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Filling In The Gaps Left By the US Supreme Court Decision in GE Energy v. Outokumpu: Which Law To Apply?

Kluwer Arbitration Blog - Thu, 2021-08-19 01:38

The United States Supreme Court’s June 2020 decision in GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC (“GE Energy“) made clear that, under U.S. law, a non-signatory to an arbitration agreement may invoke equitable estoppel to compel arbitration under Article II(3) of the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (“New York Convention”) (for more on GE Energy, see here). The Supreme Court did not, however, decide what law should be applied to determine whether equitable estoppel is available for arbitration agreements under the New York Convention – i.e., whether this should be determined by reference to federal or state law.

Instead, the Supreme Court remanded that question to the United States Court of Appeals for the Eleventh Circuit (“Eleventh Circuit”). While the Eleventh Circuit has not yet scheduled the remand hearing in GE Energy, the same question has now arisen before other courts – should federal or state law determine the availability of equitable estoppel?

The case for applying federal law
In a recent decision by the United States Court of Appeals for the Ninth Circuit (“Ninth Circuit“), Balkrishna Setty v. Shrinivas Sugandhalaya LLP (“Setty v. Sugandhalaya”), the majority determined that federal law principles apply to determine whether equitable estoppel is available based on the facts of a particular case.

In that case, two brothers, Balkrishna and Nagraj Setty, signed a Partnership Deed in 1999 agreeing to joint ownership of Shrinivas Sugandhalaya, an incense manufacturing company owned by their late father. The Partnership Deed contained an arbitration clause requiring all disputes in respect of the partnership arising between the partners to be settled by arbitration. After a period of joint operation, the brothers separated and began operating their own incense manufacturing firms, though maintaining the same trademark. Balkrishna, formed Shrinivas Sugandhalaya (BNG) LLP (“SS Bangalore“), whereas Nagraj formed Shrinivas Sugandhalaya LLP (“SS Mumbai“).

After a period of operation, the Plaintiffs-Appellees, Balkrishna and SS Bangalore, commenced litigation against SS Mumbai and its U.S. distributor, claiming that SS Mumbai had committed a number of U.S. federal trademark violations, including having fraudulently obtained trademark registrations. The suit was originally brought in the Northern District of Alabama but was transferred to the Western District of Washington to suit the parties’ convenience, pursuant to 28 U.S.C. § 1404(a).

SS Mumbai moved to dismiss or stay the case in favour of arbitration, arguing that the Plaintiffs-Appellees should be equitably estopped from avoiding the arbitration clause contained in the Partnership Deed. Neither SS Bangalore nor SS Mumbai were parties to the Partnership Deed.

The district court for the Western District of Washington denied SS Mumbai’s motion, applying generalized estoppel doctrine from Ninth Circuit jurisprudence. On appeal, while the Ninth Circuit affirmed the district court in finding that SS Mumbai could not assert equitable estoppel, it did so on the grounds that as a non-signatory to the Partnership Deed, SS Mumbai was barred from compelling arbitration under Article II(3) of the New York Convention.

SS Mumbai then sought, and was granted, certiorari by the Supreme Court on the basis of the Supreme Court’s decision in GE Energy, and the Ninth Circuit’s decision was vacated and remanded. On remand, the parties disputed whether the law of India (the choice of law in the Partnership Deed) or federal common law applied to the question of whether a non-signatory can compel arbitration.

The majority held that Indian law did not apply, noting that to resolve a “threshold issue”, the Court should not look to the agreement itself. Additionally, because the Partnership Deed’s arbitration clause applied to disputes “arising between the partners”, it did not apply to third parties such as SS Mumbai.

Instead, the majority held that federal substantive law applies where a case involves the New York Convention and concerns the arbitrability of federal claims by or against non-signatories to an arbitration agreement. This, the majority found, furthered the principle of uniformity in the enforcement of international arbitration agreements, as emphasized by the New York Convention and its implementing legislation, the Federal Arbitration Act (“FAA”).

The case for applying state law
Interestingly, the case for applying state law was made in a strong dissent to the majority opinion of Setty v. Sugandhalaya. Judge Bea, who authored the dissent, argued that state, not federal law should govern equitable estoppel claims to compel arbitration. Her dissent was grounded in jurisprudence from Chapter 1 of the FAA, which addresses domestic arbitration law (noting that Chapter 2 of the FAA addresses international arbitration law, by incorporating the New York Convention). In essence, Judge Bea stated that jurisprudence from the Supreme Court and Ninth Circuit on Chapter 1 of the FAA had firmly established that the state contract law that governs the arbitration agreement governs equitable estoppel claims to compel arbitration. The fact that the arbitration agreement in this case was under the New York Convention (which is implemented in the United States by Chapter 2 of the FAA) did not merit a departure from this position. Rather, Judge Bea argued, it is in the interests of uniformity that settled FAA law apply to agreements governed by the New York Convention.

Judge Bea relied on the Supreme Court’s decision in Arthur Anderson LLP v. Carlisle, 556 U.S. 624 (2009), which held that the FAA did not “alter background principles of state contract law regarding the scope of agreements (including the question of who is bound by them)”. (Id. at 630). The Supreme Court held that the application of “traditional principles of state law” is permitted under the FAA to allow a contract to be enforced by or against non-parties through a number of principles, including equitable estoppel (Id. at 631). Judge Bea went on to state that “Since Arthur Andersen, the Ninth Circuit has repeatedly applied state contract law any time a non-signatory has sought to compel arbitration under the FAA.” (Setty v. Sugandhalaya at page 13).

In addition, the Restatement on U.S. Law of International Commercial Arbitration and Investor-State Arbitration (“Restatement”) takes the position that the availability of estoppel is governed by state law (see Comment (c) to §2.3). Though the Restatement is not binding on courts, it has significant persuasive authority such that courts may look to the Restatement to decide which law to apply.

What are the implications of applying federal or state law?
The question of the applicability of federal or state law is not limited to the doctrine of equitable estoppel. In GE Energy, the Supreme Court noted that under the FAA, arbitration agreements can be enforced by non-signatories through “assumption, piercing the corporate veil, alter ego, incorporation by reference, third party beneficiary theories, waiver and estoppel.” (GE Energy Power Conversion France SAS v. Outokumpu Stainless USA, LLC, 140 S. Ct. 1637, 1643 (2020)). While the decision in Setty v. Sugandhalaya specifically addressed estoppel, it remains to be seen whether state or federal law will govern these other mechanisms for enforcement of arbitration agreements by non-signatories.

The question of which body of law applies to determine the availability of doctrines like equitable estoppel may have important practical implications. In particular, there may be instances in which the application of federal or state law produces different results when applied to the specific facts of a case. As the case law develops in different courts, parties could take advantage of these inconsistent approaches in determining where to file their claim.

There is therefore high potential for divergence in determining whether a non-signatory can enforce an arbitration agreement. We are likely to see more cases of non-signatories seeking to enforce arbitration agreements concerning the New York Convention in the wake of GE Energy, and it remains to be seen whether federal courts will converge on the methodology for determining the availability of these principles, or whether they will remain divided.

In particular, and as mentioned above, the Supreme Court in GE Energy remanded to the Eleventh Circuit to determine the body of law that governs the enforceability of arbitration clauses under the doctrine of equitable estoppel. It remains to be seen whether the Eleventh Circuit will adopt the same position as the Ninth Circuit in Setty v. Sugandhalaya.

Conclusion
While the US Supreme Court in GE Energy made the important clarification that the New York Convention does not bar non-signatories from asserting equitable estoppel to compel arbitration, gaps remain as to whether state or federal law applies to determine the availability of equitable estoppel on the facts of a particular case. The Ninth Circuit has recently held that federal law applies, albeit with a strong dissent arguing in favor of the application of state law. In light of the important implications arising out of the applicable law, further debate is to be expected.

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Theater and Law: The Use of the Actor’s Technique in Arbitration Advocacy

Kluwer Arbitration Blog - Wed, 2021-08-18 01:34

A few days ago I had the fortune of attending the fourth webinar of the Young ITA Mentorship Program – Speaker Series, entitled The (Sometimes Forgotten) Importance of the Arts and Psychology in Advocacy in International Arbitration. Part of the dialogue focused on reviewing whether theatrical study could be useful to lawyers in enhancing their oral advocacy. I would like to expand on this topic further, based on my experience as a theater director training lawyers to be more persuasive before arbitral or judicial tribunals.

The first time I asked myself whether theater could have any relationship with law was eight years ago, when ICSID arbitrator Alfredo Bullard invited me to co-teach an advocacy course at PUCP. I found the answer when I realized that litigators tell live stories. And, that just like actors, lawyers also need to know how to manage their body, voice and emotions in a technical way to bring their written speeches (their dramaturgy) to life, catch the attention of the arbitrators and persuade them to rule in their favor. I also understood how useful it can be for lawyers to become aware that – during a hearing – they are immersed in a “staging”: a professional game with specific rules in on which they need to be trained to play a special role. This implies knowing how to project certain characteristics of their personality and having a high level of energy and concentration, because acting as if in any other daily or professional circumstance could be a mistake.

 

Having good actors is as important as having a good case theory

When we talk about how to enhance a lawyer’s live performance, the first thing we need to be aware of is that writing and acting involve different skills. In theater, playwrights are aware of this. They know that the best way to stage their story is to entrust it to a good actor, capable of giving life and credibility to the words they have written on paper. Fortunately, the level of knowledge that exists today about the actor’s technique makes it possible for almost anyone to train and develop stage skills. Achieving this is more a matter of work and conviction than just natural talent.

In the legal world, there is also some level of awareness of the difference between being able to write and having the ability to perform live in an engaging and persuasive manner before a tribunal. However, based on my experience, I can say that this awareness can be further enhanced and better trained.

Unfortunately, I have witnessed many times how some lawyers use the hearing to merely read aloud their written pleadings or to just perform an impromptu and unappealing representation of their case theory. They trust that their body, voice and emotions will be projected to the members of the tribunal the way they have imagined it in their heads the night before or on their way to the hearing, but unfortunately that’s not usually the case. They do not train in the development of their expressive skills, they rehearse little or nothing in the execution of their live pleading and probably do not give themselves time prior to the hearing to warm up their body, their voice nor to focus their emotional intelligence for this professional game. The result on many occasions is that they completely miss the opportunity to bring the case to life in front of their viewers: the adjudicators.

 

How should lawyers organize their body, voice and emotions to persuade?

Based on my research analyzing theatrical, legal and psychological experiences and studies, to be persuasive lawyers should organize their body language, voice and emotions so they always project conviction and empathy. This can make their presentations more memorable and exciting for the tribunal. Research shows that our decisions are more emotional than rational.

…he who leads men must know them and their motives for action. They are generally sentimental rather than rational. Beliefs and desires rule the world. To influence men is thus primarily to influence their feelings.” (Bousquie, p.5. Own translation).

Hence, to be persuasive it is essential to have the ability to emotionally influence people.

Following this logic, it makes sense that the methodology that lawyers use for their live presentations should be structured similarly to how it would be organized by an actor who must assume a persuasive role or character. In fact, many institutions specialized in education or treatment of the voice already have lawyers on their list of spoken word professionals. Therefore, the technique and training to enhance the performance of lawyers can be based on the following principles and components of live communication. First, in relation to body language, being aware of two basic principles: we are how we move and with the body we make actions (Adapted from Stanislavski, pp. 25-105). These are articulated based on three components of body management: eye contact, posture and body placement. Second, in relation to the voice, based on principles similar to the previous ones: we are how we talk and with the words we make actions (Adapted from Stanislavski, pp. 107-201). We naturally articulate these based on six variables of management of the spoken word: pitch, volume, speed, rhythm, direction and listening. Third, in relation to emotional management, using a principle of cognitive psychology: our emotions shape our behavior (Keegan, p.64). A principle that in this case we should articulate by learning to channel self-confidence and empathy.

Although it is impossible to go in depth in these brief lines on everything that lawyers should do with respect to each element of their performance, allow me to give you a few suggestions, by way of example, on what we should do with our body language. Both theatrical tradition and social psychology research agree that, if we want to convey conviction, we should use open postures and movements. Therefore, if you want to transmit solidity, security, and credibility, you should always stand or sit in such a way that you can project your face, neck and trunk widely towards your interlocutors. You will have the opposite effect if you shift your spine, shoulders or chest forward, closing them towards your stomach, or if you cross your arms and clasp your hands together, blocking your trunk or partially or totally covering your neck or face. These latter postures will make you look insecure, nervous, and defensive. And no matter how well your live words are flowing and sounding, you will convey contradictory information to the tribunal who will probably feel distrust, disinterest or rejection, without them being aware of the reason for their negative feelings.

This is why balancing all elements of performance in the right communicative direction can be a major challenge. Many times, lawyers find themselves at a crossroads where their body and voice are projecting contradictory information. Or worse, they have inadequate emotional reactions to the obstacles that arise during the hearing and end up projecting feelings that do not correspond to the action of persuasion, such as fear, anger, guilt, etc. That way their actions during the hearing, far from persuading, become something akin to justifying themselves, confronting, or pleading with the arbitrators.

For these reasons, I would recommend lawyers to train their stage skills so they can enjoy the game of arbitration even more and to obtain good results for their clients. This will happen naturally by having more expressive resources to bring their case theory to life during the hearing and enhance their ability to persuade the tribunal.

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Canaries in the Litigation Coal Mine

ADR Prof Blog - Tue, 2021-08-17 18:42
Early coal mines didn’t have good ventilation, and miners were at risk from dangerous gases in the mines.  So miners would bring canaries into the mines because they were sensitive to the gases and provided a warning of danger.  The canaries would sing until they died from the gases.  When they stopped singing, miners knew … Continue reading Canaries in the Litigation Coal Mine →

The Antrix-Devas Dispute: Headed for a Third BIT Arbitration?

Kluwer Arbitration Blog - Tue, 2021-08-17 01:14

In May 2021, India’s National Company Law Tribunal (‘NCLT’) ordered the liquidation of Devas Multimedia (‘Devas’), on grounds of it having been incorporated for fraudulent purposes. This is the latest turn in a long running dispute contested across multiple fora. In this post, I highlight that this could give rise to a third BIT claim against India on grounds of indirect expropriation. To this end, I submit tentatively that: (1) an arbitral tribunal would have jurisdiction over such a claim, because arbitral awards can be the subject of expropriation; and (2) the liquidation of Devas, with the alleged view to preventing enforcement of the ICC award likely amount to an indirect expropriation. Before engaging with these questions, the first section of the post provides a brief outline of the facts leading to this situation.

 

Background to the Dispute

In 2005, Devas entered into a lease agreement with Antrix Corp. (‘Antrix’), the private sector arm of the Indian Space Research Organization (a government-owned body). The 2005 agreement was terminated by Antrix in line with government policy in 2011. This termination gave rise to 3 distinct sets of proceedings—one commercial arbitration before an ICC tribunal, and two investment arbitrations under the India-Mauritius BIT and the India-Germany BIT. Each of these proceedings resulted in an adverse award for the Indian government. While the two BIT awards are still pending confirmation, the ICC award has been upheld by a US Court as well as by the Paris Court of Appeal.

In its liquidation order, the NCLT has expressly directed the official liquidator to liquidate Devas, so as to prevent the enforcement of the ICC award in its favor [p. 38 (7)].

 

Can Arbitral Awards be Expropriated?

Prima facie, the actions of the NCLT as a quasi-judicial body are attributable to the Indian State. A preliminary issue then is whether arbitral awards qualify as ‘investments’ in the first place. The India-Mauritius BIT, under which Devas’ investors may bring a claim, defines ‘investments’ as including “claims to money, or any performance under a contract which has economic value” (Art. 1(a)(iii)). This definition is sufficiently broad so as to include an arbitral award in its scope. The material question now is whether judicial interference with an arbitral award can amount to expropriation to begin with.

It is settled in international law that immaterial rights can be the subject of expropriation (see e.g. Philips Petroleum v. Iran p. 75). A further qualification imposed in some cases is that the award must be final substantively—in other words, any further challenge must only be available as to procedural grounds, and not to the merits of the tribunal’s decision (see e.g. Stran Greek Refineries and Stratis Andreadis v. Greece p. 59-61). In the instant case, the ICC award obtained by Devas was final as to its merits and binding on both parties. Any further challenge to this award at the enforcement stage may only pertain to procedural grounds and not serve as a judicial review of its substantive findings. Therefore, the nature of an arbitral award does not exclude it from being the subject of expropriation.

Schwebel (2004) argues that an arbitral award is the source of material rights to compensation for the award holder, and access to an award is extremely relevant to the conclusion of the initial contract itself. Denial of access to this award, therefore, has a confiscatory effect and constitutes a vitiation of investor rights by the interfering State. While Schwebel makes this argument in the context of an anti-suit injunction, similar concerns would arise with respect to other judicial measures that nullify an arbitral award. In my view, the liquidation of Devas, by virtue of nullifying the enforcement of the ICC award, is analogous to an anti-enforcement injunction nullifying said award. For these reasons, judicial interference with an award can amount to expropriation.

 

Did India Commit Expropriation in this Case?

Expropriation by itself is not illegal per se. The specific contours of what constitutes an unlawful expropriation depend on the BIT under which a claim arises. Art. 6 of the Mauritius-India BIT defines expropriation. It states that for a breach of Art. 6 to arise, (i) there must be an expropriation; and (ii) this expropriation must not be for public purposes, be discriminatory, or without fair compensation. In the instant case, no compensation was paid to Devas following the nullification of its arbitral award. Therefore, a claimant investor need only show that the liquidation order amounted to an expropriation.

Typically, tribunals have used the “sole effects” doctrine to determine whether an indirect expropriation has occurred (see e.g. Saipem Spa v. Bangaldesh p. 133). This doctrine suggests that tribunals rely only on the effect of a State’s measure on an investment, and not the reasons behind introducing that measure. In this paradigm, so long as an investor was substantially deprived of their rights, a claim for indirect expropriation would arise. Given that the liquidation order effectively nullifies the ICC award, Devas’ investors could allege indirect expropriation. However, I submit that the standard to establish indirect expropriation must be higher in cases where judicial interference with an award is alleged as the cause of expropriation. This is because if the sole effects doctrine is applied strictly, any and all decisions rejecting foreign awards (even on valid grounds) would be considered in breach of a BIT—a perverse conclusion. Therefore, claimant investors must demonstrate that the judicial actions interfering with their rights were “illegal”, or violative of international law norms (see Saipem Spa p. 132).

Tribunals have recognised that judicial decisions that are grossly unfair or unjust constitute a violation of international investment law (see e.g. Salini v. Ethopia p. 166 and Saipem Spa p. 149). One possible example of such decisions would be a domestic court making an order in excess of its jurisdiction, on account of State bias. I submit that in the instant case, the NCLT’s order was unlawful as it exceeded the jurisdiction of the NCLT. While the determination of fraud in the affairs of a company is indeed a matter for the NCLT to adjudicate, using fraud as ascertained by the NCLT to stymie the enforcement of an arbitral award creates an appearance of perverse motives, especially considering that the respondent in this case is essentially the Indian State, of which the NCLT is in itself an instrumentality. If nothing else, this gives rise to the appearance of bias guiding the NCLT’s findings. A more appropriate route would have been for the NCLT not to interfere with the enforcement of the ICC award, and treat those proceedings as separate from those concerning liquidation. The NCLT order would have then served only as guidance to the fora hearing challenges to the award itself (i.e., the Delhi HC). Instead, by conflating two proceedings, the NCLT has acted in excess of its jurisdiction, and its actions could be seen as a denial of access to remedies for Devas’ investors.

Even India’s obligations under Art. III of the New York Convention create an overriding commitment towards enforceability, such that allegations of the award being contrary to public policy (such as by being borne out of fraud) must still be settled only by a “competent authority”. If the formation of an agreement was indeed borne out of fraud, then the appropriate forum to settle the same is the Court hearing challenge proceedings. For the NCLT itself to direct that the liquidator ceases the enforcement of the ICC award, amounts to an adverse and unwarranted interference with the arbitral process. BIT tribunals have previously looked unfavourably upon such actions. For example, in the Saipem case, the tribunal held that Bangladesh had breached the NY Convention due to its judiciary ordering the revocation of appointed arbitrators on grounds of misconduct. Importantly, no instance of actual misconduct on the part of the tribunal or Devas has been established yet by the Delhi HC, where the challenge to the award is still sub judice. Therefore, a premature move to nullify the enforcement of the award by seizing control of the award-holder would constitute an expropriation, and breach international law.

On a concluding note, the NCLT order in the Devas case might well come as no surprise to frequent observers of India’s recent dalliance with investment treaty disputes. The liquidation of Devas on account of the finding of fraud, could also imperil the enforcement of awards obtained against India by Devas’ investors under BITs. This is particularly concerning in light of India’s recalcitrance in complying with adverse awards arising out of its disputes with Vodafone and Cairn Energy. Taken collectively, these events are very likely to shake investor confidence in the Indian regulatory regime. Immediate compliance with each of these awards is therefore the ideal course of action that India must adopt.

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Comings and Goings – 2021 edition (updated)

ADR Prof Blog - Mon, 2021-08-16 11:47
Updated w/ new info (as promised) . . . . As legal education appears to be making a comeback, movement among people in the dispute resolution field is on the uptick.  And, here’s hoping the upcoming year(s) we’re able to find some talented folks to fill the shoes of our retiring colleagues.  And if I’ve … Continue reading Comings and Goings – 2021 edition (updated) →

Has Forum Non Conveniens Gone the Way of the VCR Player? Canadian Court finds the Doctrine Obsolete in Age of Virtual Hearings

Kluwer Arbitration Blog - Mon, 2021-08-16 01:00

The COVID-19 pandemic has normalized virtual hearings. According to the Ontario Superior Court, this has made the doctrine of forum non conveniens obsolete. In Kore Meals LLC v Freshii Development LLC, 2021 ONSC 2896, in the context of an application to stay Canadian court proceedings in favour of arbitration in the U.S., the Ontario Superior Court questioned whether the doctrine of forum non conveniens has “gone the way of the VCR player”. The Court answered yes. “In the age of zoom… no one forum is more convenient than another”.

The core finding of this decision is that forum non conveniens no longer applies to stay applications because all forums are equally convenient for virtual hearings. While this case highlights some of the virtues of virtual hearings, it also muddies the water with respect to stay applications in Ontario. Until this decision, forum non conveniens has not been part of the analysis to request a stay of court proceedings in favour of arbitration. Forum non conveniens (Latin for “inconvenient forum”) is a common law doctrine that allows a court to stay an action where there is an appropriate and more convenient alternative forum to try the action.

 

Key Facts

The Plaintiff, Kore Meals LLC, a Houston-based company, and the Defendant, Freshii Development LLC (“Freshii Development”), a Chicago-based subsidiary of Toronto-based Freshii Inc, were parties to a contract to develop Freshii franchises in Texas. A dispute arose and the Plaintiff claimed breach of contract and unjust enrichment.

The contract contained an arbitration clause requiring disputes to be submitted to arbitration under the American Arbitration Association (“AAA”) “in the city where Freshii Development has its business address”, which was Chicago.

The Plaintiff commenced an action in the Ontario Superior Court, suing Freshii Development as well as its parent company, Freshii Inc, though the parent was not party to the contract. The Defendants moved to stay proceedings in Ontario in favour of arbitration in Chicago.

 

Decision of the Ontario Superior Court

The Ontario Superior Court held that the proceeding should be stayed in favour of arbitration in Chicago.

The Court found that Ontario’s International Commercial Arbitration Act (“ICAA“) applied to the case, and underlined the settled doctrine of competence-competence in Canada. Quoting the Supreme Court of Canada (“SCC”) in Uber Technologies Inc v Heller, 2020 SCC 16 (“Uber“), the Court stated “in any case involving an arbitration clause, a challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator” … “Courts should derogate from this general rule and decide the question first only where the challenge to the arbitrator’s jurisdiction concerns a question of law alone.”

In Uber, the SCC held that Uber’s standard agreement clause requiring an Ontario Uber driver to pursue arbitration in the Netherlands was unconscionable. The ruling sparked lively debate about its impact on the competence-competence principle, including on this blog. In Uber, the SCC re-affirmed the general competence-competence principle, but created an exception to allow court proceedings where an arbitration clause was unconscionable.

In Kore Meals, to determine whether to stay the proceeding in favour of arbitration in Chicago, the Court applied a five-part test from Haas v Gunasekaram, 2016 ONCA 744. This test is derived from the domestic Arbitration Act, which was found to be, “in effect, the same as the prevailing test” under the ICAA. The Court considered these five questions:

  1. Is there an arbitration agreement?
  2. What is the subject matter of the dispute?
  3. What is the scope of the arbitration agreement?
  4. Does the dispute arguably fall within the scope of the arbitration agreement?
  5. Are there grounds on which the court should refuse to stay the action?

The Court found that the action should not be stayed unless the fifth question is answered in the affirmative – “i.e. unless there is some cogent reason for ignoring the express terms of the arbitration clause.”

The Plaintiff submitted that Chicago was an inappropriate forum because the Defendant merely had a post box and did not carry on business there. The Plaintiff argued that Chicago was an unfair and impractical forum, or a forum non conveniens, because holding a hearing in Chicago would be unnecessarily burdensome and costly for both parties. Instead, Ontario would be the fairest and most logical jurisdiction, especially considering the addition of the non-signatory, Freshii Inc, to the proceeding. The force of these arguments was diminished by the fact that the hearing was being held virtually.

The Defendant countered that the terms of the contract stipulated that the place of arbitration was where the defendants’ business address was located. Further, the Defendant pointed out that the Plaintiff knew that Chicago would be the seat of any arbitration, given the contract’s explicit identification of the Chicago address.

The Court agreed with the Plaintiff that forum non conveniens-type factors can be considered to determine whether the arbitral venue is unfair or impractical. In Ontario, forum non conveniens factors include “the domicile of the parties, the locations of witnesses and of pieces of evidence, parallel proceedings, juridical advantage, the interests of both parties, and the interests of justice”.

The Court nevertheless held that these factors do not apply in the age of Zoom. No location is any more or less convenient than another. Documents are filed digitally, witnesses are examined remotely, and hearings are held via videoconference. Neither location is better for access to justice because “Chicago and Toronto are all on the same cyber street,” meaning that they are equally accessible to both parties. As a result, the law governing “contests of competing forums” is “all but obsolete” and judges “can now say farewell to what was until recently a familiar doctrinal presence in the courthouse.”

 

Analysis & Impact

Competence-competence principle

This case enforces important concepts in Canadian law with respect to the doctrine of competence-competence, as well as the court’s willingness to stay court proceedings in favour of arbitration where parties have contractually agreed to resolve their disputes by arbitration.

Considering forum in stay applications

This case diverges from Canadian jurisprudence by applying forum non conveniens to an application to stay court proceedings in favour of arbitration. In TELUS Communications Inc v Wellman (“Telus“), cited by the Court in this case, the SCC did not engage in a forum non conveniens analysis. Rather, the SCC simply noted that Ontario’s domestic Arbitration Act permits courts to refuse a stay of proceedings in five enumerated circumstances where “it would be either unfair or impractical to refer the matter to arbitration” (Telus, para 65). These five circumstances are the following:

  1. A party entered into the arbitration agreement while under a legal incapacity.
  2. The arbitration agreement is invalid.
  3. The subject-matter of the dispute is not capable of being the subject of arbitration under Ontario law.
  4. The motion was brought with undue delay.
  5. The matter is a proper one for default or summary judgment.

The SCC’s remarks in Telus about the fairness and practicability concerns underlying these statutory factors to refuse a stay of proceedings did not expand the stay analysis to include factors considered in disputes about the most appropriate forum.

Likewise, in Uber, the SCC found that the arbitration clause was unconscionable, but the exception created in that case was not a forum non conveniens analysis.

In the end, this decision has imported forum non conveniens into the stay analysis while, in the same breath, also finding the doctrine obsolete at least with respect to arbitrations with virtual hearings. In the rare case where a court considers whether an arbitration clause is unconscionable, the physical location of the hearing will likely bear less weight in that analysis. We otherwise expect that this case will be an outlier in applications to stay court proceedings in favour of arbitration. However, the case may have an impact on applications with respect to forum non conveniens in court proceedings.

Have virtual hearings rendered forum non conveniens ‘obsolete’?

Despite the Court’s decision, in jurisdictional motions in Canada, it is not clear that the forum non conveniens doctrine is obsolete even if a virtual hearing is being proposed. Courts may continue to consider factors that will remain unaffected by virtual hearings, for example whether there is a risk of parallel proceedings or where one venue presents a juridical advantage.

Will in-person hearings return?

While virtual hearings have certainly been normalized, we can expect some in-person hearings to resume as pandemic-related restrictions are lifted. Whether a hearing is virtual or in-person in a post-pandemic world will depend on the nuances of each case and the preferences of the parties. Virtual hearings may be more efficient and cost-effective, but may also present challenges in some cases. In essence, practitioners have gained a new tool for their toolbox, with the option of virtual hearings.

In our view, it is a step too far to say that in-person hearings are now obsolete. Virtual hearings have been a function of necessity during the pandemic. While we expect that virtual hearings are here to stay, and provide certain advantages, only time will tell how often and in what circumstances virtual proceedings will be chosen over in-person hearings (or vice versa).

 

*The authors thank Anton Rizor, summer student at Baker McKenzie, for his valuable contributions to this article.

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No Immunity for You: Delhi Court Allows Enforcement of Award Against Afghanistan and Ethiopia

Kluwer Arbitration Blog - Sat, 2021-08-14 01:48

There has been much debate about immunity this last year. While, most were discussing concepts of “herd immunity” against the novel coronavirus, the Delhi High Court (Court) ventured into and addressed aspects of “sovereign immunity”. In a batch of petitions (KLA Const Technologies v. The Embassy of the Afghanistan and Matrix Global v. Ministry of Education, Ethiopia) a Single-Judge of the Court ruled that foreign States cannot claim “sovereign immunity” (or related procedural safeguards under the Civil Procedure Code, 1908 (CPC)) to resist enforcement of awards before Indian courts.

 

Background

In both the cases before the Court, the petitioners (both Indian companies) had entered into contracts with the government/ government entities of Afghanistan and Ethiopia, respectively, for rehabilitation of the embassy premises and for supply and distribution of certain books. Disputes that had arisen between the parties were referred to arbitration seated in India, resulting in arbitral awards in favour of the petitioners.

Both petitioners then approached the Court under Section 36 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) seeking enforcement of the awards against assets of Afghanistan and Ethiopia in India. In what may now appear to be an over-confident move, neither Afghanistan nor Ethiopia appeared in the Court, leaving the Judge to consider the issue without input from the respective respondents.

 

Sovereign Immunity and the Civil Procedure Code

Before turning to the reasoning employed by the Court, it is important to understand how “sovereign immunity” is understood in India. Section 84 of the CPC grants foreign States the right to sue in Indian courts “provided that the object of the suit is to enforce private rights”. As a corollary, Section 86 of the CPC also provides for foreign States to be sued in India, provided the Central Government of India consents thereto. Section 86(3) in particular provides that: “Except with the consent of the Central Government, certified in writing by a Secretary to that Government, no decree shall be executed against the property of a foreign State”.

The requirement to seek prior consent of the Central Government has however been limited in its scope, with Indian courts holding that they would only be strictly applicable to proceedings which may be categorised as “suits” under the CPC and would not be applicable, for instance, to initiate insolvency suits (see AIR 1940 Cal 244), probate proceedings (see AIR 1956 Bom 45) or to labour disputes (see AIR 1963 Raj 22).

It also bears mentioning that the Indian courts initially viewed the procedural safeguards in Section 86, CPC to be exhaustive of claims to sovereign immunity, de hors applicable international law on the issue. For instance, Mirza Ali Akbar Kashani (1965) the Supreme Court held that:

just as an independent sovereign State may statutorily provide for its own rights and liabilities to sue and be sued, so can it provide for rights and liabilities of foreign States to sue and be sued in its municipal courts” (Para 29).

In other words, in Mirza the Supreme Court held that a plea of sovereign immunity raised in Indian courts are to be resolved entirely as a matter of Indian law. It was, therefore, the Central Government’s prerogative to decide if a foreign State should be sued in India. However, its more recent judgement, Ethiopian Airlines v. Ganesh Narain Saboo (2011), illustrated a different approach to the issue by observing that:

Section 86 does not supplant the relevant doctrine under the international law. Rather, Section 86 “creates another exception” to immunity (emphasis added), in addition to those exceptions recognised under the international law”. (Para 77)

Resultantly, the defence of sovereign immunity in India represents both a procedural right (i.e. requiring prior consent of the Central Government) and a substantive right (governed largely by common law and international law recognizing diplomatic privileges afforded to States).

 

Are Award-Related Enforcement Proceedings “Suits”?

So far as the procedural rights of a foreign State in relation to civil claims are concerned, the Supreme Court in Nawab Usman Ali Khan’s case (1965) held that:

A proceeding which does not commence with a plaint or petition in the nature of plaint, or where the claim is not in respect of dispute ordinarily triable in a civil court, would prima facie not be regarded as falling within Section 86, Code of Civil Procedure”.

The judgement in Nawab Usman’s case, albeit in the context of a former ruler of a princely state of India who was no longer sovereign, clarified that no prior consent under Section 86, CPC was necessary to initiate arbitration against a foreign State or for arbitral awards to be rendered as decrees. However, having been rendered as decrees under Section 14/ 17 of the 1940 Act, their enforcement would nonetheless have been subject to Section 86(3) (reproduced above).

In this respect, it may be noted (as previously discussed on this blog) that Section 36 of the Arbitration Act made a significant departure from the 1940 Act by providing that arbitral awards may be enforced “as if it were a decree of the court”. In this context the Supreme Court clarified in Paramjeet Singh Patheja (2006):

The words ‘as if’ demonstrate that award and decree or order are two different things. […] The fiction is not intended to make it a decree for all purposes under all statutes, whether State or Central”. (Para 42)

 

Decision of the Court

The Court has rightly drawn from the judgement in Paramajeet Singh Patheja to hold that there exists a conceptual difference between a decree simpliciter and an arbitral award, which only for the purpose of being enforced made be treated at par with a decree of a court. With this, the Court has unequivocally held that no prior consent of the Central Government under Section 86, CPC was necessary for the petitioners to pursue enforcement of their respective arbitral awards against Afghanistan and Ethiopia. Not only does this permit enforcement against foreign States without the intervention of the Central Government, in practical terms this greatly augments the speed of enforcement of such awards.

As regard the substantive aspect of sovereign immunity, the Court drew from previous judgements of Indian courts where foreign States were deemed to have waived their sovereign immunity by failing to raise the plea of sovereign immunity promptly or by entering into international conventions which provided for civil liability. Notably, the Court has also drawn from decisions of courts in the United Kingdom and the United States of America which represent the growing international consensus that State actors are to be treated at par with private parties when in their commercial avatar. In fact, the Court has ventured further by holding that:

An arbitration agreement in a commercial contract between a party and a Foreign State is an implied waiver by the Foreign State so as to preclude it from raising a defense against an enforcement action premised upon the principle of Sovereign Immunity”. (Para 47)

On the basis of this reasoning, the Court has directed Afghanistan and Ethiopia to provide an affidavit setting out their assets in India against which the awards can be enforced.

 

Conclusion

Commenting on the difficulties of enforcing arbitral awards in India, the Supreme Court has previously observed that “difficulties of a litigant in India begin when he has obtained a decree”. In this context, the instant decision of the Court will contribute towards undoing some of these difficulties against sovereign counterparties.

The decision of the Court in KLA Const. is noteworthy for its strong reaffirmation that the arbitral process is not comparable to the prosecution of suits in civil courts. The Court has also clarified that the court system only acts in the penumbra of the arbitral process to assist it and to enforce the outcome of such proceedings.

In a world where the contours of “State” are no longer precise and easily discernible, with States directly or indirectly entering into vast commercial relationships, their counter-parties are likely to welcome the Court’s inference that consenting to arbitration shall ipso facto proscribe such a party from thereafter claiming sovereign immunity. It is the authors’ view that the same reasoning is equally applicable to foreign-seated arbitrations, allowing the enforcement of such awards against the concerned State’s Indian assets. Readers may note however, that this reasoning may not find direct applicability in the case of investment arbitration – whose subject-matter may not be exclusively commercial in nature.

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Incorporation of Arbitration Clauses by Reference: Recent Developments in Dubai

Kluwer Arbitration Blog - Fri, 2021-08-13 01:00

The Dubai Court of Cassation, in its recent judgement, DCC 1308 of 2020, explored the effect of incorporation of arbitration clauses by reference. Typically, “incorporation by reference” refers to parties agreeing to incorporate arbitral clauses found in separate standard-form agreements (“SFAs”) into the agreement between the parties by making reference to the same. Such reference can be specific, where the agreement between the parties refers to the specific clause in the SFA, or general, where the agreement between the parties makes a generic reference to the SFA as a whole without specifying the arbitral clause in particular. The Court of Cassation in DCC 1308 of 2020 held that parties might not necessarily be bound by arbitration clauses incorporated through general reference.

Very few debates in the legal field cut across international jurisprudence in the way as discussions regarding the validity and binding nature of arbitration agreements incorporated by reference. The reasons are clear: in a construction contract for example, parties generally agree to SFAs (such as FIDIC, AIA, etc.) with certain specific modifications. The preference for adopting pre-existing SFAs in a specialized and high contract volume industry is understandable. Such documents have a few distinct advantages, in that they allow parties a sense of fairness and to save time which they otherwise would spend negotiating the contract.

As discussed by the Court of Cassation in DCC 1308 of 2020 and stated above, this practice of adopting pre-existing SFAs also extends to arbitration clauses found in such agreements. Parties agreeing to such arbitration agreements can be certain that a wider gamut of possible disputes would be covered, and that there would be a deemed acceptance of the arbitration clause. Naturally, with incorporation of arbitration clauses through reference to standard form agreements, questions pertaining to validity are bound to arise, especially when truant parties would like to derail the process.

 

The First Instance Judgment

The dispute related to construction works for 5 villas in Dubai. The parties (respectively, the Employer and the Contractor) had executed an agreement for the said construction works and had made a general reference to incorporate the terms of the 1987 FIDIC Red Book General Conditions of Contract (“FIDIC Red Book”). The FIDIC Red Book is one of the agreements in the suite of FIDIC documents, which governs different aspects of construction agreements. Clause 67 of the FIDIC Red Book provides a detailed and multi-step dispute resolution process, requiring that all disputes must first be referred to the project Engineer, and if the parties unable to resolve the dispute in that forum, they may then proceed to arbitration under the ICC rules.

The Employer sued the Contractor before the Court of First Instance, Dubai, for over AED 41 million, and VAT and interest. The Contractor objected to the Court of First Instance’s jurisdiction by virtue of an arbitration clause present in the abovementioned FIDIC Red Book which was incorporated by reference through a signed agreement between the parties.

This objection was rejected by the Court of First Instance. The Court held that the arbitration clause did not impact the court’s jurisdiction. The Court of First Instance held that because there was no specific reference to the FIDIC Red Book arbitration clause in the signed contract between the parties, the agreement between the parties did not contain a valid arbitration clause.  It took the position that an arbitration clause contained in another document can be incorporated by reference only through a specific reference to that clause. According to the Court of First Instance, it was necessary that the consent to arbitrate seem obvious from a review of the contract. Unlike a clause concerning arbitration, which the Court of First Instance described as an “exceptional clause”, general terms contained in schedules and annexures could be incorporated by general reference.

 

The Court of Appeal Decision

Aggrieved, the Contractor approached the Court of Appeal, Dubai. The Court of Appeal disagreed with the Court of First Instance and set aside its decision. It held that the arbitration clause was validly incorporated by reference: a general reference to the FIDIC Red Book was sufficient to incorporate a valid and binding arbitration agreement between the parties.

 

The Court of Cassation Decision

The Employer then applied to the Court of Cassation, which overturned the Court of Appeal’s decision, holding that a mere general reference would be insufficient to prove that the parties were explicitly aware of the existence of an arbitration agreement. The Court of Cassation upheld the reasoning of the Court of First Instance.

 

Comparative Analysis

Because arbitration requires the consent of the parties, the debate around incorporation of arbitration agreement through reference is also an interesting insight into one of the central pillars of arbitration: party autonomy. A final, credible challenge to the incorporation of arbitration clauses through reference depends on the interpretation of the scope of the parties’ consent to have their disputes resolved through arbitration instead of local courts. It is important to ascertain by looking at national laws whether, in case of incorporation of an arbitration agreement by reference, a specific reference would be required for a valid and binding arbitration agreement under the New York Convention.

It is interesting to note that the national courts in the UAE have been consistent in their view that, since resolving disputes through arbitration deprives parties access to local courts, arbitration agreements are to be treated as “exceptional arrangements” and, as such, must be clearly drafted. Therefore, parties are generally encouraged to take preemptive steps so as to avoid a situation wherein the arbitration agreement incorporated through general reference is void.

Article II (1) of the New York Convention 1958 (“New York Convention”) simply requires Contracting States to recognize an agreement in writing as an agreement to arbitrate. The requirement itself is easy to understand; there is no other method of proving a conclusive arbitral agreement. The UNCITRAL Model Law also does not require a specific reference to the arbitration clause, and a general reference is sufficient. The only requirement of Article 7(2) of the UNCITRAL Model Law is that the contract is in writing and the reference is such as to make that clause part of the contract: see Fouchard Galliard Goldman on International Commercial Arbitration.

The international experience differs across jurisdictions. For example, in Psichikon Compania Naviera Panama v. SIER (see footnote 176 of Fouchard Galliard Goldman on International Commercial Arbitration), the French Court of Appeal, owing to a lack of a clear reference, held that the arbitration clause had not been firmly accepted by the other parties. Similarly, the Italian Court of Cassation has underlined the necessity of establishing party consent to adjudicate disputes through arbitration. The Court held that parties had to have knowledge of the arbitration agreement through specific reference to it in the main agreement.

German courts have taken a view that consent may be construed to be implied from relevant international trade usages and conventions, especially when such contracts are widely and typically used in the industry in question, and where such parties have been previously active in the relevant business. A United States court also upheld an arbitration agreement incorporated through general reference to another agreement. The Court stated that parties had “tacitly” agreed to the general terms of the document to which they had referred. This was despite the fact that the plaintiff had never been in possession of those general terms. The Indian Supreme Court has also upheld a printed arbitration agreement annexed to a bill of lading.

In view of the above comparative analysis, it can be concluded that while jurisdictions such as the UAE and Italy place importance on “party consent” while deciding the validity of an arbitration agreement incorporated by reference, it is equally important to recognize practical realities such as the fact that parties involved in such construction agreements are usually active in the industry and are aware of the industry’s general practices, as recognized by German and Indian courts.

 

Conclusion

According to the authors, excessive emphasis on the form by courts in the UAE is antithetical to the concept of party autonomy. Most construction contracts are entered into between sophisticated parties who are well aware of how the detailed suites of contracts work. The argument that a specific reference is required to demonstrate knowledge and, consequently, consent, seems out of sync with the commercial realities of the time. That being said, given the fact that debate over this issue can easily be resolved at the time of drafting, it is essential that commercial parties focus on the arbitration clause whilst negotiating their overall contractual agreements, ensuring that the arbitration agreement is drafted in clear and unequivocal terms.

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CPTPP and ISDS: Three Years On

Kluwer Arbitration Blog - Thu, 2021-08-12 01:22

On 2 June 2021, the British government announced that the existing 11 signatories (the “Parties”) to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (“CPTPP”) have agreed to the United Kingdom’s bid to begin the accession process.1)The signatories consist of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. jQuery('#footnote_plugin_tooltip_38148_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38148_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); International Trade Secretary, Liz Truss, commented that “CPTTP membership…will help shift our economic centre of gravity away from Europe towards faster-growing parts of the world, and deepen our access to massive consumer markets in the Asia-Pacific…without having to cede control of our borders, money or laws.” The optimism can hardly be said to be unwarranted when one considers the economic impact, given that the gross population of the CPTPP markets exceeds those of the United States and the EU.

However, the question of the CPTPP’s legal impact remains open, especially with regard to the Investor-State Dispute Settlement (“ISDS”) provisions under Section 9B of Chapter 9 of the CPTPP’s legal text.

This article sets out an overview of the CPTPP and its ISDS provisions and comments on the future of the CPTPP.

 

Overview of the CPTPP

The CPTPP, which developed from the Trans-Pacific Partnership’s (“TPP”) failure to enter into force after the United States withdrew in January 2017, is one of the world’s largest free-trade agreements. With a combined GDP of approximately $13.5 trillion, it has been projected to raise $147 billion in annual global income.

The legal text retains two-thirds of the TPP’s provisions, suspending or changing 22 provisions that were primarily favored by the United States. The legal text has to be read together with the relevant side letters, which are bilateral arrangements between specific Parties. Although the use of side letters is not unique to the CPTPP (see, for example, the ASEAN-Australia-New Zealand Free Trade Area (“AANZFTA”) and the United States-Mexico-Canada Agreement (“USMCA”)), the extensiveness of its use is noteworthy: New Zealand (25); Canada (40); Australia (21); and Vietnam (35).

Administratively, Chapter 27 provides for the formation and functions of a TPP Commission composed of government representatives of each Party (the “Commission”). Since the CPTPP’s entry into force on 30 December 2018, the Commission has met at least once a year to endorse various decisions.

 

Overview of the CPTPP’s ISDS Provisions

ISDS is provided under Section 9B of Chapter 9, where a multi-tiered dispute resolution mechanism is set out.

Prior to commencing arbitration, the claimant is required to serve “a written request for consultations setting out a brief description of facts regarding the measure or measures at issue” (Article 9.18.2). Disputing Parties are then required to engage in consultations and negotiations for six months from the respondent’s receipt of the claimant’s written request for consultations (Article 9.19.1). The claimant is also required to serve a written notice of intent to submit a claim to arbitration containing specified details on the respondent 90 days before submitting a claim to arbitration (Article 9.19.3). The said written notice must be accompanied by a written waiver “of any right to initiate or continue before any court or administrative tribunal under the law of a Party, or any other dispute settlement procedures, any proceeding with respect to any measure alleged to constitute a breach referred to in Article 9.19” (Article 9.21.2(b)).

Arbitration may be commenced in accordance with any of the following regimes: ICSID Convention and the ICSID Rules of Procedure for Arbitration Proceedings; the ICSID Additional Facility Rules; the UNCITRAL Arbitration Rules; or, any other arbitral institution or arbitration rules that the claimant and respondent agree on (Article 9.19.4). The arbitration must be commenced within three years and six months from the date on which the investor first acquired, or should have first acquired, knowledge of the breach (Article 9.21.1).

At the Commission’s first meeting on 19 January 2019 in Tokyo, it endorsed a decision on ISDS Code of Conduct per Article 9.22.6. Of note is paragraph 3(d) of the Annex that provides as a governing principle that “Upon selection, an arbitrator shall refrain, for the duration of the proceeding, from acting as counsel or party-appointed expert or witness in any pending or new investment dispute under the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or any other international agreement.” The restriction is particularly broad. It covers other disputes that the claimant and respondent are uninvolved in.

Parties are entitled to bring a claim based on the actionable breaches of obligations under Section 9A in respect of a “covered investment,” that is given a broad definition under Article 9.1, save for “judgment entered in a judicial or administrative action.”

Where the respondent Party is Chile, Mexico, Peru, or Vietnam, the claimant must elect between litigation in the court or administrative tribunal of those parties or arbitration in accordance with Section 9B. The election shall be definitive and exclusive (Annex 9-J).

In addition, New Zealand has signed side letters with Australia, Peru, Brunei, Malaysia, and Vietnam to exclude the direct application of ISDS provisions under Section 9B. With regard to New Zealand vis-à-vis Australia and Peru, no Australian and Peruvian investors, in relation to New Zealand, “shall [not] have recourse to dispute settlement…under Chapter 9, Section B (Investor-State Dispute Settlement) of the Agreement,” and vice-versa. As regards New Zealand vis-à-vis Brunei, Malaysia, and Vietnam, any dispute between an investor and the respondent State that would otherwise be subject to ISDS under Section 9B of Chapter 9 must comply with a procedure similar to the first tier of Section 9B’s multi-tiered dispute resolution clause for six months. For the second tier (commencement of arbitration) to operate, the respondent State must consent to the application of Chapter 9 to the dispute. In the case of Vietnam, specific consent by the respondent State is required.

Although there is no official explanation on the requirements of specific consent, it is worth noting that the side letters between New Zealand and Vietnam also contain a provision stating that “nothing in this side letter shall derogate from the rights and obligations of the Parties under any existing international agreements to which Parties are party”—these agreements include the AANZFTA Agreement, under which both parties have recourse to ISDS per Article 20 of Chapter 11. Hence, it is plausible that specific consent was intended to circumscribe arbitrations under the CPTPP’s ISDS regime in light of other international agreements.

 

The Future of ISDS under the CPTPP

As illustrated by New Zealand’s side letters, the ISDS provision is not written in stone. Parties are free to augment its applicability.

Already we see a recent trend of States moving away from ISDS. In the USMCA that succeeds the North American Free Trade Agreement, Canada is notably absent from Chapter 14 on ISDS. (See definition of “Annex Party” in Annex 14-D of Chapter 14). The EU is looking to reform existing ISDS mechanisms through the creation of a multilateral investment court to preside over disputes arising from future bilateral EU investment agreements. The Regional Comprehensive Economic Partnership (“RCEP”) that is currently the world’s largest FTA excludes any ISDS dispute settlement mechanism under Chapter 10 that deals with investments. In addition, the Biden administration has made clear that the United States would not be returning to the CPTPP anytime soon.

In light of this, it appears that the weight of preserving support for ISDS has fallen chiefly on the shoulders of Japan, given the strong support by its business community for ISDS. However, in the face of New Zealand and Australia’s notable opposition to ISDS, Japan’s influence alone may not be sufficient in promoting and sustaining the current regime for ISDS. The fact remains that to date, there has been no reported case of a claim commenced under the CPTPP’s ISDS regime could reflect its lack of popularity.

Consequently, the most immediate indicator of continued support for ISDS in the CPTPP may be revealed in the outcome of United Kingdom’s accession process. According to the Commission’s endorsed decision regarding Accession Process of the CPTPP on 9 January 2019, an Accession Working Group will be establishedto negotiate the accession of the aspirant economy” (para. 2.3, Annex to CPTPP). At the first meeting with the Accession Working Group, the United Kingdom will have to “identify any additional changes it will need to make to its domestic laws and regulations, in order to comply with the obligations of the CPTPP” (id. para. 3.3). It is likely that the subject of ISDS will be one of the important issues given that ISDS featured significantly with mixed views in the United Kingdom’s Department for International Trade’s public consultation on potential United Kingdom’s accession to the CPTPP.

The outcome of the United Kingdom’s negotiations on ISDS is difficult to forecast. On the one hand, the United Kingdom has shown signs that it is willing to exclude ISDS as seen in its in-principle agreement with Australia that the investment chapter in the United Kingdom-Australia FTA will not include an ISDS mechanism. On the other hand, when Minister of State for Trade Policy, Greg Hands was asked in the House of Commons in late May, on whether the government could rule out the inclusion of ISDS in the CPTPP, he stated that “It is a live negotiation, and there will be a chapter on investment…We are huge investors in each other’s markets, and…that the UK has never lost an ISDS case.”

One of the main pushbacks against ISDS has been its use by private companies to sue States for the impacts of public policies that result in limiting profit margins. In this regard, the recent release of the new Canadian Foreign Investment Promotion and Protection Agreement Model on 13 May 2021 reflects a shift from older investment and trade treaties that focused primarily on achieving economic prosperity, to a “new” generation of treaties that tend to provide comprehensive frameworks that reflect national (and international) agendas for promoting sustainable development, corporate social responsibility, and human rights, while also expressly addressing how this may interact with the interests of private businesses.

The CPTPP’s ISDS regime has not fallen behind in this regard. In respect of claims under the CPTPP’s ISDS regime, Article 9.16 provides a safeguard for States “to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental, health or other regulatory objectives.” Article 9.17 contains an affirmation by States to encourage enterprises operating in their territories “to voluntarily incorporate into their internal policies those internationally recognised standards, guidelines and principles of corporate social responsibility” that the respective State endorses or supports. These provisions may soften the negative image of ISDS in the sphere of public opinion over the course of accession negotiations.

If the United Kingdom follows in New Zealand’s footsteps and negotiates side letters to waive investors’ recourse to ISDS, this might pave the way for other potential applicants like the Philippines and Taiwan to follow suit in future negotiations, although one should be cautious in being too quick to pronounce the end of ISDS. As mentioned in the previous section, States obligations under the CPTPP are part of a wider network of international trade agreements. The lack of uptake of ISDS under the CPTPP could simply reflect an aversion of States against opening themselves up to claims on multiple fronts as opposed to a definitive end to ISDS.

References[+]

References ↑1 The signatories consist of Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. function footnote_expand_reference_container_38148_30() { jQuery('#footnote_references_container_38148_30').show(); jQuery('#footnote_reference_container_collapse_button_38148_30').text('−'); } function footnote_collapse_reference_container_38148_30() { jQuery('#footnote_references_container_38148_30').hide(); jQuery('#footnote_reference_container_collapse_button_38148_30').text('+'); } function footnote_expand_collapse_reference_container_38148_30() { if (jQuery('#footnote_references_container_38148_30').is(':hidden')) { footnote_expand_reference_container_38148_30(); } else { footnote_collapse_reference_container_38148_30(); } } function footnote_moveToReference_38148_30(p_str_TargetID) { footnote_expand_reference_container_38148_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38148_30(p_str_TargetID) { footnote_expand_reference_container_38148_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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The Role of Law in Legal Disputes

ADR Prof Blog - Wed, 2021-08-11 21:25
Law school teaches students that law is a seamless web of rules emanating from authorities like statutes and cases which they must memorize and finely parse in hypothetical cases. In real life, practitioners generally think of law in terms of Oliver Wendell Holmes’s famous definition:  “prophecies of what the courts will do in fact.” Of … Continue reading The Role of Law in Legal Disputes →

Can You Have Your Cake and Eat It Too? Unilateral Appointments in Indian Arbitration

Kluwer Arbitration Blog - Wed, 2021-08-11 01:00

This blog has previously discussed the illegality of unilateral appointments of sole arbitrators in India. However, a good beginning is only half the battle won.  Before one dwells further, it is important to gauge the Indian position on unilateral appointments.  First, as stated in TRF Ltd. v. Energo Engineering (“TRF”), if the nominated arbitrator is barred from presiding such arbitration under Section 12(5) read with Schedule 7 of the Arbitration and Conciliation Act, 1996 (“Act”), by extension of his inability, his nomination for a replacement is invalid under the law. The invalidity stems from the fact that such an arbitrator would have an interest in the outcome of the proceedings and his nomination could be biased. Second, as upheld in Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (“Perkins”), even if the person authorised to nominate is not an arbitrator himself, his interest in the outcome of the dispute would invalidate an appointment made by him. Essentially, both judgments bar one party from having the exclusive power to appoint the arbitrators.

Be that as it may, several arbitration agreements now stipulate an alternative that is equally lopsided but does not prima facie fall afoul of the grounds stated in Schedule 7 or the ratio decidendi of TRF and Perkins. Such arbitration agreements allow one party originally disqualified to directly nominate an arbitrator (because of his interest in the dispute) to provide an exhaustive list of names from which the other party would have to select an arbitrator. In December 2020, the Supreme Court of India (“SC”) in Railway Electrification vs. M/s ECI-SPIC-SMO-MCML (JV) (“Railway Electrification”) ruled on the validity of such appointments. Can such a guise of autonomy be enough or does the current jurisprudence bar any and all appointments where the power of appointments is not evenly balanced?  Expanding on the issues dealt with by the SC, this post aims to critically examine the judgment and its reasoning.

 

Facts and Judgment

In this case, the Railway Board (“Board”) invoked the arbitration agreement they had signed with the contractor. The contractor did not comply with the terms of the appointment in the arbitration clause and petitioned the High Court (“HC”) seeking the appointment of an arbitrator. To put things into perspective, the arbitration agreement in their contract empowered the General Manager (“GM”) of the Board to identify a roster of four serving railway electrification officers from which the contractor could nominate candidates for a sole arbitrator. The contractor would be required to nominate two candidates from this panel and thereafter, the GM would be bound to pick at least one of the nominees to act as an arbitrator. Further, the clause entitled the GM to appoint the remaining arbitrators and indicate the Presiding Officer. The contractor argued that the contract does not make way for the appointment of a neutral arbitrator while the Board argued that the arbitrator was to be appointed as per the terms of their contract. The HC rejected the Board’s argument and exercised its right to appoint an arbitrator. Aggrieved, the Board challenged the appointment before the SC.

The SC overturned the HC’s decision and held that the power of the Board to nominate members was counter-balanced by the power of the contractor to select two names from the suggested panel. The SC also noted its decision in Perkins, which stated that“…where both the parties could nominate respective arbitrators of their choice…whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party…” The SC countered the contractor’s reference to TRF by stating that the judgment had noted that “…when there are two parties, one may nominate an arbitrator and the other may appoint another. That is altogether a different situation.” and thus, remained inapplicable in this case.

 

Analysis

An arbitrator essentially acts as a judge when it comes to arbitration proceedings. Due to the nature of his role as an adjudicator, it is important that he remains independent of both parties, and thereby, thoroughly impartial. As per 12(5) of the Act, any person whose relationship falls under categories stipulated in Schedule 7 of the Act is legally disentitled from being appointed as an arbitrator. Schedule 7 prohibits an employee, consultant, or advisor to one of the parties from acting as an arbitrator. Thus, the GM of the Board, who has been empowered to select a panel of arbitrators by the Board, is himself disqualified from acting as an arbitrator under Section 12(5) of the Act.

At this juncture, it is important to refer to the SC’s judgment in Pratapchand Nopaji v. Kotrike Venkata Setty & Sons which upheld the validity of the maxim ‘qui facit per alium facit per se’ in the Indian context. In other words, the SC upheld that it is impermissible in law for one to do through others what one is statutorily ineligible to do himself. Therefore, as an extension of the GM’s incapacity under Section 12(5) of the Act to act as arbitrator, any appointment under his control is tainted with illegality. This is rational because the GM is an interested party, and hence, his ability to unilaterally dictate the composition of the panel essentially results in one party completely charting the course of the dispute resolution process. However, in the aforementioned case, the SC held that the GM’s power was countervailed by the contractor’s right to pick two arbitrators from the panel selected by the former. In the author’s opinion, the right to pick from a list curated by someone who has an interest in the outcome of the dispute is merely Hobson’s choice. The fact that not even one of the arbitrators on the panel could be outside the scope of the Board’s influence raises serious concerns over the possibility of bias and the fairness in the procedure and outcome of the proceedings.

Furthermore, the reliance on excerpts from TRF and Perkins to justify the appointments was devoid of context. In TRF, the SC held that when both parties have the right to nominate their respective arbitrators, the same was unmistakably different from unilateral appointments. Thereafter, in Perkins, the SC adduced a reason to its conclusion in TRF. The SC said that the rationale behind the same was that the party’s powers to nominate an arbitrator could be counter-balanced by the other party’s power to do the same. Objectively, both propositions envisage a situation where both parties have an equal bargaining ground with each having the power to appoint arbitrators independently of the other. By contrast, in Railway Electrification both the parties are not placed equally in the selection process, nor could the contractor elect its respective arbitrator without the Board’s influence. It is inconceivable to think that the Board’s power to elect its own arbitrators, elect the President of the tribunal, and also to curate the panel of arbitrators could be counteracted merely by the contractor’s right to pick an arbitrator from the roster. Thus, the propositions put forth in TRF and Perkins deal with a different scenario and cannot be used to justify the lopsided allocation of power where one party can only pick from a panel of arbitrators proposed by the other.  Conflating the two is unfounded and falls wide off the mark.

Having said that, it is important to review such conclusions against the touchstone of party autonomy. When the arbitration agreement tilts in favour of one of the parties, the issue boils down to the thin line between procedural impropriety and party autonomy. In this regard, one can refer to the 246th Law Commission Report for clarity. The Report provides: “the principles of impartiality and independence cannot be discarded at any stage of the proceedings, specifically at the stage of constitution of the Arbitral Tribunal, it would be incongruous to say that party autonomy can be exercised in complete disregard of these principles — even if the same has been agreed prior to the disputes having arisen between the parties.” Thus, party autonomy reigns supreme when it comes to arbitration, however, this power cannot be exercised at the expense of basic considerations of impartiality and independence. In sum, an arbitration agreement cannot make way for a proceeding that prescribes a semblance of a fair procedure regardless of it being biased and against the principles of natural justice.

 

Concluding Remarks 

In December 2020, the SC’s faulty reasoning in Railway Electrification found support in the Delhi High Court (“DHC”) judgment of M/s Iworld Business Solutions Private Limited vs M/s Delhi Metro Rail Corporation Limited as the DHC deemed that the appointment of an arbitrator selected through an exhaustive roster forwarded by one party to the other was legal. The principal civil court held that by no stretch of the imagination could the impartiality of such a panel be brought to question. However, if Indian courts continue to allow such appointments where one party is allowed to exercise an exclusive right to panel selection, the Indian arbitration landscape will be severely affected. No sensible/reasonable law should allow such blatant violations of independence and impartiality. In fact, courts in India are bound by Section 18 of the Act which mandates equal treatment of both parties and stipulates that both parties should be given full opportunity to present their case. Thus, if one party is allowed to take advantage of such loopholes in the law and circumvent the limitations placed by Schedule 7, the entire objective of Section 18 is defeated.

The Railway Electrification case is currently under consideration and the Hon’ble Chief Justice of the SC has been requested to constitute a larger bench to probe into the correctness the judgment. In order to nip such unequal panel formation in the bud, the SC needs to assess the correctness of Railway Electrification at the earliest.

 

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Analysis of Environmental Dispute Resolution Mechanisms in the EU-UK Trade Deal

Kluwer Arbitration Blog - Tue, 2021-08-10 01:27

In December 2020, the EU and UK concluded the negotiations of the  Trade and Cooperation Agreement (TCA). This Agreement is a crucial step towards maintaining a long-standing relationship between the EU and the UK. One of the principal goals of the TCA is to achieve climate neutrality by 2050; with this objective, the treaty establishes environmental protection standards. These include non-regression provisions, rebalancing mechanisms, and dispute settlement mechanisms, among others. While the inclusion of such provisions is to be celebrated, several loopholes in the TCA may prevent them from achieving the desired results. This post analyses the loopholes in the enforcement mechanism, the requirement that any measure impacts on trade and investment  for it to constitute a violation of the environmental rules, and the possibility of third-party participation in environmental disputes.

Enforcement Mechanisms

In the TCA, environmental matters are included in Chapter 7 and are categorized as essential elements. If a party infringes them, it may lead to suspension of the treaty regime; thus, implying that the States have given substantial weight to environmental concerns.

In case of potentially serious environmental damage, the agreement provides for safeguard measures, which can be unilaterally applied by the parties (Article 773), after initial consultations between them. Where the applied safeguard creates an imbalance, the counterparty can adopt appropriate rebalancing measures, and if there is any issue regarding safeguard measures, that party may then resort to arbitration procedures. However, there is no provision for an expedited proceeding to prevent imminent damage to the environment. Rather, the standard six-month arbitration procedure will be applied (Article 739).

In this regard, in comparison to the provisions of the TCA, other treaties such as UNCLOS or the PCA Environmental Rules, expressly empower the arbitral tribunal to take provisional measures in ongoing proceedings. These measures are an expeditious remedy to restrict the infringing party from causing irreparable harm to the environment.

In addition, the EU has recognized that the lack of evidence and data, and the insufficient powers vested in enforcement bodies are factors holding back the implementation and compliance of environmental standards. The TCA could have bridged these gaps by vesting arbitrators and/or panels of experts with the power to subpoena. The ability to subpoena is essential for verifying party disclosures and validating the accuracy of information and evidence. Had this power been vested in dispute resolution bodies under the TCA, they could access essential scientific information and achieve a full discovery of facts, which is crucial for dispute resolution bodies to rule in environmental cases and, in this sense, to further environmental protection.

The Requirement that a Measure Impact “Trade and Investment” as a Pre-requisite for Violation of the TCA’s Environmental Rules

Article 391 of the TCA contains the so-called, “non-regression clause”, which determines that parties can refer disputes to expert panels only in cases where the non-compliance of environmental standards “affect trade or investment.Environmentalists have observed that adducing evidence which meets this threshold of “affecting trade” is difficult to prove. For instance, Professor Barnard explains that “single changes in the legislation may not impact trade, which will make difficult to trigger the threshold of violation.” This also leaves uncertainty and ambiguity as to what is considered a grave enough impact on trade for a party to be able to raise a dispute under the TCA.

Additionally, while the TCA mostly regulates trade among the parties, there is a strong environmental cooperation component as outlined in section 7 of the Preamble. However, the treaty contains no remedial procedure for a panel of experts to settle environmental disputes which are unrelated to trade and investment, and thus a vital area has been left uncovered from an adjudicatory mechanism. The narrow scope of the regression clause, limited to disputes that “affect trade”, has also been criticised by the Institute for Public Policy Research, which suggests that the non-regression principle should apply to all circumstances and that the contravention of environmental legislation should be sufficient to hold a party liable, regardless of whether a measure affects trade and investment.

Similarly, Article 411 on rebalancing measures allows parties to take countermeasures in response to acts of the other party that have a “material impact on trade and investment”, where such measures can cause “significant divergences”. The phrase “material impact” is defined as a threshold entailing “reliable evidence [of impact] and not a remote possibility”, which means that the party is required to present well-grounded, convincing evidence of the alleged “material impact”. Further, the requirement of “significant divergences” implies that the party must evince more than one severe discrepancy. This criterion leaves room only for grievous breaches, and the parties will often be unable to meet such a high standard of proof. This also allows member states to deviate from furthering environmental protection while only complying with the bare minimum standards.

This position is analogous to that in the Trail Smelter judgment, where the party had to show “materialized damage” and follow a “de minimis” rule. Such approaches discourage legal actions where the impact of the breach is negligible. Thus, parties can only apply rebalancing measures where there is clear and significant evidence of environmental damage and not mere minor damages.

Contrary to the above, jurists such as Medes Malaihollo have noted that it is difficult for parties to present evidence of actual materialized damage. In the same line, in Ireland v UK and New Zeeland v Japan, both adjudicative bodies held that the potential or foreseeable risk of harm, rather than material damage, was sufficient to hold a party liable for the breach of their duty of care under the precautionary principle. This is a reasonable threshold that does not defer to the tribunal to decide which measures are appropriate in the absence of material evidence, thus, preventing environmental degradation.

Finally, it is essential to adopt the precautionary principle for broadening the bar to accommodate non-trade environmental disputes under the TCA. This approach is crucial as the rebalancing mechanism only allows parties to seek arbitration proceedings due to significant deviations in environmental standards, which are extremely limited. A study conducted by IPPR indicates that arbitral tribunals will settle environmental issues in rare cases under the current threshold. Adopting the precautionary principle will provide parties standing to raise environmental disputes under the TCA as both potential risks and materialized evidence will be actionable under this threshold.

Civil Society Participation in Environmental Disputes

It is widely known that civil society actors play a pivotal role in ensuring transparency, protecting public interests, and efficiency in environmental disputes. Their participation in dispute resolution mechanisms is quintessential. On this matter, the TCA allows arbitral tribunals (not expert panels) to accept amicus curiae submissions but only permits limited participation through written submissions. Further, the parties are permitted to receive information through expert advice or domestic advisory groups (DAGs).

Under the current provisions, amicus curiae submissions do not ensure the active participation of third parties, such as might be achieved by providing them with access to documents or oral arguments. Additionally, studies have shown that DAGs are not entirely representative of all the interests in environmental disputes. The disadvantaged and regional minorities are not part of these groups most of the time. In this vein, states should adopt internal legislation to ensure the meaningful participation of all groups.

On the contrary, the Trans-Pacific Partnership Agreement vests substantive powers to civil society by allowing access to documents and making oral arguments in initial and appeal proceedings. Further, UNCITRAL’s Working Group III has acknowledged that several actors who have direct interests in investor-State disputes should be included through joinder or intervention to have an opportunity to protect their rights. In this respect, States could adopt similar policies for DAGs to represent the interests of all the actors of civil society in TCA disputes.

Finally, under the TCA, arbitral tribunals are vested with plenary powers to accept or reject submissions from third parties. This makes it necessary to establish a detailed standard to carry out this process to avoid consistency and transparency concerns. For instance, the TCA could incorporate similar criteria to the ones outlined in Article 37 of  the ICSID Convention, where tribunals are able to consider whether a submission brings any novel perspective to the existing arguments or consider the inclination of submitted amicus curiae.

Conclusion

The TCA has endeavored to create a stringent dispute resolution mechanism for resolving environmental disputes. However, some loopholes still need to be addressed to achieve the desired goal of environmental protection. Primarily, it is significant that parties have standing to resolve environmental disputes that are not restricted by the narrow interpretation of the non-regression and rebalancing clauses. This will deter the parties from deviating from protection standards and will provide room for adequate legal review. Secondly, third-party oral intervention and joinder of third parties should be permitted to provide transparency and to ensure a broad representation of all interests. Finally, tribunals should have powers to subpoena and to order interim measures to ensure that the treaty has effective enforcement mechanisms.

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ALEXANDRA CARTER TO DELIVER MORITZ’S 2021 LAWRENCE LECTURE

ADR Prof Blog - Mon, 2021-08-09 21:14
On Monday September 13, 2021 (beginning at 12:10 eastern), Alexandra Carter will deliver The Ohio State University Moritz College of Law’s 2021 Lawrence Lecture on Dispute Resolution: “Ask for More.” Here is the description from OSU’s website. Negotiation is not a zero-sum game. It’s an essential skill for your career that can also improve your … Continue reading ALEXANDRA CARTER TO DELIVER MORITZ’S 2021 LAWRENCE LECTURE →

Missouri is Hiring Entry-Level or Lateral Faculty

ADR Prof Blog - Mon, 2021-08-09 16:51
From my colleague, Ilhyung Lee, Director of Missouri’s Center for the Study of Dispute Resolution: The University of Missouri School of Law invites applications for one full-time tenure-track or tenured position.  Senior lateral candidates should have a national reputation for distinguished scholarship and a record of excellence in teaching.  Entry-level and junior lateral candidates should … Continue reading Missouri is Hiring Entry-Level or Lateral Faculty →

Time for Class Action Arbitrations in Korea?

Kluwer Arbitration Blog - Mon, 2021-08-09 01:00

In a class action lawsuit, a plaintiff or group of plaintiffs bring claims on behalf of similarly situated individuals. The legislatures in some civil law countries including Korea, have recently proposed or implemented measures allowing or expanding the use of class actions in their court systems.

Considering that Korea currently does not have in place the framework or rules for class arbitrations, introducing class actions in the Korean courts could encourage and provide a legal basis for permitting class action arbitrations in Korea.

 

Recent Development of Class Actions in Korea

Currently, class actions are available in Korea only for securities related cases. However, in September 2020, the Korean government proposed a bill (the “Bill”) that would allow a plaintiff to initiate a class action in any area of law. Further, class action lawsuits in Korea currently have stringent requirements, such as the requirement that the class representative shall be the person with the greatest economic interest in the outcome, which render it arguably difficult to file a class action lawsuit.

The Bill, if passed as a legislative act (“Act”), is expected to loosen up several requirements for filing of class action lawsuits, which includes key proposed provisions such as: (1) easing of requirements on class and class representatives; (2) expansion of venues which permits class action claims to be brought before a district court under a high court with jurisdiction over one of the defendants, and not only before the district court with jurisdiction over one of the defendants; (3) introduction of pre-litigation discovery; and (4) permission of jury trials.

Significantly, the Act would apply retroactively, thus allowing potential plaintiffs to file class action lawsuits for claims that are filed before the Act to take effect, if they are within the prescriptive period under the statute of limitations. The intent behind this proposal is to expand the availability of class action lawsuits to a wider scope of similarly situated individuals.

While the Act will exclusively apply to court litigation, it begs the question of what impact it would potentially bring to arbitration in Korea, considering that class action arbitrations could likewise provide relief to a larger number of aggrieved parties and fulfill the intent behind the Bill.

The passage of the Bill would perceivably favor the argument for permitting class action arbitrations in Korea.

 

Possible Framework for Class Action Arbitrations in Korea

While the Bill is still in its early stages of implementation, it is now an appropriate juncture to consider its implications for arbitrations given that it will take considerable time to set up the framework for class action arbitrations.

As a first step, the Korean arbitration community may propose arbitration rules tailored to class action arbitrations in Korea. To establish the legal foundation and specific arbitration rules for class action arbitrations, key issues and challenges to be aware of must be identified which may begin by referring to existing rules on class arbitrations.

One example of such framework is the American Arbitration Association (the “AAA”) which administers class arbitrations according to its Supplementary Rules for Class Arbitrations (the “Supplementary Rules”).  According to Article 1 of the Supplementary Rules, they apply where a party submits a dispute to arbitration on behalf of a purported class by supplementing any other applicable AAA rules.  It also contains rules on key topics such as “Class Certification” (Article 4), “Class Determination Award” (Article 5), and “Form and Publication of Awards” (Article 10), all of which will be valuable resources to the Korean arbitration community when it seeks to develop and implement its own class action arbitration rules.

Once the draft class action arbitration rules are put together, the Korean arbitration community may be consulted for comments and suggestions on changes to the proposed class action arbitration rules, especially on arguably the most challenging aspects in any class action arbitration which is class certification where it is often a point of contention as to whether a class should be certified and whether the claimant is an appropriate class representative. Accordingly, the draft class action arbitration rules should provide a list of clear and detailed conditions that the tribunal and parties may consider when determining whether a class should be granted certification.

 

Training and Nurturing

Next, the Korean arbitration community may develop a long-term plan to nurture and train local arbitrators and practitioners to handle class action arbitrations in order to ensure the fair and efficient conduct of class action arbitration proceedings. One consideration may be that arbitrators are required to possess the requisite knowledge and experience to resolve the issues at disputes.

For example, a prerequisite for class action arbitrations is the determination of whether a class can be certified.  This would require the arbitral tribunal to consider (1) numerosity of the class; (2) whether questions of law or fact are common to the class; (3) whether the claims or defenses of the representative parties are typical of the claims or defenses of the class; (4) whether the representative parties will fairly and adequately protect the interests of the class; (5) whether counsel selected to represent the class will fairly and adequately protect the interests of the class; and (6) whether each class member has entered into an agreement containing an arbitration clause that is substantially similar to that signed by the class representative(s) and each of the other class members. 

However, given the inherent complexity of certifying class actions as demonstrated by the abovementioned multifaceted consideration required, it is unlikely that the Korean arbitration community will be equipped with such experienced arbitrators or practitioners at the initial stage.

It is thus inevitable that in the early stages of class action arbitration in Korea, arbitrators and practitioners from other countries who already have relevant experience will probably play key roles in the community. It will likely take several years for Korea to see its first group of local class action arbitrators. A long-term plan to nurture and train class action arbitration arbitrators and practitioners is needed.

 

Conclusion

There is no doubt Korea will rise to the challenge. Korea has swiftly become a dynamic, global economic powerhouse and has arisen as a recognized arbitration hub for parties conducting business in Asia. Once the Act becomes effective and supports the growth of class action arbitrations in Korea, a heightened need and demand for dispute resolution in Korea through class arbitrations would be foreseeable.1)The authors would like to thank Caroline Yoon of Barun Law LLC for her invaluable assistance in the preparation of this article. jQuery('#footnote_plugin_tooltip_38248_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38248_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

References[+]

References ↑1 The authors would like to thank Caroline Yoon of Barun Law LLC for her invaluable assistance in the preparation of this article. function footnote_expand_reference_container_38248_30() { jQuery('#footnote_references_container_38248_30').show(); jQuery('#footnote_reference_container_collapse_button_38248_30').text('−'); } function footnote_collapse_reference_container_38248_30() { jQuery('#footnote_references_container_38248_30').hide(); jQuery('#footnote_reference_container_collapse_button_38248_30').text('+'); } function footnote_expand_collapse_reference_container_38248_30() { if (jQuery('#footnote_references_container_38248_30').is(':hidden')) { footnote_expand_reference_container_38248_30(); } else { footnote_collapse_reference_container_38248_30(); } } function footnote_moveToReference_38248_30(p_str_TargetID) { footnote_expand_reference_container_38248_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38248_30(p_str_TargetID) { footnote_expand_reference_container_38248_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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More on Gary Friedman’s Not-So-Excellent Adventure in Politics

ADR Prof Blog - Sun, 2021-08-08 18:59
The Association for Conflict Resolution of Greater New York and the John Jay College of Criminal Justice in the City University of New York recently hosted an interesting breakfast roundtable featuring Gary Friedman, discussing his unfortunate tenure as a local elected government official.  You may recall that this was the subject of a series of … Continue reading More on Gary Friedman’s Not-So-Excellent Adventure in Politics →

Cairn Moves to Seize Air India Assets to Recover Hefty Award against India: Worthwhile Choice or a Futile Exercise?

Kluwer Arbitration Blog - Sun, 2021-08-08 01:39

In May 2021, Cairn Energy PLC filed a lawsuit before a New York Court to enforce a USD 1.2 billion investor-State arbitral award against India passed by the Permanent Court of Arbitration. It sought, in particular, a proclamation that State-owned entity (SOE), Air India “should be held jointly and severally responsible for India’s debts, including from any judgment resulting from recognition of the award” (Complaint, ¶ 31). A detailed account of the facts of this case can be accessed here.

The protection of States’ assets against enforcement actions has remained an insufficiently explored area of international law, even though the doctrine of sovereign immunity is central to this discourse. This post compares and analyses cases where States have invoked sovereign immunity to resist attachment of assets of SOEs like Air India and the rationale adopted by courts towards piercing the corporate veil to ascertain whether they may be treated as the State’s “alter ego”.

 

Sovereign Immunity and Executing against SOEs

The doctrine of sovereign immunity, emanating from the principles of comity and equality of States, forms an integral part of customary international law in State practice. This doctrine acts as a procedural bar, ensuring that governments remain protected from the burden of defending lawsuits overseas. Its narrow object is to keep properties of States and their representatives immune against enforcement measures in foreign courts.

The United Nations Convention on Jurisdictional Immunities of States and their Property (UNCSI) has been the only sustained endeavour to develop a uniform framework of international guidelines, aiming to provide a comprehensive code for the immunity of State assets. This Convention, however, has only been ratified by 22 States and is awaiting entry into force since 2004. Thus, the lack of a widely-ratified international convention on this topic has resulted in a situation where domestic courts must interpret and determine the issue of immunity by reference to customary international and domestic law, including potential immunity for SOE assets against coercive measures like attachment in execution proceedings.

Precedential Analysis

Although the doctrine of sovereign immunity is adopted by both common and civil law jurisdictions, much inconsistency lies in the treatment of an immunity plea in execution matters.  This has prompted award-creditors to painstakingly select the forum that is most likely to execute an award. Through the years, several attempts have been made by investors (much like Cairn) to satisfy their awards against the State assets located in jurisdictions considered to be “pro-execution”, such as the United States. Thus, this section examines two significant American judgments that may influence the outcome in Cairn’s proceedings. To draw a comparison with how civil law jurisdictions have dealt with similar facts, this section also discusses a prominent and contemporary Dutch case.

In a discussion regarding the separability of State debts from SOEs, the 1983 case First National City Bank (now, Citibank) v. Banco Para el Comercio Exterior de Cuba (“Bancec”) is important. The question was whether Citibank could recover its dues from Cuba by expropriating the assets of Bancec, a known organ of the Cuban government. The US Supreme Court pierced the corporate veil and, in the process, formulated the ‘Bancec factors’ to determine, in effect, whether a corporation was functioning as the wholly-owned instrumentality of a foreign government. The factors were: (1) the extent of the government’s economic control in the entity; (2) whether the government is the beneficiary of the entity’s profit-making; (3) the extent to which government officials manage the daily affairs of the entity; (4) whether the entity’s conduct supplements the government in any way; and (5) whether separating identities from the entity would facilitate the State to avoid obligations in US Courts. These factors were later crystalized in Rubin v. Islamic Republic of Iran. More recently, in the 2019 decision Crystallex International Corporation v. Bolivarian Republic of Venezuela, the Venezuelan government was found to be the real beneficiary of the shares and profits generated from its SOE, Petróleos de Venezuela SA (PDVSA). To adjudicate, the US Court of Appeals for the Third Circuit relied heavily on the Bancec factors while also recognizing that they do not purport to create a ‘mechanical’ formula and should only be applied on a case-by-case basis. Incidentally, in the context of enforcement of awards, the Third Circuit reformulated the Bancec factors as follows: (1) the extensive control prong need not automatically entail a nexus between the aggrieved investor and the entity against which enforcement was sought; (2) a formal principal–agent relationship  was not necessary as a mandatory requirement to establish extensive control; (3) consideration of third-party interests was not a pre-requisite when determining asset attachment; (4) the court cannot adjudicate upon later events but may only rely on the subsisting record while evaluating the status of the entity; (5) the appropriate burden of proof was the ‘preponderance of evidence’, as opposed to a ‘clear and convincing’ standard; and (6) the equitable component in treating one entity as the alter ego of another need not be determined by the court.

Coming to the civil law perspective, Dutch courts follow the General Provisions Act 1829 in matters of sovereign immunity of foreign State properties. Section 13a has enshrined that enforceability (of awards) shall be regulated as per restrictions recognized under international law, thus limiting the jurisdictional powers of national courts. In Anatolie Stati v. Kazakhstan, the Dutch Supreme Court took a strikingly dissimilar stand compared to US Courts in enforcement of the award passed in favour of the claimant. Initially, the Amsterdam Court of Appeal allowed seizure of Kazakhstan’s shareholding in a Dutch company, held through the Kazakh sovereign wealth fund, Samruk-Kazyna. The rationale behind the decision was Samruk’s lack of “factual economic independence” from the sovereign in invoking its legally separate nature, formulating its own policies and digressing from State policies. It was emphatically clarified that due to Samruk’s purpose of incorporation and business being commercial in nature, the shareholding could not be brought within the purview of sovereign immunity. However, the claimant’s victory was short-lived as, in December 2020, the Supreme Court of the Netherlands set aside this decision, adjudging it “erroneous in law” (Judgment, ¶ 3.2.4). In doing so, the apex court demonstrated allegiance to the UNCSI as customary international law, applying its Article 19 as the basis of deciding immunity over foreign States’ assets (elaborated here). Thus, countries like the Netherlands, which shift the onus of proof onto the award-creditor to prove that State assets should be attached or that they do not have a public purpose, have notably dissuaded such parties from approaching these jurisdictions and steered them in the direction of the more favourable American courts.

 

Concluding Remarks

Usually, arbitral awards against States are not enforced against SOEs due to the presumption that corporations have independent identity and operate separately from the sovereign. For instance, recently in a December 2020 ICSID case, the British Virgin Islands High Court was required to determine whether assets belonging to Pakistan International Airlines (PIA) including the iconic Roosevelt Hotel in New York could be attached in settlement of a claim made by Tethyan Copper Co. against the Pakistani government. The court, in its decision, disallowed such attachment on the ground that Tethyan had failed to satisfactorily establish that PIA can be “assimilated into the State for all purposes” (Judgment, ¶ 99) and expounded that the assets of a company listed on an international stock exchange could not be seized as to hold otherwise would disadvantage its body of independent shareholders. Seeing that these circumstances are akin to those in Cairn v. India, it is fair to speculate that obtaining control over assets of Air India will also be an uphill battle for the award-creditor. Nonetheless, it is not uncommon for this presumption to be refuted on the basis that governments exercise substantial control over the day-to-day affairs of SOEs. For instance, in Walter Bau AG v. Kingdom of Thailand, the German investor was able to impound a royal aircraft against a UNCITRAL award directing the Thai government to clear its debts owed to the said investor.

In other news, Cairn in an attempt to seize other Indian assets, has filed lawsuits in eight other countries, including France. On July 8, 2021, it was widely reported in global media that the Tribunal Judiciaire de Paris had ordered to freeze State-owned properties of India in France. Interestingly, on the same day, India’s Ministry of Finance released an official statement claiming that the government had not received any notice regarding such freezing thus indicating that it may have been an ex parte order. This statement also clarified that while India intends to challenge any adverse order, talks of settlement may not be entirely off the table either. Coming back to the instant US lawsuit, the principles originating in Bancec and later clarified in Crystallex may play a definitive role in deciding India’s fate. This includes looking closely into the constitution of Air India, the extent of governmental control and whether the sovereign is the real beneficiary of the company’s profit-making.  Thus, it remains to be seen if Cairn can establish that these requirements are met in the case of Air India.

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The Strange Case of Denial of Benefits Clauses: The Italian and Colombian Model BITs

Kluwer Arbitration Blog - Sat, 2021-08-07 01:00

First appearing in the 1970s, denial of benefits (DoB) clauses have proliferated, became more sophisticated, and evolved significantly and even beyond recognition as in the 2017 Colombian Model BIT. This post discusses such evolution and provides a taxonomy of the different versions of the clause.

 

Denial of Benefits Clauses in Outline

Traditionally, DoB clauses permit the Host State to exclude from treaty protection companies that formally have the nationality of the other Party, but are controlled or owned by nationals of a third State.

The notions of “control” and “ownership” are far from being uncontroversial and some treaties provide some clarification (Art. 21(3) BIT Japan Jordan). Sometimes DoB clauses combine nationality requirements with the absence of substantial business activities in the territory of the Host State (see, for example, Art. 17(1) Energy Charter Treaty).

Tribunals have not been entirely coherent in dealing with DoB clauses, often due to their different or vague wording. They have treated them as matter of jurisdiction (i.e. Ulysseas v. Ecuador; Guarachi v. Bolivia), or merits (i.e. Yukos v. Russian Federation; Ascom v. Kazakhstan; Bridgestone v. Panama). Furthermore, they have taken different views as to whether a denial of benefits can be exercised at any time (i.e. Ulysseas v. Ecuador; Guarachi v. Bolivia), or only before the institution of arbitral proceedings (i.e. Plama v. Bulgaria; Ascom v. Kazakhstan).

In recent years, investment treaties have extended the scope of DoB clauses to situations of corporate restructuring clearly intended to gain access to treaty protection (i.e. Art. 20, 2015 Indian Model BIT). The clause follows the original logic behind DoB clauses by allowing the Host State to neutralise aggressive treaty shopping. It is consistent with recent arbitral awards that have considered such practice as an abuse of rights (i.e. Philip Morris v. Australia).

Several other treaties require control or ownership by nationals of third States in combination with other situations such as

  • absence of diplomatic relations with the third State (Art. 21.1(a) BIT Israel Japan). The application of such clauses tends not to be problematic as the absence of diplomatic relations can be identified objectively.
  • absence of normal economic relations with the third State (Art. XII(a) BIT US Bahrain). The expression “normal economic relations” is rather vague. It has been expressly associated with unilateral economic sanctions and situations such as those existing in 1998 between the US and Cuba or Libya (Message to the US Congress on the ratification of the BIT US Mozambique (1998), Art. XII). Presumably, the clause also covers mandatory measures adopted by the UN Security Council as they are meant to upset “normal economic relations”. From this perspective, 103 of the UN Charter comes into play.
  • existence of measures with respect to third States, or even persons of third States (i.e. Art. 20, BIT Israel Japan), that prohibit transactions with the enterprise, or would be circumvented in case of application of treaty to such enterprise (Art. 14.14(2), USMCA). This category largely overlaps with the criterion of “normal economic relations”, as it relates to unilateral countermeasures and collective sanctions. It seems even broader as it may cover measures adopted directly against investors.
  • existence of measures related to the maintenance of peace and security (i.e. Art. 8.16(b)(i) CETA). The expression evokes the powers of the UN Security Council and again must be read in conjunction with Art. 103 of the UN Charter. The inclusion in some treaties of the protection of human rights within those measures remains rather obscure (see Art. 8.13, EU Japan).

These clauses inject some political content into DoB clauses. Yet, they do not normally provide for any procedural guarantees. It may be argued that these clauses are not entirely self-judging and that arbitral tribunals have at least some role in determining the existence of any of the situations referred to in the clause.

 

Italian Model BIT

Article 18 of the Italian Model BIT (on file with authors) incorporates quite a sophisticated DoB, which combines some of the categories included in the classification above. It requires ownership or control by nationals of a third state, cumulatively with (1) absence of normal economic relations with the third State or existence of measures related to the maintenance of international peace and security adopted against such State; or (2) “a proportionate reaction” by the Host State to “the serious deterioration of the political situation in the other country with respect to the rule of law, democracy and human rights” in the third State.

Paragraph 1 essentially combines the situations referred to in the taxonomy under (c) and (d) (see also Art. 13, BLEU Model BIT 2019; Art. 8.16 CETA). The language used in Art. 18(1) suggests that the measures related to international peace and security may be adopted unilaterally, or within the collective security system.

Paragraph 2 constitutes a novelty as the investor becomes the direct target of the unilateral response to the alleged violations committed by the third State. Its content and implications, however, raise concern. The situation that may trigger such response appears to be difficult to define in legal terms. Moreover, the treaty contains no procedural guarantees in favour of the investor, who is inevitably exposed to the unilateral political decision of the Host State. It is true that the investor may challenge the invocation of Art. 18 before an arbitral tribunal, but the level of deference such tribunal will exercise is difficult to anticipate.

 

Colombian Model BIT

The DoB clause contained in the 2017 Colombia Model BIT offers an interesting blend of traditional and new elements. The clause applies to enterprises of the other Party controlled or owned by nationals of third States if the Host State has no diplomatic relations with the third State, or maintains measures that prohibit transactions with the enterprise, or would be circumvented in case of application of treaty to such enterprise – paragraph (a); as well as to enterprises that do not have substantial business in the Host State – paragraph (c).

The scope of the clause has been further extended to two new categories. Under paragraph (b), the Host State may invoke the clause when the enterprise is controlled or owned by nationals of a third State and shareholders submit a treaty claim without a written authorization of the enterprise. The clause is meant to prevent parallel proceedings and any compensation granted to shareholders shall constitute the final compensation to the enterprise.

Paragraphs (d) and (e) are even more intriguing and innovative. Paragraph (d) allows the Host State to deprive the investor of treaty protection where the investor is an enterprise that has:

  • committed serious human rights violations;
  • sponsored persons or organisations sentenced for serious human rights violations or violations of humanitarian law, or sponsored internationally-listed terrorist organisations;
  • caused serious environmental damage;
  • committed serious tax and fiscal fraud;
  • committed acts of corruption;
  • caused grave violations of labour laws;
  • engaged in money laundering activities.

Importantly, paragraph (d) is triggered by a judicial or administrative decision certifying the commission of wrongdoings. From this perspective, a precedent can be found in the 2006 ECOWAS Supplementary Act. Art. 18(1) deprives the investor found in breach of its obligations concerning corruption of the right to initiate any dispute settlement process under the treaty.

Furthermore, under paragraph (e), the DoB clause applies when a local court has found the investor or the executives of an enterprise responsible for the violation of criminal laws.

With paragraph (d) and (e), the clause takes a completely different connotation, disconnected from the traditional requirements of control or ownership. It assumes the function of a sanction, which directly targets the enterprise for its wrongful practices.

Unlike the Italian Model BIT, the Colombian Model BIT provides a detailed procedure for the application of the clause. The Host State must promptly inform the investor and the Home State of its intent to invoke the DoB clause. All pending proceedings are suspended for 90 days and terminated in the absence of any objection by the Home State. Otherwise, and with exception of Paragraph 1 (a), the Bilateral Investment Council will try to reach a friendly solution within 6 months, during which proceedings are further suspended. If the Council intervention is not successful, the effectiveness of the DoB is to be settled by the dispute settlement mechanism invoked by the investor (be that a local court or tribunal). The procedure appears to provide a solid protection against abusive application of the clause.

 

Concluding remarks

DoB clauses were designed as technical clauses giving the Host State the possibility of limiting treaty protection to genuine investors of the other Party. They have evolved significantly in different directions, with the introduction of politically charged situations connected with the conduct of third States, such as economic sanctions or maintenance of peace and security.

With the Colombian Model BIT, the clause performs an additional new function as the Host State may deprive the enterprise of the treaty protection in response to a comprehensive catalogue of wrongful acts committed by the enterprise itself. Ownership and control become less dispositive. While the procedure set in the treaty seems to adequately protect the investor against abuses, the clause ultimately offers the Host State an important tool to recalibrate its relationship with investors.

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The Gift that Keeps on Giving: New Evidentiary Developments in the Canadian Installment of the Yukos Saga

Kluwer Arbitration Blog - Fri, 2021-08-06 01:32

Much ink has been spilled on the 2014 Yukos arbitral awards, and rightfully so. They are notorious for collectively breaking the previous record for the largest arbitral award in history. Their magnitude (these were, in the tribunal’s words, “mammoth arbitrations”) also commands our attention, as do the issues at stake and the multiple companion arbitrations and enforcement proceedings around the globe that have sprung like mushrooms after the rain. One of such related cases is Luxtona Limited v. The Russian Federation, a PCA-administered, Toronto-seated UNCITRAL arbitration brought by a former Yukos shareholder. Though the tribunal has thus far only rendered an interim award on jurisdiction in 2017, the case is noteworthy as it shines the light on the Canadian judiciary’s take on the all-so-important issue of new evidence in the context of court proceedings under Art. 16(3) of the UNCITRAL Model Law (“ML”).

On June 30, 2021, the Ontario Superior Court of Justice (“Court”) allowed Russia to file new evidence because the Court was considering the issue of jurisdiction de novo, as opposed to reviewing the tribunal’s ruling. In reaching its conclusion, the Court drew inspiration from international authorities, including the UK Supreme Court judgment in Dallah v. Pakistan (“Dallah”), which was previously extensively discussed on this blog (for example, here and here).

 

The Evolving View of the Court

By way of reminder, Art. 16(3) provides that “if the arbitral tribunal rules as a preliminary question that it has jurisdiction, any party may request, within 30 days after having received notice of that ruling, the Court to decide the matter […].”

Interestingly, this was the third time the Court grappled with the issue of evidence in this case. Russia initially sought to set aside the tribunal’s award pursuant to Arts. 16(3) and 34(2) ML. In April 2018, Dunphy J. allowed Russia to file new evidence as of right because “[t]he court is directed to ‘decide the matter’ and not merely to review the decision of a tribunal whose very existence may or may not have been authorized” (2018 ONSC 2419, para. 33). Russia’s new evidence included two expert reports: one, which allegedly responded to the tribunal’s “incorrect findings”, and the other, which addressed statutory interpretation arguments that had evolved “following the hearing [before the tribunal] in response to positions asserted by Professor Stephan in reports submitted to the Hague Court of Appeal” in a different case (Professor Stephan is also Luxtona’s expert). In response, Luxtona filed additional expert evidence on Russian law.

Due to changes in judicial assignments, the application was reassigned to Penny J. who first accepted but then questioned Dunphy J.’s ruling and asked the parties “to reargue the narrow question of whether new evidence, which does not meet the test for new evidence under Ontario Law, is admissible on a court review of an arbitral tribunal’s jurisdiction under Art. 16(3)” (2019 ONSC 4503, para. 38). As Dunphy J.’s decision was merely an earlier evidentiary ruling, Penny J. could revisit and reverse it, as he did in December 2019 (2019 ONSC 7558). He determined that Russia could not file fresh evidence as of right. Rather, it had to show that “(1) the evidence could not have been obtained using reasonable diligence; (2) the evidence would probably have an important influence on the case; (3) the evidence must be apparently credible; and (4) the evidence must be such that if believed it could reasonably, when taken with the other evidence adduced at the hearing, be expected to have affected the result,” (para. 69) which Russia failed to demonstrate.

Penny J.’s decision was appealable with leave to the branch of the same Court, known as the Divisional Court, pursuant to s. 19(1)(b) of the Courts of Justice Act. Leave was granted in August 2020 (2020 ONSC 4668) and Penny J.’s decision was set aside in June 2021.

Why have there been so many different answers to a, seemingly, straightforward question within the same Court? Three main themes of divergence can be identified: (1) the relevance of authorities from a non-ML jurisdiction; (2) the significance and international acceptance of Dallah, and (3) the pertinence of United Mexican States v. Cargill, Inc. (“Cargill”) in the context of Art. 16(3) applications.

  1. After comparing the ML and UK legislation, Penny J. noted that the emphasis and scope for court intervention in the decisions of arbitral tribunals under the two statutory regimes differed significantly (so much that the UK approach undermined the competence-competence principle). Thus, English decisions were to be carefully scrutinized before being adopted in Ontario.1) 2019 ONSC 7558, paras. 54-55, 60-62. jQuery('#footnote_plugin_tooltip_38325_30_1').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_1', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Conversely, the Divisional Court opined that there was no compelling reason to distinguish the nature of jurisdictional hearings under the two regimes.2) 2021 ONSC 4604, para. 33. jQuery('#footnote_plugin_tooltip_38325_30_2').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_2', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });
  2. With respect to Dallah, Dunphy J. observed that the international ML jurisprudence was quite unanimously in line with the approach suggested by Dallah and Cargill in the sense that a court need not defer to the decision of the tribunal on jurisdictional matters, nor is it explicitly confined to the record before such tribunal.3) 2018 ONSC2419, para. 28 jQuery('#footnote_plugin_tooltip_38325_30_3').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_3', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Penny J. referred to Dallah briefly, noting its silence on the matter of new evidence.4) 2019 ONSC 7558, para. 46. jQuery('#footnote_plugin_tooltip_38325_30_4').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_4', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Au contraire, the Divisional Court discussed Dallah extensively, concluding that it enjoyed “strong international consensus” and was cited by the Ontario Court of Appeal in Cargill with approval.5)2021 ONSC 4604, paras 30, 38. jQuery('#footnote_plugin_tooltip_38325_30_5').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_5', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });
  3. Cargill (previously discussed here) concerned Mexico’s application to set aside pursuant to Art. 34(2)(a)(iii) ML a NAFTA award that allegedly granted the investor losses in excess of the tribunal’s jurisdiction. Dunphy J. held that the “ratio” of Cargill was applicable to Art. 16(3) applications, adding that neither of these provisions constrained the Court to the four corners of the arbitration’s evidentiary record.6)2018 ONSC 2419, paras. 32-33. jQuery('#footnote_plugin_tooltip_38325_30_6').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_6', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Penny J., while recognizing Cargill’s relevance for applications under both articles of the ML, highlighted that Cargill clearly described that “[o]n a true jurisdictional challenge, it is a review on correctness, without any deference, … but a ‘review’ nevertheless.”7)2019 ONSC 7558, paras. 57-58. jQuery('#footnote_plugin_tooltip_38325_30_7').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_7', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); Contrary to Dunphy and Penny JJ., the Divisional Court underscored that Cargill concerned Art. 34(2), which envisages a different test, i.e. a “review”. The Court of Appeal in Cargill “did not decide whether an application under Art. 16 [was] a ‘review’ or a hearing de novo,” nor did it comment on Dallah’s applicability under Art. 16(3).8)2021 ONSC 4604, paras. 23-24, 32. jQuery('#footnote_plugin_tooltip_38325_30_8').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_8', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

 

A Closer Look at the Court’s Most Recent Decision in Light of Cargill and Dallah

By way of reminder, in Cargill the Court of Appeal discussed Dallah, albeit noting that the jurisdiction issue before it was “quite different under Art. 34(2)(a)(iii)” as it did not concern the ability of the tribunal to adjudicate altogether, but the content of the award itself. The Court of Appeal concluded that the standard of review was correctness, meaning that on a “true question of jurisdiction, the tribunal had to be correct in its assumption of jurisdiction to decide the particular question it accepted.”9)2011 ONCA 622, para. 53. jQuery('#footnote_plugin_tooltip_38325_30_9').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_9', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], }); The same court, however, cautioned that the standard of correctness does not presuppose “a broad scope for intervention in the decisions of international arbitral tribunals, [rather] only in rare circumstances where there is a true question of jurisdiction.”10)ibid., para. 44. jQuery('#footnote_plugin_tooltip_38325_30_10').tooltip({ tip: '#footnote_plugin_tooltip_text_38325_30_10', tipClass: 'footnote_tooltip', effect: 'fade', predelay: 0, fadeInSpeed: 200, delay: 400, fadeOutSpeed: 200, position: 'top right', relative: true, offset: [10, 10], });

On the one hand, the Divisional Court says that Art. 34(2) which was at the center of Cargill, prescribes “the limited review” and provides for a different standard than Art. 16(3) (paras. 23-24). On the other, it upholds the de novo approach of Dallah, which concerned Art. V(1)(a) of the New York Convention which is much more similar to Art. 34(2) than Art. 16(3) ML. Can the two decisions be reconciled? Both concerned similar provisions, yet Dallah allowed a de novo hearing whereas Cargill provided for a review (on the standard of correctness).

If Cargill is not directly pertinent because it revolves around Art. 34, why is Dallah’s de novo approach applicable to an Art. 16 application? Is Dallah relevant whenever the existence of the arbitration agreement is in question, irrespective of which provision of the ML is invoked? This arguably leaves room for Dallah’s de novo approach in the context of an Art. 34(2) application, if the jurisdictional issue concerned the existence of the arbitration agreement (and not the award’s content, as in Cargill). If the de novo approach presupposes that a party can submit new evidence as of right, new evidence could then be introduced on an Art. 34(2) challenge to the final award. Would this be conducive to certainty, efficiency, fair play?

Conversely, if Dallah’s de novo approach is applicable only in the context of Art. 16(3) proceedings (because courts are invited to “decide the matter”), why should a party be able to file new evidence as of right just because the tribunal ruled on the jurisdictional issue as a preliminary question, and not have that same right if the tribunal did so in the final award?

 

Conclusion

Though Canadian authorities dealing with Art. 16(3) ML are rare, they appear to demonstrate the expansion of the courts’ role in recent years. In 2005, the Alberta Court of Queen’s Bench held that, despite the appearance of “wide discretion”, Art. 16(3) did not go “so far as to allow a reviewing court to substitute its view simply because the court would not have reached the same conclusion,” and that the standard of review ought to be “one of reasonableness, deference and respect” (para. 53). In February of this year the Ontario Court of Appeal discussed Art. 16(3) ML in United Mexican States v. Burr, albeit focusing on other parts of the provision. Perhaps it is instructive that, when quashing Mexico’s appeal, the court underscored that the text of said provision prohibited an appeal from “the ruling of a Superior Court judge on the correctness of an arbitral tribunal’s ruling” (para. 26). Now, the Divisional Court ruled in favor of a de novo hearing. Courts in Québec also seem to lean towards the de novo approach (see, e.g., Groupe Dimension Multi Vétérinaire inc. c. Vaillancourt, para. 10).

Ultimately, whatever the nature of the court’s involvement or the standard of review, should a party be allowed to file new evidence as of right? While situations when it may be necessary to admit “new” evidence exist (for example, under the conditions enumerated by Penny J., or if a party did not participate in the arbitration and only decides to become involved after the tribunal it does not recognize rules that it has jurisdiction), what is the justification when a party participated in the arbitration all along? Despite the ML’s evasiveness on this point, the drafters’ intention to circumscribe court intervention under Art. 16(3) is evident from the 30-day deadline, absence of appeal and the tribunal’s discretion to proceed while the matter is pending before the court (para. 26).

The arbitral tribunal in the present case has reportedly suspended its proceedings while the Canadian challenge is pending. Four years after the tribunal’s interim award, the Court’s decision on jurisdiction is nowhere in sight (introducing new evidence will certainly not expedite the matter). Is this the “immediate court control” that the ML’s creators had in mind?

 

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

References[+]

References ↑1 2019 ONSC 7558, paras. 54-55, 60-62. ↑2 2021 ONSC 4604, para. 33. ↑3 2018 ONSC2419, para. 28 ↑4 2019 ONSC 7558, para. 46. ↑5 2021 ONSC 4604, paras 30, 38. ↑6 2018 ONSC 2419, paras. 32-33. ↑7 2019 ONSC 7558, paras. 57-58. ↑8 2021 ONSC 4604, paras. 23-24, 32. ↑9 2011 ONCA 622, para. 53. ↑10 ibid., para. 44. function footnote_expand_reference_container_38325_30() { jQuery('#footnote_references_container_38325_30').show(); jQuery('#footnote_reference_container_collapse_button_38325_30').text('−'); } function footnote_collapse_reference_container_38325_30() { jQuery('#footnote_references_container_38325_30').hide(); jQuery('#footnote_reference_container_collapse_button_38325_30').text('+'); } function footnote_expand_collapse_reference_container_38325_30() { if (jQuery('#footnote_references_container_38325_30').is(':hidden')) { footnote_expand_reference_container_38325_30(); } else { footnote_collapse_reference_container_38325_30(); } } function footnote_moveToReference_38325_30(p_str_TargetID) { footnote_expand_reference_container_38325_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } } function footnote_moveToAnchor_38325_30(p_str_TargetID) { footnote_expand_reference_container_38325_30(); var l_obj_Target = jQuery('#' + p_str_TargetID); if (l_obj_Target.length) { jQuery( 'html, body' ).delay( 0 ); jQuery('html, body').animate({ scrollTop: l_obj_Target.offset().top - window.innerHeight * 0.2 }, 380); } }More from our authors: International Arbitration and the COVID-19 Revolution
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Colorado Hiring in ADR

ADR Prof Blog - Thu, 2021-08-05 17:13
I’ve been asked by Sharon Jacobs to post the following announcement by Colorado who tells me they are especially interested in those teaching ADR/negotiation/mediation: Hiring Announcement: University of Colorado Law School The University of Colorado Law School invites applications from entry-level and lateral candidates for one or more full-time, tenured or tenure-track faculty positions to … Continue reading Colorado Hiring in ADR →
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