclusion on historical damages, but was wrong on its assessment of future damages. In CMS, the tribunal assessed damages by measuring FMV on the date of the breach, in two scenarios: (1) but-for the treaty-breaching measures, and (2) with the treaty-breaching measures. The difference between these two represented the damages. Had the CMS tribunal followed Chorzow, they would have conducted a two-step process consisting of (1) assessing the actual loss measured from the date of the breach to the date of the award, and (2) assessing the projected loss going forward from the date of the award using the FMV approach. In Mobil, the tribunal used an actual-losses approach similar to step 1b) of Chorzow, by looking at the damages that were caused by the measures between the dates of each breach, leading up to the date of the award. The tribunal rejected the FMV approach, reluctant to compensate speculative claims. Mr. Miles therefore argued that both tribunals missed the mark despite Chorzow’s existence. If both had thoroughly followed Chorzow’s two-step approach, they would have rendered an accurate damages award.

 

Historical Damages

Turning the focus to the second part of Chorzow’s test, Ms. Carey addressed some of the complex issues surrounding the assessment of historical damages. Highlighting one example of the but-for scenario based on the income approach, she demonstrated the complexity of calculating historical damages:

Damages = [Q But-For x (P But-For – C But-For)] – [Q Actual x (P Actual – C Actual)]*

*(Q = quantities, P = price, C = costs)

In addition, Ms. Carey cautioned that probation standards for causation and proof of reasonable certainty, as well as the duty to mitigate damages, are complex factors. Because of the variety of factors that come into play, she cautioned that a case-by-case analysis is crucial.

 

Novel Approaches to Future Damages: Discounting Probability, Updated Claims and Installment Payment of Awards

Moving away from historical damages, the second part of the panel addressed future damages. Ms. Ferraro began by referring to the ILC Draft Articles on Responsibility of States for Internationally Wrongful Acts, Article 37(2), which requires that a financially assessable damage, including loss of profit, be “established”. When deciding whether to award future damages, there is never a question of absolute certainty. Instead, a threshold of reasonable certainty that relates to the existence of future damages must be reached, which does not address the calculation of the damages. However, there is also the possibility of a loss of chance where this level of certainty is not reached, but where it might still be permissible to calculate future damages. Ms. Ferraro proposed several conceptual approaches. Discounting the probability in the calculations may be done in some contractual cases even where the required levels of certainty may not be reached. Tribunals could also defer to future tribunals when they consider estimates to be too unreliable at the point of rendering the award. This might be done, for instance, where the damages will become concrete only after a longer period of time passes. This was done in Mobil v Canada, where the claimant amended its case to claim damages in respect of alleged future losses, as well as damages incurred in the future until the end of the oil concessions, i.e., until 2047. Another example, inspired by The Netherlands’ Civil Code Article 6:105, comprises lump awards or sum installment payment of awards, and the possibility to review an award after it has been rendered if new circumstances come to light.

 

Fair Market Value, Standard Approaches

Ms. Kunsman clearly delineated the components of FMV, which essentially measures the value of the investment in a comparable way to the typical buyers and sellers-market of the investment. The standard approaches include the income approach (which can use the Discounted Cash Flow “DCF” method), and the market approach, which can rely on a comparable public company or a comparable transaction. Ms. Kunsman compared the applicability of the approaches, identifying that in some cases it may not be reasonable to apply the FMV approach to future losses. One instance would be where the investor contracts with a State-owned entity, involving a sovereign risk that would consequently affect the FMV of the subject assets. Tribunals would therefore be advised to consult other ad hoc methods where this would be more reasonable, on a case-by-case basis.

 

Conclusion

Investment tribunals have widely resorted to Chorzow’s “full reparation” standard to assess damages. But while the principle stemming from the PCIJ may seem axiomatic and simple, a rigorous approach would be required under Chorzow’s two-step test. As an alternative, the proposed methodological approaches to the Chorzow test may foster a more systemic application, as well as a more precise assessment of damages taking into account both historic and future losses. One thing is sure, unless new investment agreements include compensation provisions for non-expropriatory breaches. Chorzow’s legacy will live on.

 

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Schneider to Carzdozo

ADR Prof Blog - Fri, 2021-11-12 15:17
Earlier today the Cardozo School of Law announced that Andrea Schneider (Marquette) – one of this blog’s founders among many other great things – will be joining its faculty next year taking over as the Director of the Kukin Program for Conflict Resolution.  Talk about a win-win:  Cardozo gets one of the leaders in the field … Continue reading Schneider to Carzdozo →

Does a Party’s Participation in a Costs Proceeding Estop them from Claiming that the Time Period for Determining Costs has Expired?

International Arbitration Blog - Fri, 2021-11-12 11:09

In Meszaros v 464235 BC Ltd, 2021 BCSC 2012 (“Meszaros”)[1], Justice MacDonald of the Supreme Court of British Columbia declined to set aside an arbitrator’s decision that a responding party to a costs application, having participated in the proceeding, was precluded, or estopped, from asserting that the application for costs was out of time. However, Justice MacDonald did find an arguable point of sufficient substance was raised to warrant leave to appeal.

YSIAC Conference Recap: Cryptocurrency, Blockchain and NFTs

Kluwer Arbitration Blog - Fri, 2021-11-12 01:00

On 10 November 2021, YSIAC Conference 2021 ARBXTalk and panel discussion canvassed a myriad of dynamic developments in the arbitration space, amongst which included the impact of cryptocurrency, blockchain and non-fungible tokens (“NFTs”) (collectively referred to as “CBNFT”) on arbitral disputes, the enforcement of awards, and how practitioners can adapt to digital transformations and disruptions created.

Guest speaker Mr. Ziyang David Fan, Head of Digital Trade at the World Economic Forum, was first invited to share his insights on regulating technology in a digital age. Mr. Fan expressed his excitement to explore the intersection between technology on traditional industries such as shipping, trade and agriculture and its pull on such industries. He also warned of the legal issues that could arise as a result of technology progressing faster than the law as industries trudge swiftly ahead on the path of digitization. An apt example raised by him was the electronic bills of lading where tokenising bills of lading could face potential issues of contentious legal recognition, as well as inconsistent legal practices and treatment across the entire supply chain. To navigate these digital disruptions, Mr. Fan believes in agile governance – adopting an anticipatory approach with regulatory sandboxes to test, receive feedback on and calibrate policies that capture the nuances of new technologies.

Thereafter, the panel discussion was moderated by Ms. Wendy Lin (WongPartnership LLP), and discussion comprised Mr. Matthew McGhee (Twenty Essex), Mr. Rakesh Kirpalani (Drew & Napier LLC), Mr. Andy Meehan (Gemini Trust Company) and Mr. Calvin Koo (Kobre & Kim LLP).

The panel discussion was kickstarted by Mr. Kirpalani with succinct definitions of key terms (blockchain, hashing, cryptocurrency, NFTs, Smart Contracts) for the audience. In addition, Mr. McGhee emphasised the distinctions between the legal nature of crypto assets and the associated rights pertaining to the crypto asset. For instance, the ownership of an NFT which grants access to certain products may be proprietary in nature, while entitlement to those products may merely be contractual.

In particular, Mr. Kirpalani defined smart contracts as computer codes that automatically executes certain functionalities when certain conditions are met (i.e. If x, then y). Building on this, Mr. McGhee highlighted the distinctions between smart contracts as Mr. Kirpalani defined, in its truest form, and pseudo / soft smart contracts. The latter referred to orthodox written contracts with smart features bolted on e.g. where the purchase price is paid in advance to an escrow account that gets automatically released upon an event.

Having defined smart contracts, panellists turned to the question of whether smart contracts, in their truest sense, are legally binding. Mr Kirpalani believed there to be no reason, in theory, for the negative – some traditional contracts contain the same computational logic (If x, then y). The heart of the matter boils down to whether one is merely breaching a computer code, or a legally defined agreement expressed in computer code. Mr. McGhee considered it possible that grounds of misrepresentation or mistake could arise due to faults in the code, but unlikely that parties may refuse to perform (seeing as smart contracts are automatically executing).

A consensus shared amongst the panellists was that arbitral disputes surrounding CBNFT do not differ greatly from disputes in other industries beyond the change in underlying subject-matter of the disputes. Mr. Meehan likened such subject matter to traditional disputes regarding investment contracts, service agreements and intellectual property, but reiterated that with the CBNFT space in its infancy, the future is unpredictable. His advice to arbitration practitioners in preparing for such changes was, to the extent that such disputes are resolved using traditional arbitral methods, to be well-equipped to handle navigate the CBNFT landscape the same way one would traverse other existing niche industries such as emerging medical technologies.

Pivoting to practical concerns of enforcing arbitral awards and tracing digital assets, Mr. McGhee expounded on the difficulties of obtaining protective injunctions in relation to crypto assets. For instance, freezing injunctions often exclude crypto assets due to the volatility in value of such assets and the ensuing magnitude of losses to the defendant if they were wrongfully frozen. The converse may be true for tracing crypto assets. Mr. Koo believes it may in fact be easier to trace crypto assets because transactions are immutable, public and can be viewed in real time. He recommended working with professionals with access to software that can crunch these data efficiently and view the transactional pathway, the different wallets and whether a wallet is associated to a particular exchange. Alternatively, Mr. Kirpalani recommended using Etherscan or other blockchain monitoring networks to trace the movement of crypto assets. Mr. McGhee further added that while tribunals may have limited power compelling third-party crypto exchanges, parties can consider obtaining court orders to compel crypto exchanges to provide details of their customers (for anonymous accounts) or freeze the account of an unknown party who could be referred to as beholder of the crypto wallet.

To pursue arbitral awards, the usual procedures for physical seizure of assets would not apply, and removing control of the private key to the crypto assets may face its own set of difficulties, especially with recalcitrant award debtors. To combat this, Mr. Koo suggests that the traditional exposure points and methods such as leveraging criminal liability (e.g. contempt of court) and reputational damage can still be engaged to increase pressure on the opposing party to comply.

 

Conclusion

In sum, the guest speaker and panel discussion offered great insight into the technical matters arising from the proliferation of CBNFT, and demystified the topic with clarity and accuracy for arbitration practitioners. Cryptocurrency and NFTs are in its infancy and its future pathway is unpredictable. To navigate the complex and ever-evolving landscape of CBNFTs, practitioners would benefit from utilising existing legal tools and strategies in the arsenal with agility, whilst understanding and leveraging the perks of CBNFT either as an underlying subject-matter for disputes or the target of enforcement.

 

This post concludes our coverage of YSIAC Conference 2021. More coverage from YSIAC Conference is available here.

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YSIAC Conference Recap: Resolving ESG Disputes Through International Arbitration

Kluwer Arbitration Blog - Fri, 2021-11-12 00:00

Earlier this week, the YSIAC Conference 2021 took place virtually for the first time since its inception. The opening webinar was a panel discussion titled “Resolving ESG Disputes Through International Arbitration”, which agenda was to analyse the disputes in the buzzing environmental, social and governance (“ESG”) domain, distil the trends and lessons learnt therefrom, and to provide suggestions on the best practices.

As moderator Ms. Kate Apostolova (Freshfields Bruckhaus Deringer) pointed out, there has been an exponential increase in interest in ESG issues in the recent years. Particularly in Singapore, prevalence of such interest is evident from the Singapore Green Plan 2030, the recent introduction of sustainability reporting guidelines, and other local green finance trends.

The distinguished panel comprised of Ms. Gerui Lim (Drew & Napier LLC), Ms. Jennifer Lim (Sidley Austin LLP), Mr. Kartikey Mahajan (Shardul Amarchand Mangaldas & Co), Mr. Devathas Sathianan (Rajah & Tann Singapore LLP), Ms. Khushboo Shahdadpuri (Al Tamimi & Company), Dr. David Tebel (Rothorn Legal), and Mr. Tiong Teck Wee (WongPartnership LLP).

 

Environment

Mr. Mahajan and Ms. Jennifer Lim kickstarted the panel with exploring the kinds of environmental disputes arising therefrom.

Mr. Mahajan observed that in the context of commercial arbitration, disputes typically arise from or in relation to: (1) international commitments, e.g. the Kyoto Protocol and its Joint Implementation mechanism; (2) a company’s efforts to reduce greenhouse emissions and its corresponding investments, e.g. in renewable energy projects; and (3) commercial contracts which on its face do not relate to environment issues.

Practically speaking, Mr. Mahajan highlighted the importance of engaging suitable arbitrators and experts. This is especially considering the complexities in the mechanism of renewable energy processes, which are difficult for inexperienced arbitrators to grasp and for inexperienced experts to explain clearly and consistently. He also suggested including contractual terms addressing ESG issues in commercial contracts, such as the consequences of breach(es) of ESG guidelines or delays in delivery due to the environmental reasons.

Ms. Jennifer Lim then elaborated on trends that she has observed in environmental disputes in investor-state arbitrations. Firstly, there has been an increase in investor-state disputes in the last few years. Secondly, while environmental issues were more typically used as a shield in arbitration proceedings in the past (such as a defence to justify a challenge by the investor), they have been increasingly used as a sword instead (such as States making counterclaims based on breaches of environment law). Thirdly, there is an increased willingness by tribunals to review and deal with environmental law issues.

 

Social

Mr. Devathas Sathianan, Ms. Khushboo Shahdadpuri, and Ms. Gerui Lim then moved on to speak on social disputes, which usually relate to employment, diversity inclusion, child rights, and modern slavery, though they emphasised that the list is by no means exhaustive.

For commercial arbitration, Mr. Sathianan shared that social disputes may be split into business-to-business disputes and business to consumer disputes. An interesting example for the former category is where companies who are up in the supply chain take on the role of watchdog or governance to impose certain restrictions, such as Mastercard’s interaction with the porn industry by requiring banks to ensure that sellers obtain clear and documented consent in adult content.

In the context of investor-state arbitrations, Ms. Shahdadpuri shared that a common way that disputes arise is when States revoke certain rights that were initially granted to investors such that the States would have to justify why the revocation was made. She also noted that an interesting aspect of investor-state arbitrations is the investor’s need to obtain a social licence to operate (as opposed to mere legal licence), where the investor would need to convince the State and the community on its legitimacy and gain their consent and trust.

Ms. Gerui Lim then shared that there are common difficulties in investor-state arbitrations and commercial arbitrations, namely the difficulties in ascertaining the soft rules of a community and in holding companies and investors accountable for their actions. Ultimately, Ms. Lim also opined that arbitration may not be the best tool for the resolution of such disputes, which may benefit from the compulsion and transparency that court proceedings can offer.

Practically speaking, Mr. Sathianan also suggested concocting a framework in order to take into account the limitations of arbitration in social disputes such as the limitations to documental access by interested third-parties and the difficulty in enforcing arbitral decisions on non-parties. One example of such framework is the Bangladesh Accord.

 

Governance

Dr. David Tebel and Mr. Tiong Teck Wee then proceeded to speak on governance disputes, which would include financial issues, corruption, bribery, data protection, and tax. A particularly interesting area of disputes relate to issues arising from bribery and corruption. Quite apart from the fact that any allegation of bribery and corruption would be difficult to prove as is, there is historically a high standard of proof for such allegations. This is particularly in the context of investor-state arbitrations as bilateral investment treaties are often focused on safeguarding investors’ interests. However, this practical difficulty has also somewhat been alleviated by recent developments relaxing the standard of proof to a balance of probabilities.

Another issue in the context of governance dispute is jurisdiction. Fortunately, it has been observed in practice that tribunals are increasingly finding and exercising jurisdiction over States and companies in relation to governance disputes in the recent years.

 

Conclusion

The panel discussion was power-charged with compelling and gripping analysis of the existing jurisprudence in ESG disputes and arbitrations as well as detailed and thoughtful analysis of how certain ESG issues can develop in the future. The practical insights provided by the esteemed panellists also no doubt shed light on the likely thoughts in developing the area and shaping the practice.

 

More coverage from YSIAC Conference is available here.

More from our authors: International Investment Protection of Global Banking and Finance: Legal Principles and Arbitral Practice
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